Brianna Beckford

On this episode of Blockworks&#8217; podcast &#8220;<a href="https://youtu.be/aJiEINKl2Ng" target="_blank" rel="noreferrer noopener">On the Margin</a>,&#8221; Michael Ippolito, Blockworks&#8217; co-founder, is joined by Jordi Alexander, chief innovation office, of Selini Capital, and Checkmate, Lead On-chain Analyst for Glassnode. 



Jordi and Checkmate discuss the long-term structural macro trends and how they affect the crypto markets. Jordi and Checkmate also discuss how crypto can forecast broader market conditions, whether bitcoin has become a viable macro asset, if crypto is entering a bear market and how the Fed will respond to the highest inflation in 40 years.



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<blockquote class="twitter-tweet" data-width="550" data-dnt="true">0/ ⚡️💡⚡️💡⚡️ A thread on the Game Theory of the Crypto universe! My most important piece to date for the crypto community: How <a href="https://twitter.com/search?q=%24BTC&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$BTC</a> Dominance is the gravitational force causing the tidal nature of crypto cycles. or &quot;A Tragedy of the Crypto Commons, and how WAGMI despite it.&quot;&mdash; Jordi Alexander (@gametheorizing) <a href="https://twitter.com/gametheorizing/status/1435693384694321158?ref_src=twsrc%5Etfw">September 8, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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They also covered: 



<ul><li>Value vs. momentum</li><li>Long-term structural trends</li><li>And so much more!</li></ul>



Watch the full episode below! 👇



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&#8220;On the Margin&#8221; is a two-part show.&nbsp;Once a week, Mike interviews industry experts, and then at the end of the week, he is joined by a co-host where they break down the top crypto and macro stories. Episodes go live every Wednesday and Saturday morning.



Subscribe to On the Margin today on <a href="https://podcasts.apple.com/us/podcast/on-the-margin/id1558223079" target="_blank" rel="noreferrer noopener">Apple</a> or <a href="https://open.spotify.com/show/2yFL2nSsQucf1rzdEKbFZY" target="_blank" rel="noreferrer noopener">Spotify</a>, or watch episodes on <a href="https://youtube.com/playlist?list=PLvER9nHSRN3xVs_p-dl7L7K_ZgL6lSudu" target="_blank" rel="noreferrer noopener">YouTube</a>.



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Podcast: The Macro Forces Driving Crypto in 2022 with Jordi Alexander & Checkmate

Bessie Liu

Global payments processing company Stripe is launching its own fiat-to-crypto on-ramp, allowing customers to exchange dollars for cryptocurrencies.



Stripe’s new transactions solution is billed as a customizable widget, which can be directly embedded within different DeFi platforms.&nbsp;



The most common way to on-ramp fiat-to-crypto today is to purchase cryptocurrencies through a centralized exchange — including the likes of Coinbase, Binance, Kraken and the recently deceased FTX. To partake in DeFi, one then transfers the cryptocurrency to a third-party wallet.



As a major payments processor for prominent Web2 companies, such as Apple and Walmart, Stripe’s decision to step further into the crypto world during a time when centralized exchanges are under heightened scrutiny can help DeFi become more accessible to mainstream consumers. 



“It’s extremely difficult to get end users ‘on chain’— that is, to fund their wallets with the crypto required to interface with Web3 applications,” Jennifer Lee, product manager at Stripe, wrote in a <a href="https://stripe.com/blog/crypto-onramp" target="_blank" rel="noreferrer noopener">blog post</a>. 



Lee added: “Developers have to wrestle with rampant fraud; navigate complex KYC requirements; and somehow still offer a seamless, high-conversion payments experience so that their users can actually use their Web3 applications.”



Stripe says it will handle tasks related to KYC requirements, payments, fraud and compliance.



Companies that <a href="https://support.link.co/questions/which-websites-support-purchasing-crypto-with-link" target="_blank" rel="noreferrer noopener">already partner</a> with Stripe for fiat-to-crypto on-ramp services include NFT marketplace Magic Eden, social NFT platform Nifty&#8217;s, and decentralized exchange Orca.



There are very limited ways to use DeFi services without a centralized mediator. Stripe’s latest fiat-to-crypto onramp will compete with non-custodial exchanges, such as <a href="https://blockworks.co/news/kado-brings-fiat-on-off-ramp-to-cosmos" target="_blank" rel="noreferrer noopener">Kado</a>, which recently moved to bring its on- and off-ramp services to Ethereum, Solana, Avalanche, Cosmos and Axelar.



