PBOC One-Upping the Fed

This week, China’s central bank initiated what we believe are the first steps in a broader effort to stimulate the economy, which is struggling to meet its annual growth target of around 5%. These new measures are aimed at reviving economic activity and restoring confidence, especially in the real estate and equity markets, both of which are facing significant challenges.

The People’s Bank of China (PBOC) has introduced several initiatives to address these concerns:

• Lowering short-term interest rates: The PBOC reduced its seven-day reverse repurchase rate from 1.7% to 1.5%, providing a short-term liquidity boost to the financial system. On Wednesday, they also announced that they would be reducing the medium-term loan facility (1-year policy rate) to 2% from 2.3%, the largest cut since this tool was enacted in 2016.
• Mortgage rate cuts: In response to the prolonged real estate downturn, mortgage rates on existing housing loans will be reduced, aimed at easing pressure on the housing sector and stimulating home purchases.
• Reserve requirement ratio (RRR) cut: By lowering the RRR by 0.5 percentage points, banks will be required to hold less in reserves, freeing up liquidity to encourage lending and investment.
• Stock market support: A newly established swap facility will enable brokers, funds, and insurers to access liquidity for stock purchases, supporting equity markets. Additionally, the PBOC has introduced special refinancing options that allow listed companies and major shareholders to repurchase shares, further stabilizing the stock market.

These measures are part of a broader push to counter the country’s economic challenges, including a deepening real estate crisis and slowing growth. The real estate sector, in particular, remains under severe strain, with home prices continuing to fall and local governments reluctant to absorb excess housing inventory. The $18 trillion wealth loss in the property sector has greatly undermined consumer confidence.

There are many who are skeptical about the potential impact of the measures taken by the PBOC, and possibly for good reason. Even if money is cheap and plentiful, you still need a confident economy that is willing to borrow. Thus, many are calling for a fiscal bazooka to complement the monetary measures. We have yet to see major fiscal stimulus yet, but there are signs that it is coming.

• Stimulus Checks: Just this week, China announced 1-time stimulus checks to be paid to those in need before the upcoming holiday that celebrates the 75th anniversary of the country’s founding.
• Special Bonds: And on Thursday, the MOF announced that they will be issuing $284 billion in special sovereign bonds to help stimulate the struggling economy.

What it Means for Crypto

While restrictions on crypto trading remain in place in China, it’s reasonable to expect that some capital may still find its way into crypto assets. Moreover, the regional implications are important. If China’s stimulus proves successful in boosting domestic economic activity, China could become a more engaged trading partner across Asia, which could benefit neighboring countries.

A more robust Asian economy could lead to increased investment, heightened risk-taking, and eventually some capital flowing into crypto markets. Asia is the source of a lot of retail flows, which tends to find its way into the more speculative areas of the market. Should this play out as China hopes it does, this is likely to become a tailwind for altcoins over the next couple of quarters.

BNB as a Proxy for Chinese Strength

Last week, we added BNB to our Core Strategy due to several factors: fundamental tailwinds, narrative-driven momentum, and its relative strength against BTC in this cycle. One key but often overlooked advantage for BNB is its favored status among crypto market investors across China and the broader Asian continent.

BNB’s origins are deeply tied to Asia, with Binance having created BNB before it evolved into the token of a separate network. Binance remains the dominant exchange in the region, and price action has shown that BNB performs notably better during APAC market hours, reinforcing this view.

Given these dynamics, it’s reasonable to expect that if the Chinese economy rebounds, with broader Asia benefiting from downstream effects, BNB could see additional upside through year-end. To illustrate this, we compared the performance of FXI (A Chinese large-cap index) with BNB’s performance relative to BTC. Since the start of the bull market in January 2023, these two have tracked relatively closely.

To confirm this isn’t just a case of broad market strength benefiting all altcoins, we also examined FXI’s performance relative to SOLBTC and ETHBTC.

