By David Gerard and Amy Castor
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The previous two crypto bubbles, in 2013 and 2017, both quietly deflated without much fuss. The 2021–2022 bubble is collapsing with lots of noise and explosions!
Fear spreads by contagion. There have never been enough dollars to cash out the paper wealth in crypto. So the whales — the largest crypto holders — are swinging their weight around to try to cash out before you can.
Ransacking the DeFi piñatas
The music’s stopped. So where’s the money?
On Monday, Amy wrote about Solend. A Solana SOL whale deposited “$170 million” (face value) of illiquid SOL into Solend as collateral on a loan of $108 million in the USDC and USDT (tether) stablecoins, and disappeared. It wasn’t a loan — it was an exit.
The whale exited at least twelve days before Solend realized there was a problem — when SOL dropped in price and the interest on the loan came due. Now the depositors can’t get their USDC out of Solend. And Solend can’t sell off the SOL without crashing the price.
Solend quickly created a DAO, and passed two proposals to just take the SOL the whale had left behind. They just passed a third DAO proposal, to limit the size of loans to $50 million in future. This doesn’t stop someone from taking out multiple loans.
All three proposals were pushed over the line by a single voter with over 80% of the governance token. Why bother with the DAO? They could just ask that guy what he wants to do. [Solend]
The same scam was pulled on Vires Finance on Waves on Tuesday — a big holder put up illiquid WAVES tokens as collateral to borrow liquid stablecoins. Vires was looted for $540 million in USDC and USDT from suckers attracted by unfeasible interest rates on staked stablecoins. [Reddit]
This sort of heist used to be a common way to dump dead altcoins: use them as collateral to borrow ETH or USDC, then disappear, never to be heard from again.
DeFi protocols have always been fat, juicy targets — as we saw with Beanstalk. The Beanstalk attacker used a flash-loan to borrow the governance tokens they needed to vote themselves all the money. But the reason is the same: DAOs full of stablecoins are piñatas full of cash, waiting for you to hit them in just the right place.
But now, after the crash, the whales are getting out. They’re dumping their illiquid bags and grabbling whatever fiat-equivalent stablecoins they can find — even with a haircut.
Here’s a pile more juicy suckers, ripe for the looting. [Twitter]
The Times 21/Jun/2022 SBF on brink of second bailout for crypto
Sam Bankman-Fried from FTX and Alameda defies the contagion narrative — by increasing contagion. He’s propping up doomed DeFi firms to keep the music playing a little longer.
FTX just gave a quarter of a billion “dollars” (in crypto) line of credit to BlockFi, who were hot favorites to be the next DeFi lender to collapse. Decentralization, eh? BlockFi had problems with “a large client that failed to meet its obligations on an overcollateralized margin loan,” who is thought to be Three Arrows Capital (3AC). [Twitter; press release]
BlockFi were the business geniuses who previously racked up a “$280 million” (in cryptos) loss in the bull market of the 2021 bubble. [Twitter thread]
DeFi lender Voyager — who are still offering “up to 12%” on crypto deposits, and are under an ongoing SEC investigation — also got bailed out via a “$200 million” line of credit from Bankman-Fried’s Alameda, who own 11.5% of Voyager. The line of credit includes “a cash/USDC-based credit facility with an aggregate principal amount of US$200 million, and a revolving credit facility for 15,000 BTC.” Voyager had 15,250 bitcoin and $350 million in USDC at 3AC, who they will be issuing with a notice of default. [press release; Decrypt]
FTX itself is not throwing money around like water any more, and has abandoned new deals with sports teams and arenas. [New York Post]
Two recent entries for the crypto "nothing to see here" hall of fame.
Celsius blew up the following day. Voyager disclosed $655m in suspended (and likely lost) funds a week later. pic.twitter.com/BQTojT6SAj
— Nate Anderson (@ClarityToast) June 22, 2022
The Impermanent Unassured Nonmutual Improvidence Not Prudential
Dirty Bubble Media says that the “hostile market condition” is that Celsius pulled their BNT deposits, collected a loss reward in BNT, shorted BNT on FTX, then dumped the BNT. Celsius torched the building, claimed the insurance, and shorted the insurer. [Twitter]
3AC is looking at selling off what assets it can and is hoping for a bailout. [WSJ, paywalled]
Celsius “seeks time to stabilize liquidity.” The actual problem is that Celsius founder Alex Mashinsky seems to have been an utterly incompetent crypto trader, and was mostly good at being a salesman. We’re sure he can shout his way out of it, though. [Bloomberg]
The Washington Post tells the heartwarming story of Mashinsky and Celsius, though they took the time to quote Dirty Bubble Media on Celsius’ nonsense. Dirty Bubble’s Twitter was hacked shortly after this went up. [Washington Post; Twitter]
Celsius has blogged that “we maintain an open dialogue with regulators and officials. We plan to continue working with regulators and officials regarding this pause and our company’s determination to find a resolution.” Translation: regulators are demanding information from Celsius. [Medium]
Babel Finance collapsed on Friday. Their business model appears to have been built entirely on rehypothecation — when you take out a loan, then use that as the collateral for another loan, then use that as the collateral for yet another loan. It’s a great way to leverage your trades for as long as the market’s going up! That’ll keep going forever, right? [WuBlockchain]
Babel says that it’s won a “reprieve” on some debt repayments — but with no details. [Bloomberg]
South Korea is not at all happy with the collapse of Terraform’s UST stablecoin. Daniel Hong, an ex-employee of Terraform, has been barred from leaving the country. Past and present Terraform staff have apparently been subpoenaed by the government, and many haven’t responded. [Twitter thread]
SBF tries to break food markets
In March 2020, the markets were in turmoil after investors panicked over the COVID pandemic. CitiGroup blew a margin call at Intercontinental Exchange (ICE), and technically defaulted. [Financial Times, paywalled]
In DeFi land, this would have resulted in Citi getting “rekt,” as the kids say. The commodities markets would have been deeply shaken up, with knock-on effects of the sort we’re seeing in crypto.