Kado, once part of the old Terra ecosystem, initially launched a Terra UST native on-ramp, allowing transfers from bank accounts directly to wallets in fewer than five minutes.&nbsp;



For now, Stripe’s new products are slated to only be available to US customers, with availability to other countries in the works.



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Stripe Enables Fiat-to-crypto On-ramp

John Gilbert

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<h2>Introducing Reserve</h2>



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<h2>Series Table of Contents</h2>



Part 1: <a href="https://blockworks.co/news/how-broken-monetary-policy-fuels-instability">What’s broken</a> Why unstable money isn’t safe for the world and how to understand monetary policy Part 2: <a href="https://blockworks.co/news/the-investors-guide-to-stablecoins">What are people doing today about it?</a> A dive deep into the types of monetary policy alternatives that stablecoins offer Part 3: <a href="https://blockworks.co/news/what-is-an-inflation-hedge-finding-stability-in-todays-market">What is the right way forward?</a> A guide to the various inflation hedging tactics and how they can be used in stablecoins Part 4: <a href="https://blockworks.co/news/what-it-takes-to-tokenize-the-world">What will the future look like?</a> A look at how tokenization will change the stablecoin ecosystem About our sponsor: <a href="https://blockworks.co/news/about-our-sponsor-reserve">Reserve</a> A video explaining the Reserve Protocol



<h2>The protocol and services</h2>
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The <a href="https://reserve.org/">Reserve protocol</a> is a self-service, permissionless factory where anyone can build, deploy and govern their own asset-backed stablecoins (RTokens), which can be integrated within DeFi and real world commerce.



Their long-term goal is to create non-inflationary currencies that remains stable both month-to-month as well as century-to-century. In addition to their protocol, Reserve also launched a pay app called the <a href="https://reserve.org/en/app/about_app/">Reserve App</a>. It is a user-friendly way for ordinary people to buy RTokens with their local currencies and use them in locally. More than $300m a month is transacted on the platform, mainly real people and companies using Reserve to escape inflation.

About Our Sponsor: Reserve

Michael Bodley

The moat has been breached, and the sky is all but falling.



Even blue-chip crypto traders running serious institutional money have booked eye-popping losses in just weeks. For their investors, the full extent of the damage is still anyone’s guess&nbsp; — a seeming eternity after FTX’s <a href="https://blockworks.co/news/bankman-fried-underestimated-collapse" target="_blank" rel="noreferrer noopener">abrupt bankruptcy</a> — as investor relations professionals hide behind pending mark-to-market valuations for startup stakes and early-stage tokens.&nbsp;



And that’s not to mention the scores of asset managers who have battened down the hatches as they’ve tried to trade their way out of historic holes, before their monthly performance updates are due, any day now, to their limited partners, industry participants told Blockworks.



One institutional crypto fund allocator, who has written checks to more than a dozen such operations, said the abrupt radio silence has been all but “maddening” — drawing a direct parallel to TradFi traders running for any kind of cover during the 2008 financial crisis.



“We’re all in the dark,” the source said. “I gave you my money. Why are you not answering my calls?”&nbsp;



Not that they’ve all beat feet to desert islands with no cell service. Case in point: Multicoin Capital.&nbsp;



The veteran cryptoasset manager’s flagship liquid hedge fund <a href="https://blockworks.co/news/multicoin-lost-more-than-half-its-crypto-funds-capital-this-month-sources" target="_blank" rel="noreferrer noopener">plummeted 55% in approximately two weeks</a> in November. The firm’s investors, of course, were not pleased.&nbsp;



But three sources close to the firm told Blockworks they took some solace in the fact that Multicoin executives didn’t hem and haw on a recent call explaining what happened — and at least tried to walk them through why.



One of the sources provided a detailed account of the call, which was open exclusively to limited partners. A Multicoin spokesperson declined to comment.



“The market is down a lot this year,” an executive said on the call. “And we&#8217;re down more than that. There&#8217;s no sugarcoating that. Making matters worse, we got hit while [we were] down. We strongly and publicly endorsed [FTX Founder] Sam Bankman-Fried and FTX. And they turned out to be frauds.”



