Hope you’re well. In this week’s look at crypto trends, we attempt to pull together some threads involving a hack that happened nearly six years ago, some searching questions about what makes a DAO, well, a DAO, and the growth of exchange traded funds as a way for TradFi to benefit from DeFi.
As usual, a note: We’re not here to evangelise or criticise, but hopefully to add perspective, context and a bit of insight about the week’s moves within DeFi, as well as on its fringes.
Your feedback is welcome, and if there’s anything we can help more on, don’t hesitate to ping us at thecontext@yapglobal.com
The YAP Editorial Team
[Bitfinex Charges/ Fraud]
The hack of cryptocurrency exchange Bitfinex back in 2016 was the second largest such breach at the time. Nearly 120,000 bitcoin, then worth $72 million and now worth $5.3 billion, was stolen. This week the Justice Dept announced it had seized more than half of the missing bitcoin and had arrested two people on charges of laundering some of it. Some interesting elements to this:
The two detained, Ilya Lichtenstein, 34, and his wife, Heather Morgan, 31, have attracted plenty of attention. While Ms. Morgan’s Twitter profile lists her as surreal artist and rapper, she also has an academic background, contributing a chapter to a World Bank book on food security. The charges make no mention of whether they were involved in the actual hack, but Ms Morgan’s internet history has raised some interesting possibilities: in public talks she has spoken of using ‘social engineering’ – exploiting human weakness for personal gain – extensively in her life, prompting some to wonder whether the original hack was, as conventional wisdom has it, a sophisticated cyberattack or something else.
The case also highlights that while cryptocurrencies are vulnerable to attack and theft, it is relatively hard to not leave a paper trail while laundering it. A study by Elliptic dissects the efforts to launder some of the currency, and how the seizure of one dark web marketplace Alphabay in 2017 may well have allowed federal investigators to trace the funds which went through it. That, and the seizure of the remainder of the funds by law enforcement, “demonstrates that even when sophisticated money laundering techniques are used, blockchain records still allow law enforcement to link criminal activity to individuals, and bring them to justice,” Elliptic concludes.
Sources:
Eric Wall on Twitter: “In fact I think @mikebelshe pretty much reveals that the hack involved a significant human element when he says ”and people”, and that BitGo was not hacked. Sounds like someone finessed their way in… not the ”buffer overflow payload hack” that most people here seem to envision https://t.co/XEmYTKurUA” / Twitter
[DAO Governance in question]
A core part of the web3 vision is the decentralised autonomous organisation, or DAO. The DAO is the embodiment of the principle at the heart of the blockchain and the cryptocurrencies based on it, namely that there is no one point central control, relying instead on an automated system of voting and ownership via rules embedded in code.
The DAO is still very much a work in progress, and many groups which call themselves DAOs are more akin to crowdfunds, falling some way short of being autonomous and decentralised. The decision by the Ethereum Name Service to removes core team member Brantly Millegan over a 2016 tweet has again focused attention on what, exactly a DAO is, what the mechanisms are for making a decision like this, and whether the DAO itself is fit for purpose.
For a community drawn to the charms of anonymity, resistance to external control and censorship – think ‘cancelling’ and ‘deplatforming’ driven by lynch-mob anger and fear of upsetting consumers – the case has highlighted some weak points in DAOs and how they work – or don’t work – under certain circumstances.
