[CORRECTED] #45 The Context: Beyond FTX: where do we go from here?
Troubles for other DeFi lenders highlight how deep the shocks of FTX’s collapse might go
(Resending to correct sixth bullet in [Outside FTX: Contagion]. Kaiko is not a client of YAP Global)
G’day. This week has been another hairy one: Contagion from FTX is the plat du jour, although the FTX story itself still contains its fair share of humdingers. With FTX, FTX US and Alameda filing for bankruptcy, attention is on those who are owed money and whether there’s anything left to pay them, although there’s still some talk about whether the company could be saved in some way. That seems unlikely, especially as regulators and prosecutors circle. In the immediate future the question is how far the contagion spreads. We take a look at all that this week.
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, Becky Corbel, Delon Chan, Ewan Brewster and Tiffany Mac Sherry for their contributions. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
Sam Bankman-Fried is still talking about reviving FTX, though his utterings are given short shrift by its new CEO
Crypto lenders BlockFi and Genesis are hit by FTX fallout, with BlockFi reported to be considering bankruptcy
Self-custody wallets and decentralised exchanges are attracting interest. Exchanges are rushing to publish proofs of reserves, a novel practice fast becoming a de facto standard
[Outside FTX: Contagion]
There are numerous directions in which the shock waves of FTX’s collapse is being felt. Most aren’t pretty.
The FTX collapse sparked billions of dollars of outflows from exchanges and volatile trading has erased $244 billion of value since last Sunday, according to CoinGecko data.
BlockFi, a crypto lender, plans to file for bankruptcy, according to Bloomberg sources, after pausing client withdrawals over uncertainties with FTX. (Story: Rachel Butt and Annie Massa of Bloomberg). The FTX fallout has also hit another crypto lender, Genesis Global Capital, which has suspended customer redemptions. Some have argued any closure of Genesis may have broader ramifications than that of FTX. It’s already hurting South Korean crypto exchange Gopax Services.
Bitcoin futures have fallen below spot prices, something called backwardation, suggesting speculative shorting of the cryptocurrency, either by speculators or proxy hedging by investors who can't get access to their funds. This is a reflection of the jitteriness surrounding FTX's demise and was not seen during previous selloffs. (Story by Vildana Hajric of Bloomberg)
Indeed, there's anxiety that contagion risk is not (yet) fully reflected in the prices of bitcoin, despite its fall to below $17,000. (Lex at the Financial Times)
Measuring the interconnectedness of other companies and networks isn’t easy. The Solana Foundation has detailed its financial ties to FTX and SBF.
The biggest immediate problem is going to be liquidity. If there’s no liquidity there’s no trade. Liquidity is provided by market makers, one of them Alameda. That’s now gone. Data provider Kaiko explored the implications in a piece published on Smartkarma: Crypto Liquidity in a Post-Alameda World.
FTX sponsors are walking away: Mercedes F1 and Miami Heat have suspended their FTX sponsorship; Esports giant TSM has removed FTX logos and halted its $210 million sponsorship deal.
Anxiety about Crypto.com has made it the latest bank-run victim, but its CEO says it is business as usual. Not helping was its accidental transfer of $400m to Gate.io (which it later got back.) Coin Metrics' State of the Network found evidence that 3% of the supply of Crypto.com's native token, CRO, had been moved to the same wallet on October 11, and called for more transparency over what these transactions were for.
[Inside FTX: The dissection begins]
This is going to be a tragedy with many acts. For now, most attention is going to be focused on what exactly happened and what is going to happen next.
Inside FTX, there are still a lot of questions being asked:
not least about FTX’s purported balance sheet: FTX held less than $1bn in liquid assets against $9bn in liabilities, reported the FT, while Bloomberg's Matt Levine splutters in his coffee dissecting it: “It’s an Excel file full of the howling of ghosts and the shrieking of tortured souls.” Ledger Insights wasn't impressed either, calling it "fantasy.”
about what legal peril the company and its lieutenants are in. Authorities are already lining up to take a forensic look, while FTX's bankruptcy lawyers are facing a “huge mess”, according to the FT's Due Diligence team (their third look at FTX in a week). Binance, which decided to abort a possible takeover, will submit evidence on the deal and prior FTT transactions.
about the fate of its creditors. What’s clear is that there are 1000s, possibly more than 1 million, of them, ranging from companies like Nigeria’s Nestcoin to Ikigai Asset Management, whose ‘large majority’ of assets on FTX, leave it uncertain whether it will be able to continue.
