Hi there, hope you’re doing well. This week we peer behind the curtain as Celsius and Voyager work with creditors, courts and trustees to figure out who gets paid first from the funds still accessible. We also look at the thorny problem of compliance when it comes to Tornado Cash and how, surprisingly, there’s lots of investment activity going on in other parts of DeFi.
The usual disclaimer: This newsletter collates the main themes and headlines of the week in DeFi/crypto/metaverse/web3/NFT land and tries to provide unbiased context. It’s aimed at anyone who wants to keep an eye on the space but isn’t following it too closely, or is on the hunt for story ideas and angles. It’s put together by a team at YAP and doesn’t contain any promotion of our clients (if one is mentioned, we’ll flag that).
This was put together by a team led by founder Samantha Yap, and Jeremy Wagstaff, formerly of the journalism parish. Thanks to Ruby Wu, Roslyn Tear, Sam O'Donohoe, Becky Corbel and Joey Woo for their contributions. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
Celsius’s second bankruptcy prompts calls for an examiner to “untangle” the mess
U.S. sanctions on mixer Tornado Cash have raised questions about how far companies must go to comply
Investment in crypto is still strong, suggesting that mainstream interest in DeFi is returning, or never went away
[Creditors, trustees try to untangle Celsius, Voyager and other messes ]
DeFi is facing its first winter, and like all downturns, there are lessons to be learned and precedents set. How the various tumbles play out will lay the rails for crypto’s future.
Amy Castor chronicles the latest Celsius news, after its second bankruptcy hearing. Two key questions are: who gets paid back first from whatever is left, and, if Celsius is still functioning, what is the business model Celsius hopes will allow it to move out of bankruptcy? The U.S. Trustee handling the case has deemed the situation opaque enough to call for an examiner to "untangle” the “business structure, practices and liquidity" of the debtors. A further complication: Celsius has accused a former business partner of not turning over $17 million of assets.
Who gets first dibs on any money left is as old as business itself. And DeFi is not immune. Voyager Digital's creditors have filed a motion opposing the company's plan to distribute $1.9 million to 38 key employees it deems vital to its recovery plan for the business which it says will return value to customers when implemented.
Crypto makes things more complex in some ways, and we’re seeing how that plays out as winter lingers on. Loans platform BendDAO discovered to its cost that its “liquidation mechanics” were vulnerable as a bank run drained its reserves, leaving it at one point with 5 ETH and a bunch of NFTs they couldn’t sell. (Story by Danny Nelson of CoinDesk)
Joel Davies places this kind of faulty tokenomics in the broader context, citing Friedrich Hayek as a warning of the dangers of overly-complex structures, but he concludes on an optimistic note: “Crypto is a complex system, but it is a fully digital & transparent one which means we should be able to move a lot quicker than complex systems in the real world.”
This is probably true, but not everything is transparent, and users still rely on the probity of the owners. This didn’t turn out so well for users and staff of Singapore-based crypto lending firm Hodlnaut, which cut 80% of its workforce. While Hodlnaut had earlier said that it had no direct exposure to the collapsed Terraform Labs, the statement was contradicted by a filing revealed by Twitter user FatMan, which appears to show that they lost $190 million through the Terra-developed Anchor Protocol. (Story by Mike Dalton of Crypto Briefing)
Navigating the complexity is one test DeFi is facing in the downturn. Another is how well Decentralised Autonomous Organisations (DAOs) can manage complicated challenges. A move by Fei Protocol, a key member of the Tribe DAO, to leave the DAO has created problems, with Frax Finance founder Sam Kazemian (a YAP Global client), arguing that the proposal inadequately compensates victims of an earlier hack. The DAO had largely voted in support of an earlier reimbursement plan, which was not implemented. (Story by Oluwapelumi Adejumo of BeInCrypto)
Another sign there’s still a lot that needs fixing: NFT exchange SudoRare has suffered a $800,000 ‘rug pull’ six hours after launch, which is probably a record. (A rug-pull is when a project's founders take all the money they can from their own project and abandon it.) (Story by Osato Avan-Nomayo of The Block.)
[Crypto companies torn over complying with mixer sanctions]
Tornado Cash is a little different since the crisis was triggered by a U.S. investigation and sanctions. But there’s still lots to be learned, and unlearned.
