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An overall flat week with market cap unchanged sub 900bn as volumes continue to drop and spreads get wider. This allows for some short squeezes to occur on some of the most consensus shorts. It’s hard to explain otherwise why LTC +23% and BCH +11% are among the largest gainers this week and then of course CRV +22% on the AAVE incident. In the news we keep following FTX the first hearing from the bankruptcy court and the emerging story around DCG and Genesis how close they are to bankruptcy themselves. We had some unfortunate revelations to privacy policy over at ConsenSys and a very interesting headline about the upsize of their investment in troubled crypto bank Silvergate by the EOS/block.one founder. Despite all the -ve headlines we hear of new HFs launching their crypto arms and Binance’s Industry Recovery Fund is forming. Enjoy reading!
Bat Tai Chi — [email protected]
FTX Dominos continue to fall
So we know the FTX aftermath will be with us for a while, remembering Luna collaps it took over a month before we had Celcius and 3AC tumble and now arguably 6month for the cracks at Alameda to show. I hope I won’t be writing every week about this now but for the time being there is still so much happening and unfortunately continues to be the dominant driving force of narrative. So we had the first bankruptcy hearing, for now creditors will remain anonymous. There was wide sparked fear that a Celcius like database will be made public as part of the filing. We also heard them wanting to sell some assets quickly especially after seeing what protocols can do to fork out token holders. Serum did that last week and we could see others copying the trade, meaning after the hack there is not much token equity left. Media outlets are all over the story but reporting in mixed lights. Particularly the New York Times received harsh critique for benign reporting and even having SBF still on as a speaker at their DealBook conference next week. In terms of dominos all eyes this week were still on DCG group and their subsidiary Genesis. Now they halted withdrawals last week but this week there were reports earlier this week about them warning about bankruptcy only later to be clarified as not ‘imminent’. That things are fragile however is undeniable. Genesis hired investment bank Moelis & Co for advice and DCG CEO Barry Silbert wrote a letter to shareholders. All the while we saw GBTC discount reach all time highs of -45% before retracing back to <40% now after we learned Cathy Woods started buying again. Keeping an eye on DCG and their raising/restructuring efforts.
DeFi Exploit (failed?)
This is probably the biggest story this week in terms of what’s been happening in DeFi and it also highlights how interconnected things are even if they don’t seem so at first. Aave this week was subject to what some would call a fire probe and other an exploit. So what happened? A good summary here in blockworks. An unidentified trader, believed to be Mango Markets exploiter Avraham Eisenberg, accumulated a roughly 92 million token loan of CRV on Aave. He then didn’t repay but watched it to get liquidated as price of CRV started dropping. Due to thin liquidity position was closed over the course of 50 minutes through 385 individual mini-liquidation transactions which left AAVE with 2.64 million CRV, roughly $1.7 million, in bad debt — borrowed CRV that will never be repaid. Now this is small and can likely be covered by the treasury but it clearly shows that protocol design has to be updated. Now why is this relevant, it’s because AAVE doesn’t liquidate themselves but relies on liquidators to perform the task. Now these are bots that are basically trading vs other pockets of liquidity and since market makers on CEX and volumes there have dropped off such liquidations are becoming more difficult. I’d like to make the argument that this ‘exploit’ was only possible because liquidity on CEX has dried up post FTX fall out. It’s an unfortunate reminder of how intertwined DeFi and CeFI really is.
Front ends end privacy
It’s a turn for the worse for sure, not only do we have now the majority of ETH blocks being OFAC compliant but now Consensys updated their privacy policy this week. Users of Infura will now have some of their data collected. For those of you who are unfamiliar with Infura it’s the most popular API that allows you to connect to the Etherum network and provides the basis for many key Web3 projects, such as Aragon, Gnosis, OpenZeppelin, and of course their own flagship wallet service MetaMask. So every time you use the default remote procedure call provider in MetaMask — that’s Infura. It will now collect your IP address and your Ethereum wallet address whenever you make a transaction. Of course you can opt out by running your own Node or using a different 3rd party for remote procedure call but let’s not kid ourselves here how many of Metamask users will do that? Most people believe even setting up MetaMask is too complicated and preferred to keep their crypto on a CEX. So unfortunately the default preservation of privacy in crypto is being again undermined. But of course Consensys is not alone in this, UNI also recently announced that they started collecting some off-chain user data like browser or device type. They said it’s only for internal purposes to improve user experience and they don’t collect personal data (yet?). Again this is on the front end level and the back end is all still fully privacy supportive but how many retail users are actually going to build their own API to access the UNI backend? This was what SBF was pushing forward with his bill in congress to basically have front end DeFi protocols be OFAC compliant — for which of course they will have to be able to collect user data. Be careful out there. Is there an alternative?
Well Flashbots this week offered something interesting that should be welcomed by hobbyist cypherpunks. As mentioned above right now we are at >70% OFAC compliant blocks which is mostly because in Flashbots MEV market place the majority of builders are building OFAC compliant blocks. Now they added a feature in MEV-boost (the tool to only pick highest bidding blocks in order to maximize production yield) to set a min threshold. What this parameter does is only accept blocks from relays if they bid above a chosen value, otherwise a locally-built block is proposed. This leverages the fact that the profit increase coming from mev-boost is not that large for most blocks. Validators can thus forfeit a small amount of profit in exchange for making the network more resilient, while keeping the door open for high-MEV opportunities. Vitalik encourages this ‘short term’ censorship resistance fix but it remains to be seen who’s willing to forfeit profits (even if small) to increase censorship resistance…somehow this type of behavior has not been too commonly observed even in crypto.
It’s the first devnet that enabled withdrawals on all of these implementations and is a big step forward. It also helps other clients to test their implementations by joining the network.
Marius Van Der Wijden, Ethereum Developer
Self custody is a fundamental human right. You are free to do it at any time. Just make sure you do do it right.
Changpeng Zhao, Binance Founder
I fully support BNBCHAIN ecosystem and #BUSD. Actually, we will have a big partnership announcing soon.
Justin Sun
New to trading? Try crypto trading bots or copy trading
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