Unsecured DeFi lenders to Alameda also look shaky, from protocols to investment firms, although interestingly, some closed loans some weeks before disaster struck.
And outside looking in, lots more. Such as:
whither SBF? Sam Bankman-Fried is ‘under supervision’ in the Bahamas, looking to flee to Dubai, reports Cointelegraph, while The Milk Road wonders whether he's going to make it. As per earlier cataclysms, this has become something of a game. He is still trying to raise fresh cash despite the bankruptcy. On Twitter and in a direct message interview, SBF has been trying to explain himself. (Stories by Kelsey Piper of Vox, Caitlin Ostroff of The Wall Street Journal and Felix Ng of Cointelegraph)
And what of his mates? Bankman-Fried’s Cabal of Roommates in the Bahamas Ran His Crypto Empire – and Dated. Other Employees Have Lots of Questions, writes Tracy Wang of CoinDesk.
what were investors thinking? There’s been a fair bit of sackcloth and ashes among VCs who recognise they had more of a FOMO than a strong rationale for investing. FTX’s collapse has pushed VCs to rethink their oversight of crypto startups, according to Yuliya Chernova and Angus Loten of The Wall Street Journal.
[FTX: The broader ramifications]
The FTX debacle will be remembered for a long time, or until something even bigger happens. For now it’s worth pondering how we might eventually remember this episode.
CeFi vs DeFi. There is the inevitable argument that this wasn’t a DeFi disaster, it was a CeFi (centralised finance) one, and all this tells us is that We Need More DeFi, Not Less in the words of Donovan Choy. Amanda Cassatt of Serotonin agrees: FTX Showed the Problems of Centralized Finance, and Proved the Need for DeFi
There are more nuanced arguments too, such as this one from Camila Russo, who after listing the ways in which DeFi functioned as it should during the crash, wrote: “DeFi is not ready for mainstream yet (not scalable, bad UX, lack of privacy, code risk & exploits, regulatory grey area, etc.) No doubt we'll get there, but in the meantime, we need centralized crypto to be better."
In the meantime, decentralized exchanges are likely to benefit. Some already are. Expect to see software and hardware wallets also become more popular. Binance’s Changpeng Zhao happily promoted one, Trust Wallet, which just happens to be owned by Binance.
A big, visible, change, has been the rush by exchanges to publish Proof of Reserves (PoR): Kraken, Coinbase and Gate.io, for example, published proof of reserves with liabilities. There is clear momentum to this becoming the norm: the Bitcoin Policy Institute has released a new report arguing “the adoption of PoR will provide information on counterparty risk, reduce the chance of systemic default contagion and improve user trust in their custodial relationships." (Stories by Shawn Amick of Bitcoin Magazine)
Less clear is what this means for DeFi going mainstream. Will ordinary investors and users give up? Big Investors Are Giving Up on Crypto Markets Going Mainstream, argue Sujata Rao-Coverley and Lynn Thomasson of Bloomberg.
And of course, there’s likely a regulatory response in the works, once the dust has settled from the midterms: FTX’s Failure Is Sparking a Massive Regulatory Response, says Nikhilesh De - of CoinDesk. SBF was the darling of at least the Democratic side of the aisle, which leaves a gap and lots of embarrassment: Sam Bankman-Fried Made Himself the Face of Crypto in DC—Now What?
And no crypto crisis would be complete without those who announce its death. This time it’s The Atlantic’s Will Gottsegen, saying You Can Forget About Crypto Now. The #1 Database of Notable Bitcoin Skeptics predicting its demise hasn’t been updated since June but hopefully it will be soon.
