Thursday, October 8, 2020

DoJ's scathing 83 pages 👺 / KuCoin's $281m hack 💽 / Ghost of Bitfinex's 2016 hack 👻 / Upbeat U.S. Treasury 🥳

The 83-page document provides stern warnings to exchanges, cryptocurrency issuers, and money transmitters...
                                                           
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What MetaMask's 1M Milestone Means for Ethereum

Also: Square invests $50M in BTC, Google Cloud is not interested in EOS tokens and more
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October 8, 2020
By Daniel Kuhn
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Making consensus 

CoinDesk is preparing for the invest: ethereum economy  virtual event on Oct. 14 with a special series of newsletters focused on Ethereum's past, present and future. Every day until the event the team behind Blockchain Bites will dive into an aspect of Ethereum that excites or confuses us.

The Top Shelf news you subscribed to is down below. 

Now, a few words from CoinDesk markets reporter Daniel Cawrey.

Increased usage 
One of the best metrics of increased usage in the Ethereum economy comes via wallet adoption, the entry point for anyone wanting to interact with decentralized finance, or DeFi. 

Wallets are a key part of the discussion around DeFi adoption and a focus of the CoinDesk invest: ethereum economy panel “Unlocked: TVL and Beyond - Measuring the DeFi Economy” on Oct. 14. Total value locked, or TVL, may measure the top-line numbers, but wallets are where investors park their crypto.

The MetaMask wallet, a browser extension that allows users to interact with the Ethereum network and its multitude of smart contract-based DeFi applications, has surpassed 1 million users. That's a fourfold increase for the wallet since 2019, which is developed and maintained by New York-based software firm ConsenSys. 



Chasing juicy returns in the DeFi space, which can sometimes provide double- or triple-digit returns for lending crypto, is one of the reasons for MetaMask’s growth, said John Willock, CEO of Tritium Digital Assets, a crypto liquidity provider. “I think we can all recognize that a lot of the adoption of MetaMask is through the recent DeFi craze and interest in short-term returns that has been perceived to be out there to chase,” he said.  
 
However, that speculation is bringing real adoption, Willock added, as he compared MetaMask to a web browser, which is the piece of software that has on-boarded almost everyone to the internet. 
 
“I look at the MetaMask numbers as the same sort of early adoption indicator the uptake of Netscape browser use was in the 1990s. It is exciting,” he said.  
 
What’s even more interesting: Developing countries lead in MetaMask adoption. India, Nigeria and the Philippines are the countries with most MetaMask usage after the United States. 
 
“Metamask passing 1 million users is an impressive feat. It's by far the most used browser wallet and gives the community a best-in-class balance between security, functionality and usability,” said Brian Mosoff, chief executive of investment firm Ether Capital.
 
“I expect MetaMask will continue to dominate as DeFi and other Ethereum applications flourish over the coming months and years,” Mosoff added.  
 
It’s simple: More wallet users means more adoption of the Ethereum economy. Although MetaMask requires some knowledge of mnemonic seed storage by users, it’s actually a pretty delightful wallet for an increasingly growing DeFi ecosystem.

– Daniel Cawrey

Featured panel

Stablecoins, Hyper-Collateralization and the DeFi Economy
The rise of fiat- and algorithm-backed stablecoins has largely put crypto's volatility narrative to rest. Now, they have become the bridge into the DeFi economy as well as an engine of hyper-collateralization and "money games." How will these tools evolve as DeFi matures? What risks do these systems create, and how can they be managed as the stakes get higher?

Circle CEO Jeremy Allaire, Aave CEO Stani Kulechov and cryptorati Maya Zehavi will go live at 4:30-5:00 p.m. ET on Oct. 14 as part of invest: ethereum economy.



Weird DeFi
Ethereum’s highly anticipated 2.0 upgrade is poised to bring the network ever closer to fulfilling its original vision to be a “world computer” that plays host to a parallel, decentralized financial system. 