While ETHBTC shows some correlation to FXI, it diverges at various points and demonstrates weaker alignment than BNB.

Interestingly, FXI and SOLBTC exhibit an inverse relationship.

In our view, this suggests that BNB is positioned for continued relative strength into year-end, particularly if China’s monetary and fiscal policies continue to drive Chinese asset prices higher.

Adding CORE

Overview

Those who have followed our work over the last 12 months know that we have been optimistic about the scaling solutions emerging to bring programmability to Bitcoin. Bitcoin is increasingly viewed as the future of money and a reliable long-term store of value in a world where fiat debasement by governments and central banks seems inevitable. However, while Bitcoin offers an unparalleled hedge against monetary inflation and sound censorship resistance, its lack of programmability limits its utility for those seeking access to decentralized financial services, such as those available on Ethereum or Solana.

In Q4 2023, we took a bullish stance on Stacks, managed risk around that position, and we continue to hold a positive outlook, particularly as the much-anticipated Nakamoto upgrade nears completion. Still, Bitcoin DeFi remains small compared to the broader DeFi ecosystem, despite Bitcoin representing over 50% of the total crypto market.

Today, we are adding CORE to the Core Strategy portfolio, marking the introduction of a second Bitcoin scaling solution. CORE is the native token of Core Chain, a Bitcoin-aligned, EVM-compatible Layer 1 blockchain that integrates Bitcoin’s security with Ethereum’s programmability. Like other Bitcoin scaling solutions, Core Chain aims to assist Bitcoin’s transition from a store of value into a true medium of exchange.

Hybrid Consensus

Core Chain uses a unique Satoshi Plus consensus mechanism, which combines Delegated Proof-of-Work (DPoW) and Delegated Proof-of-Stake (DPoS):

• In DPoW, Bitcoin miners delegate their hash power to Core validators, using Bitcoin’s computational strength to secure the network.
• In DPoS, CORE token holders and BTC stakers can stake their tokens and vote for validators, adding another layer of security.

The network uses a weighted score of hash power and staked tokens to elect top validators responsible for producing blocks.

Block rewards consist of CORE token emissions and transaction fees, paid in the native CORE token, which are split among miners, stakers, and validators based on a predetermined formula that accounts for the hash power provided by miners and the amount of BTC and CORE staked to the network.

Relayers and Verifiers, who are also integral to the network’s integrity, receive smaller allocations from the System Reward Contract, with any excess rewards burned to maintain deflationary pressure on the CORE supply.

Verifiers connect Core Chain with Bitcoin by relaying block headers, while Verifiers monitor and report malicious activity. Relayers are compensated for submitting valid Bitcoin block headers to Core. Their rewards are based on performance and capped at 10 million CORE tokens. Verifiers earn rewards by successfully identifying and reporting malicious activity, with their rewards capped at 1 million CORE tokens.

The network enacts slashing penalties for malicious actors, but the slashing risk only applies to CORE tokens, not BTC staked. The yield for CORE stakers is higher as a result of this dynamic, making the BTC staking yield the “risk-free” rate on the network.

Non-Custodial Staking for Passive Yield on BTC

As mentioned above, Core Chain consensus includes a Bitcoin staking component that allows holders to earn passive yield on their BTC, which is typically a non-productive asset. Users don’t need to wrap their BTC or give up their private keys to a centralized entity, and the BTC staked is not subject to slashing risk.

The ultimate goal, based on the team’s communication, is to enable BTC restaking, allowing a derivative of the BTC staked to Core Chain to be used as collateral to bootstrap and secure other nascent chains. This is similar to the goal of projects like Eigenlayer, Karak, and Babylon, with Babylon being the closest comparable given its focus on Bitcoin.

To participate in non-custodial staking on Core Chain, users must stake at least 0.01 BTC for a minimum of 10 days, delegating their BTC to a validator as part of the consensus process.

