#53 The Context: SBF lights fires on Substack, DCG scrambles for funds
Ethereum’s Shanghai upgrade plans boost liquid stakers
Hi, hope you had a good week. Sam Bankman-Fried is not keeping quiet - on Thursday he dropped 2000+ words on “the FTX saga”, most of which is a rehash, but contains at least one potential bombshell. Digital Currency Group and Gemini continue to slug it out in public.
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. 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).
The team: founder Samantha Yap and Jeremy Wagstaff, formerly of the journalism parish, with Sam O’Donohoe, Ewan Brewster, Tiffany Mac Sherry, Becky Corbel and Delon Chan. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
SBF takes to Substack to blame Alameda, Binance, claiming the law firm working as debtors’ counsel was one of the primary law firms for FTX. Creditors have already filed an objection.
DCG and Gemini continue to trade public insults over locked funds. DCG is reportedly talking to creditors and looking to raise funds through sales.
Ethereum’s upgrade is due in March, prompting renewed support for liquid staking protocols, and raising hopes it would spark fresh institutional interest.
[FTX, DCG, Binance etc]
Gemini:
Shots continue to be fired between Gemini’s co-founder Cameron Winklevoss and Digital Currency Group’s Barry Silbert over some $900 million of user funds locked up in Genesis, a unit of DCG. Winklevoss has called Silbert “unfit to run DCG”, with DCG saying Winklevoss was trying to deflect blame from himself and Gemini.”
DCG is reported to be in talks with creditors, with one saying they had rejected a proposal to refund some 70% of funds owed. Other creditors are consulting lawyers. DCG has more than $3 billion in outstanding loans, and after trying to raise at least $1 billion in fresh cash, is now exploring selling assets, including its VC holdings.
FTX:
Sam Bankman-Fried on Thursday posted his own ‘pre-mortem overview’ of the saga. Some of his comments highlight concerns raised by four senators about the role of a law firm as bankruptcy counsel after previously working for the exchange. A judge has quashed those concerns, but SBF's post says the firm, Sullivan and Cromwell, was a primary law firm for both FTX International and FTX US.
Bankruptcy attorneys have recovered more than $5 billion of liquid assets, but there remains an unknown shortfall in repaying customers and creditors.
Where Sam Bankman-Fried’s investments went has proven harder to trace. Much of it was in crypto companies, such as a $1 billion bet on a Cyprus-registered bitcoin miner called Genesis Digital Assets. Some were in venture capital firms that were also backers of FTX, including a specific fund that invested in FTX.
Miami-Dade County, which had a $135 million naming rights deal with FTX, has successfully sought for the deal to be terminated so it can remove FTX logos from its arena, entrances and polo shirts.
Binance: despite some positive news -- it's planning a hiring spree, it has registered in Sweden, its 15th jurisdiction, and a judge has approved Binance.US buying the assets of bankrupt lender Voyager Digital -- it is struggling to hold onto assets.
Nexo: The Bulgarian office of cryptocurrency lender Nexo has been raided by police over possible money laundering, tax crimes and unlicensed banking activity. Last year several U.S. states alleged the company was offering interest-earning accounts without registering them as securities. Antoni Trenchev, Nexo’s co-founder, called the allegations “absurd”. Bulgarian media are linking the investigation to a possible violation of sanctions on Russia.
Stories by Rachel Butt, Slav Okov and Emily Nicolle of Bloomberg, Nikhilesh De and Sandali Handagama of CoinDesk, Tim Reynolds of AP, Eliot Brown and Yuliya Chernova of WSJ, Nikou Asgari, Kadhim Shubber and Joshua Oliver of the FT, Javier Paz of Forbes, Fredrik Vold of Cryptonews. See also tweets by sunil k and MetaLawMan, and a caustic summary by Amy Castor and David Gerard.
[Ethereum’s Shanghai upgrade]
Ethereum developers have agreed to roll out a software upgrade in March that would allow users to withdraw Ether tokens they had committed to operate the blockchain network. These staked tokens, worth some $20 billion, are currently earning their owners fees (yields) but cannot be withdrawn.
Withdrawals will lower the risk of staking, likely attracting institutional interest. Expect a significant proportion of ETH staked — up to 50%, according to Messari’s Kunal Goel. Currently, it’s around 14%, compared to other major Proof of Stake chains where the ratios are above 70%.)
That developers have agreed to focus on this feature and drop others is a good sign that this upgrade won’t suffer the delays of the last one.
The news has also boosted interest in liquid staking protocols — which allow users to stake any amount of Ethereum, earning yields while also trading with a token derived from the contract. (Lido, one of the highest-ranked protocols, is a Yap Global client.)
Our view: expect to see some negative predictions, as happened with the Merge (where attention focused on whether two Ethereum forks using Proof of Work would damage Ethereum’s future. Both have since lost 95%+ of their value.)
Stories by Olga Kharif of Bloomberg, Sujith Somraaj of Decrypt, Nivesh Rustgi of Cointelegraph, Jamie Redman of Bitcoin.com
Sources: Staking Rewards, Kunal Goel of Messari.
[Buzz]
Beggars' Belief: Bitcoin fell 65% in 2022, but interest in bitcoin exchange-traded funds (ETFs) stayed solid, even after the crypto winter kicked in. Is this a sign of continued confidence in crypto, ‘investor loss aversion’, or ‘more of a religion than an investment’?
Our view: Look for more interest in these products. Samsung Asset Management, for example, has just launched its own Bitcoin Futures ETF on the Hong Kong stock market, which tracks CME Bitcoin Futures.
Met-averse: What role can web3 play, if any, in the metaverse? Too early to tell, but beyond the hype, the most likely role is an “unremarkable, everyday kind of way”, where under the hood everyday (blockchain-based) technology becomes its core, according to one web3 consultancy.
Fatigue: U.S.-listed cryptocurrency exchange Coinbase is laying off another 950 workers, the second extensive round of cuts, but its deeper problem is a one shared with other exchanges: a ‘retail crypto trading fatigue.’
Stories by Brian Ponte, Nikhou Asgari and Scott Chipolina of the FT, Cam Thompson of CoinDesk, Laurie Dunn of Crypto Daily.
[Events]
World Crypto Conference | January 13th - 15th 2023 | Zurich, Switzerland
Blockchain Economy 2023: London Summit | February 27th - 28th 2023 | London, England
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
“Whitepaper” by Murial Wang
Designed as a publicly accessible document, a whitepaper is an informational thesis report published by projects or companies laying out their technical and economic details.
As a sign of goodwill and transparency, protocols produce whitepapers where they break down their product’s inner workings, mission and vision for the future. Within the world of crypto, investors and community members often dedicate time to digest the technically difficult content as it serves as a great starting point to vet the validity of a project.
One such example is the celebrated Bitcoin whitepaper ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ by anonymous founder Satoshi Nakamoto. Within the whitepaper, Satoshi challenged the constructs of our existing financial system and presented a peer-to-peer electronic cash system which has grown into the crypto industry we know today.