At invest: ethereum economy on Oct. 14, we will address the ramifications for investors as decentralized finance takes the crypto world by storm. 

In a run-up to the event, our two-part CoinDesk Live: Inside the Ethereum Economy virtual miniseries on Oct. 8 and Oct. 12 introduces trending narratives we will break down at the main event: Why all the hype behind yield farming and food-inspired tokens? Should investors take them seriously or are they a fading trend?

On Oct. 8, CoinDesk senior business reporter Brady Dale hosts Priyanka Desai of Open Law, Mason Nystrom of Messari and Sam Bankman-Fried of FTX to assess the newest crazes sweeping the DeFi landscape.

Watch DeGeneration: How Ethereum Is Making Finance Weird on Oct. 8.

Ethereum 101

Just as Metamask has become an important on-ramp to the Ethereum economy, so, too, are the narratives that capture people’s attention. 

This past year has seen the rise of new memetic trading strategies – ways to both interact with and discuss Ethereum applications – that have set the pace for development. 

Yield farming, “the rocket fuel of DeFi,” is one such strategy. A silly name, but an important concept. CoinDesk’s Brady Dale explained in July how it all works. 

Minding fields
The hot new term in crypto is “yield farming,” a shorthand for clever strategies where putting crypto temporarily at the disposal of some startup’s application earns its owner more cryptocurrency.

Another term floating about is “liquidity mining.” The buzz around these concepts has evolved into a low rumble as more and more people get interested.

The casual crypto observer who only pops into the market when activity heats up might be starting to get faint vibes that something is happening right now. Take our word for it: Yield farming is the source of those vibes. 

Broadly, yield farming is any effort to put crypto assets to work and generate the most returns possible on those assets.

At the simplest level, a yield farmer might move assets around within Ethereum-based credit market Compound, constantly chasing whichever pool is offering the best APY from week to week. This might mean moving into riskier pools from time to time, but a yield farmer can handle risk.

“Farming opens up new price arbs [arbitrage] that can spill over to other protocols whose tokens are in the pool,” said Maya Zehavi, a blockchain consultant.

Because these positions are tokenized, though, they can go further.

In a simple example, a yield farmer might put 100,000 USDT into Compound. They will get a token back for that stake, called cUSDT. Let’s say they get 100,000 cUSDT back (the formula on Compound is crazy so it’s not 1:1 like that but it doesn’t matter for our purposes here).

They can then take that cUSDT and put it into a liquidity pool that takes cUSDT on Balancer, an AMM that allows users to set up self-rebalancing crypto index funds. In normal times, this could earn a small amount more in transaction fees. This is the basic idea of yield farming. The user looks for edge cases in the system to eke out as much yield as they can across as many products as it will work on.

Right now, however, things are not normal, and they probably won’t be for a while because liquidity mining supercharges yield farming. 



Liquidity mining is when a yield farmer gets a new token as well as the usual return (that’s the “mining” part) in exchange for the farmer’s liquidity.

“The idea is that stimulating usage of the platform increases the value of the token, thereby creating a positive usage loop to attract users,” said Richard Ma of smart-contract auditor Quantstamp.

The yield farming examples above are only farming yield off the normal operations of different platforms. Supply liquidity to Compound or Uniswap and get a little cut of the business that runs over the protocols – very vanilla.

But Compound announced earlier this year it wanted to truly decentralize the product and it wanted to give a good amount of ownership to the people who made it popular by using it. That ownership would take the form of the COMP token.

By giving away a healthy proportion to users, that was very likely to make it a much more popular place for lending. In turn, that would make everyone’s stake worth much more.

So, Compound announced this four-year period where the protocol would give out COMP tokens to users, a fixed amount every day until it was gone. These COMP tokens control the protocol, just as shareholders ultimately control publicly traded companies.

Every day, the Compound protocol looks at everyone who had lent money to the application and who had borrowed from it and gives them COMP proportional to their share of the day’s total business.