How non-custodial BTC staking works:

1. Locking Bitcoin: Bitcoin holders lock their BTC in a time-locked transaction on the Bitcoin blockchain.
2. Delegation Information: The transaction specifies the validator and the address where CORE rewards will be sent.
3. Delegating Bitcoin: The staked BTC is delegated to a Core validator for a set period.
4. Earning Rewards: Stakers earn CORE token rewards during the lock period.
5. Unlocking Bitcoin: Once the lock period ends, the staked BTC is released and can be used again.

Again, to restate the key benefits for stakers:

• No Custody Risk: Users retain full control of their BTC at all times.
• No Wrapping Required: BTC is staked directly, eliminating the need for wrapping.
• Yield: BTC holders can earn rewards in CORE tokens without sacrificing security. Of course, there is ultimately risk to the sustainable value of the CORE token, but that is price risk, which is inherently different from things like custody and slashing risk.

As of today, nearly 4,700 BTC ($300 million) are staked and delegated to Core Chain validators.

Enshrined BTC Bridge

For those who wish to bridge their BTC to Core Chain for use in DeFi applications, there is coreBTC, a wrapped version of Bitcoin on Core Chain, secured through a decentralized, trustless mechanism that maintains a 1:1 peg with BTC. This overcollateralized multisig bridge carries the same risks as any multisig bridge but unlocks the ability for BTC to be used in DeFi applications on Core Chain.

BTC is deposited into lockers, custodians who overcollateralize their holdings with CORE tokens to prevent de-pegging. Porters verify Bitcoin transactions and mint coreBTC on a 1:1 basis, while liquidators initiate liquidation if lockers’ collateral falls below a threshold. Guardians monitor lockers for misconduct, such as failing to fulfill BTC redemption requests, and trigger slashing if necessary. This system enables Bitcoin holders to use BTC within DeFi in a relatively trustless manner.

Performance

Core Chain claims to support up to 700 transactions per second (TPS), a throughput made possible by the network’s architecture, which combines Bitcoin’s security model (through DPoW) with the scalability of staking (through DPoS).

However, realized TPS has been much lower. The highest daily TPS recorded in the past year was just over 260, with the median closer to 3 TPS (transaction data source: scan.coredao.org). While this is likely attributable to Core’s early stage and limited adoption, it’s important to note the disparity between stated and actual performance.

The CORE Token

CORE serves multiple purposes on the Core Chain network, including paying transaction fees, acting as staking collateral, and enabling governance.

The token’s total supply is capped at 2.1 billion, following a decreasing issuance schedule designed to last over 81 years. CORE block rewards follow a decreasing issuance schedule, with rewards decreasing by 3.6% each year. There is a minor deflationary aspect to CORE’s tokenomics as well. If rewards for relayers and verifiers exceed certain caps, any excess CORE tokens are burned, reducing the overall circulating supply. This helps offset inflationary pressure from new token issuance.

The Token Generation Event (TGE) for the CORE token took place in early 2023, which coincided with the launch of the Core Chain mainnet. This event marked the initial distribution of CORE tokens to participants, including early contributors, stakers, and validators, and laid the foundation for the token’s role in securing the network, paying for transactions, and enabling governance.

The distribution was as follows:

1. Node Mining: 40% for network security and validator rewards distributed over 81 years.
2. Users (Airdrop): 25% for users.
3. Contributors: 15% for past and future contributors supporting the network’s development.
4. Reserves: 10% to maintain reserves for future needs.
5. Treasury: 9.5% for ecosystem growth and DAO resource allocation.
6. Relayer Rewards: 0.5% for relayers maintaining network integrity.

A potential risk to note is that only 43% of CORE tokens are currently circulating, suggesting that dilution could occur in the future. However, the gradual issuance schedule is designed to avoid shocks to the system.

Governance

Core Chain’s governance, managed by the Core DAO, is progressing through three stages.

Currently, governance is off-chain, with community voting determining the outcome of proposals over a seven-day period. The eventual goal is full on-chain governance, where the community will directly control network upgrades and protocol changes through decentralized voting mechanisms.