Indeed, Managing Partner Kyle Samani led the charge to back FTX US with an unspecified amount in January 2022, when he <a href="https://www.coindesk.com/business/2022/01/26/ftx-us-attains-8b-valuation-in-400m-fundraise-including-softbank-temasek-report/" target="_blank" rel="noreferrer noopener">told Coindesk</a> that the affiliate of FTX proper was “laying the groundwork to become the dominant trading platform in the United States for all things crypto.”&nbsp;



FTX had raised $400 million at a valuation of $8 billion. Bankman-Fried, ironically, has <a href="https://blockworks.co/news/ftx-run-by-inexperienced-unsophisticated-traders-court-hears" target="_blank" rel="noreferrer noopener">recently scrambled</a> to come up with $8 billion to bail out his flailing businesses. Samani’s fund has also gone in alongside Bankman-Fried in <a href="https://blockworks.co/news/multicoin-capital-leads-60m-round-in-data-dao-delphia" target="_blank" rel="noreferrer noopener">backing</a> a number of startups, an indicator of the venture business more broadly, wherein portfolio managers typically rely on one another for deal flow and due diligence.&nbsp;



Multicoin execs — pointing out internal capital accounts for, collectively, the largest chunk of the flagship — said they had no intention of shuttering the vehicle or, worse, the firm. Nor would they entertain converting to a proprietary trading shop, an increasingly <a href="https://www.ai-cio.com/news/bluecrest-to-return-8b-become-family-office/" target="_blank" rel="noreferrer noopener">enticing route</a> for those with the stomach to place riskier wagers in a bid to print big profits from staggering market dislocations, especially arbitrage opportunities.&nbsp;



<a href="https://www.axios.com/2022/11/21/multicoin-lps-frustrated-solana-ftx-performance-tax" target="_blank" rel="noreferrer noopener">Axios</a>, <a href="https://www.theblock.co/post/184766/multicoin-capital-hit-by-ftx-collapse-with-10-of-its-funds-aum-stuck-on-the-exchange" target="_blank" rel="noreferrer noopener">The Block</a>, <a href="https://www.cnbc.com/2022/11/17/crypto-firm-multicoin-says-contagion-fallout-from-ftx-will-continue.html" target="_blank" rel="noreferrer noopener">CNBC</a> and <a href="https://fortune.com/2022/11/15/multicoin-capital-ftx-bankruptcy/" target="_blank" rel="noreferrer noopener">Fortune</a> have reported aspects of Multicoin’s recent dealings. This story contains unreported details and provides the first account of the firm’s investor call.&nbsp;



<h3>Due diligence can avert a disaster&nbsp;</h3>



Scheduling an impromptu mid-month call is easy when you’re crushing your benchmark and want to put uneasy, information-starved investors at ease. But precious few digital assets-focused hedge and venture capital firms have been in that fortunate position lately.&nbsp;



They’re facing, instead, the onerous, come-to-Jesus undertaking of owning up to many, many errors: disproportionately relying on FTX custody, employing far too much leverage and doubling down on bets — that would turn out to be disastrous — in round after round.&nbsp;



It doesn’t have to be this way, though.



It doesn’t, that is, if asset managers do their homework. If they establish ironclad due diligence standards, put in place appropriate risk parameters and stay in near-constant communication with their investors all the while, a due diligence professional told Blockworks.&nbsp;&nbsp;



And it needs to be communicated in writing, according to James Newman, co-founder of London-based perfORM Due Diligence.&nbsp;



The startup <a href="https://blockworks.co/news/crypto-due-diligence-startup-vying-to-bring-transparency-to-opaque-industry" target="_blank" rel="noreferrer noopener">specializes in deep dives</a> on digital asset buy-side players and their service providers. Newman declined to specifically discuss Multicoin, or perfORM customers, citing client confidentiality.



“So, it’s one thing, verbalizing it,” Newman said. “The next step is actually to write that down in a policy that is then made available to investors. So, that’s part of assuring investors that there is an actual procedure and policy in place.”&nbsp;



Simply putting all that in place to begin with isn’t enough, Newman said. There needs to be a real commitment to a schedule of conducting due diligence check-ins with counterparties, as well as communicating the results, and, especially, any material changes, to investors.&nbsp;



Multicoin competitor Arca, for one, has likewise recorded choppy performance in its flagship liquid hedge fund this year, despite not having significant FTX exposure. The firm, led by CEO Rayne Steinberg, has rejigged a number of internal guidelines since. 