COMP turned out to be a bit of a surprise to the DeFi world, in technical ways and others. It has inspired a wave of new thinking.

“Other projects are working on similar things,” said Nexus Mutual founder Hugh Karp. In fact, informed sources tell CoinDesk brand-new projects will launch with these models.

We might soon see more prosaic yield farming applications. For example, forms of profit-sharing that reward certain kinds of behavior.

As this sector gets more robust, its architects will come up with ever more robust ways to optimize liquidity incentives in increasingly refined ways. We could see token holders greenlighting more ways for investors to profit from DeFi niches.

– Brady Dale



invest: ethereum economy
The move to ETH 2.0 will bring the Ethereum network ever closer to fulfilling its original vision: that of a "world computer" that plays host to a parallel, decentralized financial system. Will it be the rocket fuel that takes Ethereum's financial engine mainstream?  

CoinDesk's invest: ethereum economy virtual event Oct. 14 will address the ramifications for investors of the sweeping changes underway within the Ethereum ecosystem. 

Keynote speakers and panelists including Ethereum founder Vitalik Buterin and Commodity Futures Trading Commission Chairman and CEO Heath P. Tarbert will offer deep dives into Ethereum’s adoption of a proof-of-stake consensus mechanism, sharding and other elements of its impending 2.0 upgrade, as well how the new framework impacts the rapidly advancing business of DeFi, stablecoins and decentralized exchanges.

Register to join invest: ethereum economy on Oct. 14. 

The ledger

This year, decentralized finance emerged as Ethereum’s best bet at finding mainstream attraction. While still a fraction of the activity on Ethereum, and an even smaller portion of crypto generally, DeFi has captured the public’s attention. 

The Financial Times, for instance, wrote a user’s guide to DeFi. But a few questions were left unanswered. CoinDesk contributor Alyssa Hertig responds to a few frequently asked questions, trying to filter the signal from the noise. 

How do I make money with DeFi?
The value locked up in Ethereum DeFi projects has been exploding, with many users reportedly making a lot of money.

Using Ethereum-based lending apps, as mentioned above, users can generate “passive income” by loaning out their money and generating interest from the loans.  Yield farming, described above, has the potential for even larger returns, but with larger risk. It allows for users to leverage the lending aspect of DeFi to put their crypto assets to work generating the best possible returns. However, these systems tend to be complex and often lack transparency.

Is investing in DeFi safe?
No, it’s risky. Many believe DeFi is the future of finance and that investing in the disruptive technology early could lead to massive gains.

But it’s difficult for newcomers to separate the good projects from the bad. And, there has been plenty of bad.

As DeFi has increased in activity and popularity through 2020, many DeFi applications, such as meme coin YAM, have crashed and burned, sending the market capitalization from $60 million to $0 in 35 minutes. Other DeFi projects, including Hotdog and Pizza, faced the same fate, and many investors lost a lot of money.

In addition, DeFi bugs are unfortunately still very common. Smart contracts are powerful, but they can’t be changed once the rules are baked into the protocol, which often makes bugs permanent and thus increasing risk.

When will DeFi go mainstream?
While more and more people are being drawn to these DeFi applications, it’s hard to say where they’ll go. Much of that depends on who finds them useful and why. Many believe various DeFi projects have the potential to become the next Robinhood, drawing in hordes of new users by making financial applications more inclusive and open to those who don’t traditionally have access to such platforms.

This financial technology is new, experimental and isn’t without problems, especially with regard to security or scalability.

Developers hope to eventually rectify these problems. Ethereum 2.0 could tackle scalability concerns through a concept known as sharding, a way of splitting the underlying database into smaller pieces that are more manageable for individual users to run.

How will Ethereum 2.0 impact DeFi?
Ethereum 2.0 isn’t a panacea for all of DeFi’s issues, but it’s a start. Other protocols such as Raiden and TrueBit are also in the works to further tackle Ethereum’s scalability issues. 