Traction

Despite its early stage, Core Chain has seen significant traction from a capital flows perspective. Core Chain’s total value locked (TVL) has grown sharply in recent months, driven by the ongoing Sparks incentive program, which rewards user participation, as well as the introduction of a number of DeFi apps like Colend, a borrow/lend app with $233 million in TVL, and Pell Network, an external restaking service with $159 million in TVL.

Although transaction volumes have leveled off since the peak of the “inscription craze” in early 2024, the number of unique addresses is steadily rising, signaling an influx of new users to the ecosystem.

Additionally, despite Core Chain’s relatively young age, there are already ETPs being built around it.

Valour Asset Management, a subsidiary of Defi Technologies, has launched two investment products that capitalize on Core Chain adoption. The Valour Core ETP tracks the price of CORE and is listed on Sweden’s Spotlight Stock Market. Meanwhile, the Valour Bitcoin Staking ETP offers a 5.65% annualized yield by staking Bitcoin through Core Chain and is listed on the Nordic Growth Market and Frankfurt Stock Exchange.

Valour currently accounts for $21 million of the $300 million staked to Core Chain.

Thesis Summary

To summarize our bullish view on CORE:

1. Large TAM: Bitcoin DeFi remains a small part of the overall crypto ecosystem, despite Bitcoin accounting for over half of the entire crypto market cap. As more wealth accumulates in Bitcoin, we believe the platforms facilitating the lending and borrowing of, and passive yield on, BTC will see their native tokens appreciate, potentially outperforming Ethereum Layer 2 tokens.
2. Bitcoin DeFi Narrative: CORE, like STX, is one of the few available ways to gain exposure in liquid markets to the growing Bitcoin DeFi ecosystem. While there are plenty of Bitcoin scaling solutions in development, few have launched tokens. We expect CORE to benefit from the rising narrative around Bitcoin scaling.
3. Reliable Bitcoin Beta: CORE is well-positioned to outperform in the event of Bitcoin price appreciation, given its proximity to Bitcoin. While the entire crypto space often provides BTC beta exposure, we believe that in today’s idiosyncratic market, assets closely aligned with Bitcoin have a higher likelihood of benefiting from a BTC-led rally.
4. Early Signs of Adoption: While transaction volumes are currently lagging and TVL may be inflated by the ongoing incentive program, the product-market fit for non-custodial BTC yield among institutions is clear. If Core Chain developers can continue to engage users with valuable applications, CORE should retain its value, and TVL will become more sustainable. The chain’s EVM compatibility is a strong advantage, as it allows developers to easily port applications and practices from other EVM chains onto this Bitcoin-aligned platform.

Note: CORE is traded on many popular centralized exchanges including Coinbase OKX and Bybit. Kraken and Binance have yet to list CORE, which could be a major tailwind for asset liquidity if/when that occurs.

Core Strategy

As year-end approaches, we remain optimistic about the crypto outlook, viewing the market’s lean toward a soft landing as constructive for prices. With hard landing risks fading after the Fed’s dovish but reassuring stance, we believe now is the time to take calculated risks in one’s crypto portfolio. Our focus remains on the majors, with selective exposure to altcoins like HNT, MKR, STX, BNB, and this week’s new addition, CORE. As a reminder, our Core Strategy allocation model, along with crypto equity baskets and trade recommendations, is included at the end of each note.

Tickers in this report: BTC -2.04% , SOL -2.86% , ETH -2.58% , HNT -4.18% , STX -21.82% , MKR, BNB, CORE, MSTR -7.24% , SMLR -9.06% , COIN -7.85% , HOOD -7.87% , MARA -7.21% , RIOT -8.71% , WGMI -7.51% , CLSK -7.36% , WULF -9.11% , IREN -11.41% , CORZ -8.11% , BTDR -10.85% , BTBT -7.12% , HUT -7.58% , HIVE -6.69%