The market’s turn for the worse has forced Steinberg’s hand in <a href="https://blockworks.co/news/dodging-worst-of-ftx-arca-wont-stay-stagnant" target="_blank" rel="noreferrer noopener">shifting the capital-raising strategy</a> for the firm’s ongoing Series B raise — with capital already earmarked, in part, to bolster regulatory and compliance safeguards.&nbsp;



<h3>Are third-party crypto custodians still a necessary evil?</h3>



In Multicoin’s case, “what happened?” has been the question de jour.&nbsp;



The short version: Outstanding financial instruments under FTX custody and related derivatives, as well as a position in the startup Serum and a bullish thesis on SOL, were to blame. Both Serum and SOL, Solana’s native token, have lost immense value, partially because of their longtime ties to Bankman-Fried. The former has been placed in a side-pocket since the 2020 investment.&nbsp;



Traders are required to keep collateral with market-markers before open derivatives are settled.&nbsp;



On the custody front, Multicoin entrusted FTX with unspecified cash and FTT, the exchange’s native token that is also now underwater&nbsp; — plus relatively small sums of tokens only FTX US would custody, including Solana-based Mango (MNGO). Multicoin also has an equity stake in FTX, one which it will, presumably, have to write down, too — to zero.



The firm, as of mid-November, had successfully withdrawn about a quarter of its locked assets — resulting in a total fund exposure of about 10% — and had been planning to whip up a side-pocket to protect potential incoming limited partners.



Multicoin had one other main trading counterparty: the <a href="https://blockworks.co/news/binance-could-acquire-genesis-loan-book" target="_blank" rel="noreferrer noopener">now-defunct Genesis</a>. But its team “closed out that exposure immediately” after FTX stopped withdrawals. The team also ensured its exposure to Coinbase custodial solutions was minimal (a percentage point or two) and rushed to move outstanding assets to non-custodial, multi-signature solutions.



With centralized custodians, as keepers of clients’ private keys, there’s always an element of risk, according to Nick Neuman, chief executive of Casa, which helps individuals and entities set up their own <a href="https://blockworks.co/news/jameson-lopp-doesnt-want-to-be-found" target="_blank" rel="noreferrer noopener">cold storage solutions</a>. Neuman declined to specifically discuss Multicoin or any Casa clients.&nbsp;



Complicating matters: It’s tricky for active crypto traders to rely much on cold storage, Neuman told Blockworks, because of the time and logistics involved in transferring assets in an alpha-driven game where mere milliseconds matter.



Relying on third-party custodians — however reputable — “inherently requires trust” in potential bad actors, Neuman told Blockworks, the “exact type of thing our industry is trying to eliminate.”&nbsp;



The Casa head said the problem calls for a “mix of solutions.”



“One thing I know is that we have seen repeatedly [&#8230;] in our industry, problems with bad actors — since the beginning, with Mount Gox [being the] earliest and largest,” he said.&nbsp;



<h3>Multicoin: What to do, what to do?</h3>



Multicoin is in the process of onboarding Anchorage as an additional custodian in an effort to reduce its counterparty exposures, one of the sources said. A spokesperson for Anchorage declined to comment.



Multicoin has one big, quick fix. The firm — in addition to conducting due diligence on a number of other potential custodians, as well as other types of service providers — said it has already moved to keep its assets on any exchange for no more than 48 hours at a time. A number of other high-profile competitors have historically entrusted tokens to counterparties on a near-indefinite basis.&nbsp;



Its traders are also in the process of reducing collateral it pledges to market-makers in exchange for leverage. The upshot is that the move reduces the tail risk of another liquidity crunch. The downside is that it significantly increases the risk of margin calls.&nbsp;



The “more tightly knit” the collateral, the firm said, the “greater the risk” of abrupt liquidation, adding that new mitigating risk controls are in the works. Some of those incoming, tightened controls have been about four months in the making. Multicoin is also implementing fresh restrictions on staking, aiming to minimize exposures of locked-up tokens “in order to maintain flexibility and optionality during times of crisis.”



At least one thing is clear: the toll nefarious actors have taken — and, by all appearances, are continuing to take — on all of crypto, is mounting. And it has real-world consequences for the investors who entrust their capital to the traders who increasingly encounter them.&nbsp;



The firm told limited-partners it was not yet “sure” how its administrators and auditors would value frozen assets under GAAP accounting standards.&nbsp;



“But in our view, they should be marked to zero,” an executive said. “There is some chance of a partial recovery. And, you know, it&#8217;s maybe a smaller, much smaller chance of a larger recovery. But we believe that the conservative thing to do is to value them at zero for the time being.&#8221;



Multicoin had $8.9 billion of gross assets under management as of year end 2021, the latest data available.&nbsp;



How much is left?