If and when these solutions fall into place, Ethereum’s DeFi experiments will have an even better chance of becoming real products, potentially even going mainstream.

– Alyssa Hertig

At stake

Despite the buzz surrounding DeFi, the risks are clear. Donna Redel, adjunct professor of law at Fordham Law School, and Olta Andoni, of counsel at Zlatkin Wong, are two lawyers who have soured on the field (so to say): Regulators are circling, they said in an op-ed published in August.

DeFi’s demise?
A corner of the crypto universe representing less than 1% of total market capitalization of crypto assets has been grabbing the headlines since June. This is the world of decentralized finance, or DeFi, which alternatively is referred to as the center of innovation, an experiment or the new wild, wild west where projects move fast and break things. 

A recent glance of articles on CoinDesk demonstrates the phenomenon. Once again, crypto headlines are focusing on the “craze,” the “frenzy of yield farming,” “investors pouring money into” and “another protocol going up in a fireball.” 

Will the nonstop headlines and framing around the “hot” new DeFi protocols chill the institutional adoption that is beginning in earnest for crypto, digital assets and blockchain technology? 

We believe that, at a minimum, the industry needs self-regulation. Without it, it is on a trajectory to serious regulatory scrutiny and reputational risk.

As with almost everything in crypto, the strong sentiments and opinions make it difficult to determine the true essence and reality around the majority of DeFi projects. For us, this refrain is reminiscent of 2017’s frothy initial coin offering (ICO) days that ended badly for the good names of blockchain and crypto. 

There are certainly similarities: trading frenzy; projects emerging with little or no testing and without audit; no clear regulatory guidance and the recycling of ETH now leading to inflated gas prices. Are we on the precipice of one of the regulatory agencies waking up and sending a missive similar to The Dao Report? 

On the legal front, there is a lack of clear consensus about which agency should be regulating. And, again, there is a lack of guidance from multiple agencies that could be responsible for DeFi projects or for the space generally. 

We are alarmed and concerned with the apparent lack of 360-degree understanding of the potential role of the various actors or operators and their possible interactions with the projects, the governance and hence DeFi ecosystem. Tokens are appearing overnight. Projects are hesitant to use, or totally avoid, terminology that might infer “issue,” “issuance” or “issuer,” as these are hypersensitive words in the securities world. 

Calling a project an “experimental game” or an “innovation” is not sufficient to take it out of the regulatory ambit. The focus is shifting from securities regulation of “the issuer” and the Howey Test prevalent during the ICO days and after, to more complex analysis of the application of commodities regulation, questions relating to who is the “controlling stakeholder(s)” and whether liability or responsibility falls on them.  

Many questions, from a perspective of both securities law and commodities laws, should be examined anew to see how they may be applied to, as well as reimagined for, a disintermediated-decentralized financial model.  

The outstanding questions include whether the “controlling stakeholders” are determined by voting control on DeFi platforms, who among the investor group and founders who has voting control, and whether there should be standards for exchange listing. 

Furthermore, it remains to be seen whether defining these projects as  “decentralized” puts them outside of the regulatory reach or whether  the “centralized” ones should be referred to as “disintermediated finance” – aka the ability to conduct secure financial transactions directly, without the use of financial intermediaries. 

Despite the regulatory uncertainty, traders, projects and exchanges are going full steam ahead, with the result that tokens run high risks of unwarranted price changes, which impacts governance, liquidity and the well-being of the projects.

In our view, the DeFi experiment demonstrates the need for creating a new set of industry rules: audits, proper risk disclosures and planning to anticipate what could go wrong before it actually happens. DeFi self-regulation should normalize collateral sufficiency reviews, auditing standards, governance both on an ongoing and crisis basis as well as the distribution-centralized ownership of tokens. 