[Life goes on]
Beyond DeFi, interest in blockchain technology remains. Sort of:
CBDCs: The Digital euro is still making progress, a Central Bank Digital Currency (CBDC) as is the U.S. Fed. Rich Turrin’s newsletter offers some analysis. India's central bank has also partnered with five banks for some retail CBDC pilots.
Tokenisation: the idea of being able to reconstitute and distribute complex assets as digital entities is another area where blockchain technology is currying favour: Ledger Insights paints a picture of the state of play in broad strokes.
DLT: That said, Australia’s ASX has paused a settlement project using blockchain technology, writing off is capital investment, apparently because of scaling issues. This project started in 2016, and was intended to replace the exchange’s existing settlement platform; the announcement makes it unlikely the project would survive.
[Reading]
Some light reading from Blockdata on the State of Enterprise Blockchain 2022. Easy to forget that in terms of longevity, some of these projects are up there with Bitcoin.
How North Korea became a mastermind of crypto cyber crime | Financial Times Crypto analysis firm Chainalysis estimates that North Korea stole approximately $1bn in the first nine months of 2022 from decentralised crypto exchanges alone. (Story by Christian Davies and Scott Chipolina of the Financial Times)
[Events]
EthVietnam | November 25th - 27th 2022 | Ho Chi Minh City, Vietnam
Miami Web3 | November 28th - 30th 2022 | Miami, USA
DCentral Miami | November 28th - 29th 2022 | Miami, USA
ETHDownUnder | December 1st - 4th 2022 | Sydney, Australia
ETHIndia | December 2nd - 4th 2022 | Bengaluru, India
ETHTaipei | December 2nd - 4th 2022 | Taipei, Taiwan
[Media corner]
As we mentioned last week, this newsletter relies on some impressive journalistic work. So it’s worth pointing out those who got it right.
Ian Allison of CoinDesk wrote the piece which started the FTX implosion back on November 2. Two others on the team worth a mention: Nick Baker and Tracy Wang.
Mainstream media has done some good work since the story broke: Tom Westbrook, Angus Berwick and Tom Wilson of Reuters, and the FT's Antoine Gara, Kadhim Shubber and Joshua Oliver, among others.
Jill Gunter, an academic and investor, pointed out she had been warning since 2017: "I keep sitting down to write a post about what’s going on but if I can’t come up with anything I didn’t say in like 2017 (and I was not alone — many have been screaming this from the rooftops before then and have been since)"
The Context aims to help everyone stay up-to-date with developments in crypto, decentralised finance (DeFi) and web3. Subscribe now to get your weekly crypto updates.
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[Ecosystem Overview]
An occasional segment exploring one particular ecosystem.
This Week: The Solana Ecosystem by Ewan Brewster.
The Solana ecosystem has been making the headlines over the last week due to its connection with FTX. But what is the Solana ecosystem, and what has it actually got to do with FTX?
Solana is a layer 1-based, highspeed blockchain which relies on a specific proof-of-stake consensus mechanism known as “proof of history.” This generates a much higher throughput than other blockchains such as Ethereum, processing over 50,000 transactions per second. Solana’s transaction speeds have made it an incredibly attractive blockchain for NFT marketplaces, dApps and exchanges, not least FTX.
Since the collapse of FTX, Solana’s TVL has declined 56%, but why? Sam Bankman Fried was a prominent endorsee of Solana. The Solana Foundation and Solana Labs sold 58.08M SOL tokens to Alameda Research and FTX Trading, representing nearly 11% of Solana’s total supply. The fall of Bankman Fried has led to a loss of trust in Solana, with its native token falling to $12 at this time of writing, along with many other DeFi-related tokens. Furthermore, Solana-based decentralized exchanges Raydium and Orca have seen liquidity losses of 40%.
Although this is unquestionably a major setback for the Solana ecosystem, how it responds could reveal its true value.
https://coinmarketcap.com/alexandria/article/what-is-solana-a-guide-to-solana-s-ecosystem-projects
The Context aims to help everyone stay up-to-date with developments in crypto, decentralised finance (DeFi) and web3. Subscribe now to get your weekly crypto updates.