Here in the real world, ICE said “you guys are in default — you’ll fix this now, right?” and Citi did. Because financial markets were already in a panic, and breaking them harder because “computer says no” would have been stupid.
A round-the-clock DeFi-style auto-rekt market is something that Sam Bankman-Fried has literally proposed for US commodities markets. He thinks it’d be great. [Financial Times, paywalled]
Actual commodities producers, such as farmers, roundly condemned Bankman-Fried’s idiotic idea. Commodities tend to be real-world stuff that people need — like food. Breaking the markets in essential commodities because you want to go completely pathological about the idea of automating things is a bad outcome. And this shouldn’t need saying.
Automation has made trading markets vastly more efficient. But you still need human cut-outs. Making the markets in real things that people need as dumb and bad as the DeFi markets may be ill-advised.
Funds are safe
Crypto exchanges die of various ailments:
- Insolvency — when it turns out they lied about having all the cryptos.
- Hacks, leading to 1.
- “Hacks” (they stole the coins), leading to 1.
- Playing the markets with their customers’ coins, leading to 1.
Customers find out something’s amiss when withdrawals suddenly become inexplicably difficult — or artificially limited. Urgent unscheduled maintenance never seems to end. The exchange seems to forget all the Know-Your-Customer (KYC) you ever sent them, and asks for it again in a loop. Your account is magically zeroed.
Crypto exchange Hoo in Hong Kong has put limits on withdrawals, blaming “market panic.” [Twitter]
According to Otteroooo, Hoo and AEX Global, which is based in the UK but whose customers are mostly in China, are both exposed to 3AC. [Twitter thread]
On 14 June, AEX claimed that withdrawals were limited due to technical problems with its cold wallet. [AEX]
After this announcement “caused some improper interpretations and speculations, and caused some customers to panic and withdraw funds,” AEX admitted on 16 June that the problems were from exposure to the collapse of UST somehow causing problems with USDT and USDC, and unclear problems with “some third-party quantitative institutions.” [AEX]
Various large currencies were suspended “for 36 hours.” This has been modified to severe limitations on withdrawals, for at least the next 90 days. [AEX]
But it’s okay — AEX is giving one thousand customers a special AEX NFT! [Twitter]
CoinDCX, one of the largest crypto exchanges in India, can’t get its story straight: “In email, its KYC reasons, over social media its wallet maintenance.” Some CoinDCX customers say there’s been trouble with withdrawals from CoinDCX for at least a month or more, with the excuse “wallet maintenance.” There are rumors that CoinDCX was playing Celsius and BlockFi with customer funds.
Coinswitch Kuber, another large Indian exchange, has closed withdrawals to ensure “compliance.” Well, it certainly ensures compliance with stopping their customers from money laundering — just not with stopping themselves. Deposits are still enabled. [Reddit]
Weekend at Bernie Madoff’s
Crypto is correctly modeled as a single integrated casino — and not at all as an industry of competitors. The US dollar exchanges, such as Coinbase, Kraken, and Gemini, are the cashier’s desk, and the action happens at the unregulated floating offshore tables.
Don’t pay too much attention to the disquieting noises coming from the back rooms.
Tether has reduced its market cap by 15 billion USDT in the last month. Tether has claimed that these are redemptions, or a reduction in their holdings of “commercial paper.”
Tether are extensively documented as repeated liars, e.g., in the New York and CFTC settlements — but their statements of late tend to be true from a certain perspective. Like a child trying to not technically lie. So it can be worth trying to reconstruct the sequence of events that Tether is misleadingly describing.
Our guess is that the “commercial paper” is loans of USDT, with the loans themselves having been accounted for in the reserve as the assets backing the tethers. Examples include the loans of tethers that Tether made to Celsius and to many of the other DeFi lenders.
Did the tethers get paid back, or did Tether write them off and cancel the tethers? We haven’t seen reports of tethers in circulation being frozen — which is a thing that Tether has done in the past.
Tether’s helpful Twitter bot army reassures us that Tether does not own any Evergrande bonds. We repeat, Tether does not own any debt issued by Evergrande. [Twitter]
Don’t forget: Tether only redeems for its direct customers, who number less than ten, and are all Tether’s large and very good close friends.
But there seems to be genuine internal conflict in the greater crypto casino. Tether is complaining about — get this — “malicious redemptions.” The whales are getting out, and they want their money — or “money” — back from Tether.
Tether is making noises about getting a proper audit again — that thing that Tether has never had done. This time, it’s with a “big 12” firm — or Tether CTO Paolo Ardoino thinks so, anyway. Ardoino says he’ll name the auditing firm once they finish the audit. [Euromoney; Twitter]
Tether’s books literally don’t have a history to audit — for many years, their reserve was only documented in a shared spreadsheet, which they sometimes remembered to update.
Number is going down, crypto’s bid to infiltrate the real economy has failed, and the knives are out.
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