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OK, You Blew Up Your Crypto Fund. What Do You Tell Your LPs?

Casey Wagner

A number of US representatives are concerned a government-funded central bank digital currency project will be sold to commercial banks.&nbsp;



Reps. Tom Emmer, R-Minn., and Patrick McHenry, R-N.C., drafted a letter to Susan Collins, head of the Federal Reserve Bank of Boston, Thursday to express concerns over the New York Fed’s Project Hamilton and related privacy issues.



“It has come to Congress’s attention that some firms participating in Project Hamilton intend to use government resources from the project to design a CBDC with the intent to then sell those products to commercial banks,” a Thursday <a href="https://emmer.house.gov/2022/12/emmer-leads-inquiry-into-boston-fed-led-cbdc-effort" target="_blank" rel="noreferrer noopener">statement</a> from Emmer’s team said.



Project Hamilton, a joint venture between the Boston Fed and MIT, is primarily focused on developing a retail digital dollar and corresponding payment channels. The team completed the <a href="https://blockworks.co/news/mit-and-boston-fed-conclude-first-phase-of-cbdc-research-project" target="_blank" rel="noreferrer noopener">first phase</a> of the project in February, when researchers said the concept is scalable and the technology feasible. 



Project Hamilton is giving certain private sector players an unfair advantage — as they would have exclusive access to government-funded research and initiatives — the representatives <a href="https://twitter.com/RepTomEmmer/status/1598412817396293643?s=20&amp;t=OXEWLUEV8BrxwmKN413iPQ" target="_blank" rel="noreferrer noopener">argued</a>. Emmer and McHenry are requesting more information about the involvement of private sector partners.



“The letter also asks how the Fed plans to address concerns that many have regarding the dangers a CBDC could pose to financial privacy and financial freedom, which were the subject of over 65% of the letters in response to the Fed’s January 2022 report on CBDCs,” Emmer representatives said.&nbsp;



CBDC projects in the US have shown signs of progress in recent months. The New York Fed and the New York Innovation Center (NYIC) have partnered on a separate CBDC-related project, known as <a href="https://blockworks.co/news/project-cedar-ny-fed-closer-to-wholesale-central-bank-digital-currency" target="_blank" rel="noreferrer noopener">Project Cedar</a>, which researches what a CBDC might look like in the US and what potential use cases it may have. 



Project Cedar’s phase one results, released in November, show that blockchain and distributed ledger technology allowed for foreign exchange spot settlements to complete in under ten seconds, the NYIC said, showing potentially revolutionary real-world use cases for CBDCs.&nbsp;



“Currently, cross-border transactions function well, but there are opportunities for improvement,” the NYIC said in its report. “In general, it takes around two days for a [foreign exchange] spot transaction to settle.”



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CBDC Will Give Private Players Unfair Advantage, US Reps Warn

Macauley Peterson

In a string of virtual media <a href="https://blockworks.co/news/bankman-fried-underestimated-collapse" target="_blank" rel="noreferrer noopener">appearances</a> this week from an undisclosed location, Sam Bankman-Fried appeared genuinely incredulous at the very idea that he willingly committed fraud and may face legal consequences.&nbsp;



Bankman-Fried, the founder of now-bankrupt FTX, spent over an hour during a virtual appearance at The New York Times DealBook Summit on Wednesday putting on the same display he has long used to charm the world: self-deprecating humor and his embellished, nerdy mannerisms.&nbsp;



The 30-year-old former billionaire, who appeared on screen in his signature black T-shirt, said he did not have his first sip of alcohol until after his 21st birthday. The packed live audience in New York laughed.&nbsp;



He also didn’t intend to do anything wrong, Bankman-Fried said, although he stopped short of outright denying that fraud occurred on his watch.&nbsp;



“I didn’t knowingly commingle funds,” Bankman-Fried said. “I wasn’t trying to commingle funds,” he added moments later.&nbsp;



The publicity circus continued Thursday, when Bankman-Fried took his well-worn act to the morning news circuit for a <a href="https://www.goodmorningamerica.com/Business/story/ftxs-sam-bankman-fried-denies-improper-customer-funds-94233125" target="_blank" rel="noreferrer noopener">16-minute chat</a> with Good Morning America.&nbsp;