Blocking wallets in connection with Tornado Cash and U.S. sanctions has put several issues under the microscope. How far do you go to comply? And who does the digging? In one case, 253 wallets were banned by Uniswap Labs based on information from a ‘compliance provider’, prompting accusations that not only the owners of sanctioned addresses are affected, but downstream counterparties. (Story by Sebastian Sinclair of Blockworks)
How all this plays out is anybody’s guess. At its heart is the thorny question of just how far a government can go to control, or ‘censor’, DeFi activities. That's a question on every regulator's mind. Australia’s new government, for example, has said it will adopt a recommendation by a senate enquiry to identify the different types of digital assets available to Australians as the first step to greater regulation. How this "token mapping" works and what it would include is unclear. (Story by Felix Ng's of Cointelegraph)
[Investors in DeFi companies, currencies are surprisingly upbeat]
It’s tempting to see all the walls quietly caving in as the shortcomings of both companies and beloved DeFi mechanisms fall under the microscope. But while that is going on there are signs that perceptions of crypto by some key players have shifted. Tech giants Google and Samsung, for example, have invested billions into crypto firms since September 2021, according to a report from analysts Blockdata. Other major investors include BlackRock, Morgan Stanley and BNY Mellon.
Institutional investors in cryptocurrencies themselves seem to be interested again, with Morgan Stanley saying that tightening in the crypto market has “paused”. Retail interest too: Singapore's DBS bank has reported a fourfold growth in Bitcoin buys on its own exchange DDEx in June, with buys accounting for 90% of all trades.
Probably more significant in the long run might be that companies involved in securing DeFi infrastructure are doing well — not only a welcome sign to those who have lost money to hacks but also that DeFi companies themselves see the necessity of investing money in security, with an eye on the long term. “As mass firings become the norm elsewhere in crypto, they’re boosting hiring, raising prices and taking in fresh funding," writes Olga Kharif and Anna Irrera of Bloomberg)
[Tidbits]
How to Use Tokenization to Drive Growth: 7 Lessons From a Company That's Killing It. Tascha Labs takes an intriguing look at Sweatcoin.
Art market pushes on with rocky crypto romance: Agence France Presse looks at how the art market is getting creative about using NFTs to co-invest in artworks.
[Long Read]
Arch crypt-critic David Gerrard takes a shovel to Proof-of-Stake, arguing that while it’s better than Proof-of-Work the upcoming Ethereum Merge won’t fix any of the other problems. As usual, he takes a robustly critical view of the space, but as ever, always worth a read.
[Events]
Coinfest Asia | August 25th & 26th, 2022 | Bali, Indonesia
Cryptocon Global | August 26th, 2022 | Scottsdale, Arizona, USA
DeFi Security Summit | August 27th - 28th, 2022 | Stanford, California, USA
The Science of Blockchain Conference 2022 | August 29th - 31st, 2022 | Stanford, California, USA
ETHWarsaw | September 1st - 4th, 2022 | Warsaw, Poland
Blockchain Rio Festival | September 1st - 4th, 2022 | Rio De Janeiro, Brazil
MCON | September 6th - 9th, 2022 | Denver, Colorado, USA
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This week: ‘GameFi’ by CJ Cheong.
Short for “Gamified Finance”, GameFi typically refers to blockchain games with the “play-to-earn” model which offers economic incentives to players. Participants can earn rewards in the form of cryptocurrency tokens or Non-Fungible Tokens (NFTs) by completing designated tasks or actions, progressing through levels, competing with others and more.
Unlike traditional games, players can encash their in-game rewards to be used in the physical world, via trading on NFT marketplaces and off-ramping the cryptocurrency tokens through exchanges. Players also retain ownership of their in-game assets and characters represented by the NFTs and make decisions to progress them or sell them for profit in future, which adds a unique dimension when players complete or no longer wish to play the game.
Games like Axie Infinity are generally considered the flagship representation of blockchain games, garnering attention as a career prospect for emerging economies. However, the blockchain gaming category is still relatively nascent and needs to address issues with sustainability, tokenomics, security, composability and accessibility for ease of usage and mainstream adoption.