(At the same time, DAOs can be pretty straightforward and quick: a DAO set up to raise funds for the defence of journalist Julian Assange, collected nearly 17,000 ether, or $53 million, via the online sale of a non-fungible token piece of art. Digital art auction raises more than $52 mln for WikiLeaks' Assange | Reuters)
Sources :
matoken.eth | マトークン on Twitter: “During the weekend, many people raised questions about the different roles Brantly held and the decision-making mechanism around who decides what, so I would like to dissect it a bit. Please read https://t.co/0gCyphSEMk first 🧵/” / Twitter
ENS DAO next steps re: Brantly - DAO-Wide / General Discussion - ENS DAO Governance Forum
ENS governance put to the test as a bigoted 2016 tweet from its director of operations resurfaces
[The (climate-sensitive) Ride of the Valkyrie]
Valkyrie Capital’s Bitcoin Mining exchange traded fund (WGMI) focused on renewable energy went live this week after approval from the U.S. Securities and Exchange Commission. This is the third crypto-related fund that Valkyrie has launched, and focuses on companies that derive at least 50% of their revenue or profits from Bitcoin mining operations, or hardware and software related to it. The Bitcoin miners in the WGMI portfolio use approximately 77% renewable energy, such as Bitfarms Ltd (BITF, 10% of the portfolio) and Argo Blockchain PLC. Toronto-based Bitfarms says that each of its seven facilities are more than 99% powered with “environmentally friendly hydro power”, while Argo “sources its energy from hydro and other renewable clean sources wherever possible.” Since China banned it last year mining has shifted to other countries, many emphasising environmental considerations. Canada, where much of Bitfarms' and Argo’s mining takes place, accounted for 9.6% of the average monthly hash rate in August 2021, up from 0.9% in January 2021. Source: Cambridge Bitcoin Electricity Consumption Index (CBECI) Valkyrie’s Bitcoin Mining ETF follows an announcement by Grayscale of its “Future of Finance” ETF focused on crypto and fintech companies. The SEC has only approved futures-linked ETFs, including one from Valkyrie, and has postponed decisions on or rejected several applications from spot market Bitcoin ETFs. Concerns centre on liquidity, transparency and the prevention of share manipulation and other fraud. The US, along with the UK and Singapore, have held a tight rein on crypto-related ETFs, allowing other markets to move in. The world’s first ETF dedicated to DeFi will launch this month in Brazil. The Hashdex DeFi Index ETF will invest in eight dApps, as well as related service providers such as oracles, including Uniswap, Aave, Polygon and Chainlink. The ETF will track the CF DeFi Composite Index-Brazil. Other countries allowing spot ETFs are Canada, Sweden, Germany, Switzerland, Jersey and Liechtenstein, with Australia and India planning to.
Sources:
Valkyrie Capital Bitcoin Mining ETF to Debut on Nasdaq - Decrypt
SEC Asks Bitwise to Address Concerns About Proposed Spot Bitcoin ETF
Wannabe Bitcoin ETFs Are Mushrooming and Getting More Creative - Bloomberg
The Evolution of Institutional Investors’ Exposure to Cryptocurrencies and Blockchain Technologies
World’s first DeFi ETF to launch in Brazil next month | Financial Times
[Valkyrie Bitcoin Miners ETF Approved for Nasdaq Listing](Valkyrie Capital Bitcoin Mining ETF to Debut on Nasdaq - Decrypt)
KPMG Canada on Twitter: “We have just completed an allocation of cryptoassets to our corporate treasury, our firm’s first of its kind investment in the asset class. This includes Bitcoin and Ethereum tokens, and carbon offsets to maintain a net-zero carbon transaction: https://t.co/32hsKbnGuC” / Twitter
[Tidbits]
Stuff we found interesting:
Non-fungible tokens, or NFTs promise, among other things, a way for users to unlock value from their own data and creativity. But not everyone believes that. Gaming, a huge industry in its own right, is facing resistance from its users over attempts to add NFTs to the mix: Why gamers hate crypto, and music fans don’t
Russia appears to have backtracked on crypto, reflecting the acceleration of states recognising that cryptocurrencies could and should co-exist alongside existing financial systems. Russia’s Move to Regulate Cryptocurrency Puts Other Countries on Notice - Blockworks
As with the Bitfinex hack, having access to crypto doesn’t necessarily mean you have access to it. Two recent cases highlight the challenges of being crypto-rich:
Rug-pulls are the new ICOs:
Can Ethereum solve its congestion and high-fee problems? Blobs might help. Ethereum Co-Founder Vitalik Buterin Discusses Proposal to Alleviate Network’s Congestion, High Fees – Technology Bitcoin News
North Korea: Missile programme funded through stolen crypto, UN report says - BBC News
[Interesting reads]
Crypto as culture: Inês Faria on Crypto as Ritual and Religion
Crypto and the Unbanked: Moneyness: Don’t bank on bitcoin banking the unbanked
The Bitcoin Family Robinson: Bitcoin Family moves to Portugal, crypto tax haven
This newsletter is pulled together by a team led by Jeremy Wagstaff, formerly of the WSJ, BBC and Reuters and Samantha Yap, founder of YAP Global. Other members: Farhan Musa, Rebecca Campbell and Ruby Wu. Many thanks to Joey Woo for production. Any views expressed here are not necessarily those of the writers, YAP Global or its clients.