&#8220;It was delusional,” Galaxy Digital’s Mike Novogratz said of Bankman-Fried’s interview Thursday on CNBC. “Let&#8217;s be really clear: Sam was delusional about what happened and his culpability in it. He needs to be prosecuted. He will spend time in jail. And it wasn&#8217;t just Sam. You don&#8217;t pull this off with one person.&#8221;



Blockworks compiled a list of questions Bankman-Fried has yet to answer, for the New York Times or otherwise. Many have not been asked:&nbsp;



Where did the money come from for your bid to acquire BlockFi? Did you pledge Robinhood equity and if so, where did the funds to acquire Robinhood shares come from?



Why did you move BlockFi customers’ assets on to FTX?



Was the $1 billion personal loan to you from Alameda funded with FTX deposits?



Do you have a stake in Twitter? Was it bought with customer funds?&nbsp;



How much did Alameda lose between December 2021 and June 2022? And how?



SRM was the largest position on the FTX balance sheet, valued at $2.2 billion. How did FTX get those tokens? And why were they valued like that, given Serum&#8217;s market cap is now less than $88 million?



Did you <a href="https://twitter.com/ercwl/status/1598276784130519041" target="_blank" rel="noreferrer noopener">allow Alameda to collateralize</a> a major fraction of the entire FTX margin system with FTT and SRM?



Who authorized the SRM mints on Feb 19 (50M SRM) and May 25 (50M SRM), which <a href="https://twitter.com/LucasNuzzi/status/1591595908239888384" target="_blank" rel="noreferrer noopener">increased Serum&#8217;s total supply by 60%</a>?



Was FTX the &#8220;owner&#8221; of the SRM ERC-20 contract, which has the authority to mint new SRM tokens? If not, who is?



Did FTX keep &#8220;locked SRM&#8221; awarded to market makers for staking FTT on its balance sheet as an asset?



Why did you use <a href="https://threadreaderapp.com/thread/1593469254518640640.html" target="_blank" rel="noreferrer noopener">wire transfers sent to Alameda</a> to onboard funds into FTX accounts until at least 2022?



Did any funds pledged to altruistic campaigns or political donations come from FTX customer deposits?



You <a href="https://www.vox.com/future-perfect/23462333/sam-bankman-fried-ftx-cryptocurrency-effective-altruism-crypto-bahamas-philanthropy" target="_blank" rel="noreferrer noopener">told Vox</a> that talking about ethics is “what reputations are made of” and that you “feel bad for those who get f—ed by it — by this dumb game we woke westerners play where we say all the right shibboleths and so everyone likes us.”



Given that, why should we believe anything you say?



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Everything SBF Didn’t Tell The New York Times

Brent Dornier

I landed in Houston on Nov. 28, 2001. I switched on my cell and was bombarded with voicemails from co-workers. Each was the same: Our employer, Enron, was all but dead.&nbsp;



Then-competitor Dynegy terminated its agreement to acquire Enron. The energy giant would be forced to file for bankruptcy four days later in what would become the largest US corporate bankruptcy ever.



Fast-forward 21 years, and I’m feeling deja vu. Another conglomerate was set to be acquired — and was subsequently scorned — by a hated rival once the scope of blatant fraud came to light. And the similarities between Enron and FTX don’t stop there.



In 1999, Enron dragged energy traders into the 21st century when it launched an online exchange, which quickly became the dominant platform for the sector.&nbsp;



FTX, too, was revolutionary. The exchange was considered a source of stability in a volatile industry. It was widely viewed as the poster child for crypto’s credibility.



Until both fell apart.



Both FTX and Enron ran into trouble after attempting to use their own “tokens” as collateral.



Enron’s core energy trading operation was solid, but many of its other business lines failed miserably. Enron raised money for such ventures through a series of special-purpose vehicles (SPVs) designed to keep debt off its balance sheet. To make matters worse, Enron used its own stock as collateral. Sound familiar?



The bear market sparked by the burst of the dot-com bubble led to increased calls for collateral that exposed the insurmountable hole in Enron’s finances.Sound familiar now?