It remains to be seen how a regulatory loophole in which these tokens are created, distributed and traded all without regulatory supervision will play out. At least with a modified Safe Harbor, proposed by Commissioner Hester Peirce, and which we commented on earlier this year, the SEC would have some oversight. For the moment, tokens in the DeFi are appearing daily and the explosion of tokens is leading to a distortion of purpose and “investors” are getting burned as projects implode.

– Donna Redel & Olta Andoni



Quarterly review
The latest quarterly review from CoinDesk Research is out! In this 24-chart report, we look at major developments in crypto markets over the third quarter, focusing on growth in stablecoin liquidity, surging interest in decentralized finance applications, and the notable uptick in crypto derivatives volumes. 

Download the free report from our Research Hub. 

Top shelf

Square <3s BTC
Square, the payments company helmed by Twitter CEO Jack Dorsey, announced Thursday it has purchased 4,709 bitcoins, a $50 million investment representing 1% of the firm’s total assets. "Square believes that cryptocurrency is an instrument of economic empowerment and provides a way for the world to participate in a global monetary system, which aligns with the company’s purpose," the company said in a statement. "We believe that bitcoin has the potential to be a more ubiquitous currency in the future,” said Square CFO Amrita Ahuja. "For a company that is building products based on a more inclusive future, this investment is a step on that journey." Full story

Options portend
Activity in bitcoin options listed on the Chicago Mercantile Exchange (CME) surged Wednesday as investors traded call options. According to data source Skew, the CME traded $48 million worth of options during the day, the highest daily volume figure since Jul. 28. The number marks a 300% rise from Tuesday's figure of $12 million. "The CME options had a strong session, and the spike in the volume was mainly due to increased activity in call options," Skew's CEO Emmanuel Goh told CoinDesk over Telegram. The data suggests some traders foresee a bitcoin rally, but believe the upside will be capped near $16,000 until the end of December. Further, they expect prices to remain below $20,000 till the end of the first quarter of 2021. Full story

Hayes steps down
The founders of BitMEX are stepping down from their executive roles at the parent firm of the crypto derivatives exchange soon after U.S. authorities charged the firm over allegedly illegal conduct. In a blog post Thursday, 100x – the holding group for BitMEX operator HDR Holdings – announced that founders Arthur Hayes and Samuel Reed have “stepped back from all executive management responsibilities for their respective CEO and CTO roles with immediate effect.” Vivien Khoo, current chief operating officer of 100x Group, will become Interim CEO, while Ben Radclyffe, commercial director, will take on a supporting role with greater management of client relationships and oversight of financial products. Full story

Enter Google
Google Cloud is making moves to become an EOS validator, but not for the tokens. “Google Cloud is not getting into crypto mining. This is really an infrastructure play for us,” Google Cloud Developer Advocate Allen Day told CoinDesk’s Brady Dale. On Tuesday, Block.one, the company that runs the EOS blockchain, announced Google Cloud is mulling becoming one of the network’s 21 block producers. Day said the company is committed to supporting public blockchain infrastructure, as seen by previously forged relationships with Hedera Hashgraph and Theta Labs, a video content relayer.

FATF standards
The Travel Rule Protocol (TRP), a working group favored by banks and traditional financial institutions and focused on bringing crypto in line with global anti-money laundering (AML) standards, has released the first version of its API. The 25-member TRP working group, which includes Standard Chartered, ING Bank and Fidelity Digital Assets, said the product aims to offer a straightforward way for firms to swap identification data.  This includes data of originators and beneficiaries of crypto transactions, as per the requirements of global AML watchdog the Financial Action Task Force (FATF).

Quick bites




The Thesis
It seems like every investor has a thesis about how to best play the cryptocurrency opportunity, but who’s right? 

CoinDesk has launched The Thesis, a weekly podcast with Senior Markets Reporter Daniel Cawrey that looks at the most important stories and trends for traders and unique interviews with top fund managers digging deeply into their viewpoint - their thesis.

Tune into The Thesis at 9 a.m. ET on the first and third Saturday of each month. Listen to the first episode featuring Jake Brukhman of CoinFund.

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