<h3>Widespread contagion as industry darlings become villains</h3>



Lenders, traders, venture capitalists, exchanges and even tokens have all been whipsawed by FTX’s rapid unraveling.&nbsp;



Enron was no different. Countless companies had collateral locked on its platform. While some were able to ride out the storm, major players closed up shopped after their funds and hedges went poof.&nbsp;



Like FTX, Enron had its own charismatic CEO. Before his company went bust, Jeff Skilling hit the front page of all the big business magazines. He took credit for the first true wholesale markets for natural gas and electricity. And, yes, he worked with regulators in Washington to liberalize markets.



Like Sam Bankman-Fried, the revelation of his Skilling’s balance sheet marked his downfall.&nbsp; We know the rest of the story.&nbsp;



And who led Enron through Chapter 11? The same guy now leading FTX – John Jay Ray III.&nbsp;



<h3>Takeaways</h3>



<ol><li>Sometimes you win by surviving. At Enron’s peak, a competing market maker launched, Intercontinental Exchange (ICE). Its volumes were a distant second, but it was well-positioned to fill the ensuing void. ICE today has a market capitalization of more than $50 billion.</li><li>Scared money doesn’t make money. Consider Ken Griffin of Citadel, who saw an opportunity to profit from a market dislocation when most of his peers de-risked. In a short order, he added a energy trading division — which is still minting money for the multi-strategy firm today.&nbsp;</li><li>This will not last forever. The bear market contributing to Enron’s collapse broke less than a year later, bottoming out on Oct. 9, 2002. A five-year bull market began. Markets turn once weak hands are flushed out. Once the dust settles on FTX, those left standing will reap the benefits.</li></ol>



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FTX’s Bankruptcy Is Strikingly Similar to Enron’s. Have We Learned Nothing Since?

Ornella Hernandez

Coinbase Wallet application users are caught in the fray over Apple’s in-app purchase system that takes a 30% cut from app developers who annually make more than $1 million through the ‌App Store‌.



The tech giant is now trying to collect 30% of the gas fee of any NFT transaction that occurs on the Coinbase Wallet mobile app as well, according to Coinbase Wallet’s Twitter account on Thursday.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">You might have noticed you can&#39;t send NFTs on Coinbase Wallet iOS anymore. This is because Apple blocked our last app release until we disabled the feature. 🧵&mdash; Coinbase Wallet (@CoinbaseWallet) <a href="https://twitter.com/CoinbaseWallet/status/1598354819735031809?ref_src=twsrc%5Etfw">December 1, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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In the meantime, Coinbase Wallet pushed an app update that cuts out NFT functionality because it claims that Apple made it disable the feature until <a href="https://blockworks.co/news/apple-allows-nft-sales-on-its-app-store-but-theres-a-catch" target="_blank" rel="noreferrer noopener">NFT gas fees could be paid through its in-app purchase system</a>.



However, this may leave users unable to transfer non-fungible tokens to other wallets, or “gift it to friends or family” via the Coinbase Wallet iOS anymore.



As a workaround, Wallet users can import their recovery phrase into a non-IOS wallet dapp to regain access to NFT transfers, such as the Coinbase Wallet <a href="https://help.coinbase.com/en/wallet/browser-extension/coinbase-wallet-extension" target="_blank" rel="noreferrer noopener">browser extension</a>, Metamask or Trust Wallet, bearing in mind <a href="https://www.coinbase.com/learn/crypto-basics/what-is-a-seed-phrase" target="_blank" rel="noreferrer noopener">security best-practices</a>.



<h3>Apple taking a bite</h3>



Apple’s policy change “is akin to Apple trying to take a cut of fees for every email that gets sent over open Internet protocols,” Coinbase said.&nbsp;&nbsp;



And it is also “clearly not possible” because Apple’s in-app purchase system “does not support crypto, so we couldn’t comply even if we tried,” it added.&nbsp;



Coinbase Wallet says it is willing to help Apple to overcome what it hopes is an “oversight on Apple’s behalf” — one that protects their profits at the expense of consumers and developers.



The 30% fees has also been a contentious point for Fortnite publisher Epic Games who <a href="https://appleinsider.com/articles/20/08/23/apple-versus-epic-games-fortnite-app-store-saga----the-story-so-far" target="_blank" rel="noreferrer noopener">sued</a> Apple in 2020 for not allowing it to use its own payment platform instead of in-app purchases through the App Store.



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Coinbase Wallet App Update Disables NFT Functionality at Apple’s Request

Concerns around possible censorship of Ethereum transactions was prevalent in the weeks leading up to and after the Merge, but the latest data shows that this upward trend may be reversing.



The Merge introduced changes to the process of block building alongside the transition from proof-of-work to proof-of-stake, that introduced some risk of centralization, particular with respect to MEV — or maximum extractable value.



Tracking site <a href="https://www.mevwatch.info/" target="_blank" rel="noreferrer noopener">MEV Watch</a> reveals that the percentage of censored blocks has dropped from its all-time high of 79% to roughly 70% over the past month. Anything less than about 99%, means Ethereum remains censorship free.



MEV refers to the maximum amount of income that can be earned by validators from the automated process of re-ordering transactions for inclusion in a block.



If MEV in a block exceeds standard <a href="https://www.blockworksresearch.com/glossary#block-reward" target="_blank" rel="noreferrer noopener">block rewards</a>, validators may choose to re-organize a block to capture the income generated by MEV for themselves. 



In order to prevent malicious MEV practices, validators choose to use MEV-Boost relays which allow them to request blocks from a network of builders.



But after the US Treasury’s Office of Foreign Assets Control (OFAC) <a href="https://blockworks.co/tornado-cash-sanctions-expose-potential-defi-achilles-heel" target="_blank" rel="noreferrer noopener">sanctioned crypto privacy service Tornado Cash</a>, popular MEV-Boost realy provider Flashbots — which is based in the US — decided to remain OFAC-compliant, meaning it would ignore any transactions which were restricted by OFAC.



That alone is not enough to censor Ethereum, although it can delay some transactions, Uri Klarman, CEO of relay provider bloXroute Labs previously told Blockworks.



“If I had an OFAC-restricted transaction, it [would] take more time for my transaction to be included, but eventually a validator, which isn’t ignoring [OFAC transactions] would include it,” Klarman said.&nbsp;



Nevertheless, the concern within the Ethereum community is that if the proportion of censored blocks were to become too high, <a href="https://blockworks.co/news/ethereum-is-not-under-attack-understanding-mev-boost-relays" target="_blank" rel="noreferrer noopener">it could threaten</a> a fundamental ethos of Ethereum — credible neutrality — as well as a desirable feature of most public blockchain networks: censorship resistance.



Coming up with technical solutions to preserve these values is a major goal of the Ethereum community.



<h3>Developing SUAVE</h3>



Ethereum developers have also launched a new project to combat censorship.



Dubbed SUAVE, short for “Single Unifying Auctions for Value Expression,” the project aims to decentralize block building itself.



SUAVE was <a href="https://blockworks.co/news/ethereum-is-not-under-attack-understanding-mev-boost-relays" target="_blank" rel="noreferrer noopener">first teased </a>at Devcon, the Ethereum foundation’s annual conference, where Philip Daian, a Flashbots steward, said its latest technology would “make TradFi look embarrassing.” The project&#8217;s latest vision was unveiled in a <a href="https://writings.flashbots.net/the-future-of-mev-is-suave/">blog post</a> on Nov. 22. 



At a high level, SUAVE will be a new blockchain that acts as a plug-and-play <a href="https://www.blockworksresearch.com/glossary#mempool" target="_blank" rel="noreferrer noopener">mempool</a> and decentralized block builder for other blockchains. 



“SUAVE goes beyond sequencing for a single blockchain. We designed SUAVE to be the mempool and block builder for all blockchains,” Hasu, pseudonymous strategy lead at Flashbots <a href="https://twitter.com/hasufl/status/1595492568157937665" target="_blank" rel="noreferrer noopener">tweeted</a>.  



Through building a decentralized sequencing layer, the Flashbots team wants to “give domains control over their own validation guarantees and ensure smaller domains stay decentralized.”



Domains <a href="https://twitter.com/natanb55/status/1469103889056256005" target="_blank" rel="noreferrer noopener">means</a> any combination of layer-1 or layer-2 blockchains, but also side-chains, shards, and even centralized exchanges.



Flashbots does not intend to participate in the marketplace beyond bootstrapping, the company noted.&nbsp;



“We consider this strategy the most aligned with our mission and the health of the entire ecosystem,” the company said.



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Ethereum Reverses Post-Merge Censorship Trend

Ben Strack

The yield product of crypto payments tech company Circle has halted new loans just weeks after the company <a href="https://blockworks.co/news/gemini-circle-genesis-exposure" target="_blank" rel="noreferrer noopener">reduced its yield to zero</a> as contagion of FTX’s failure spread.



Circle Yield is not accepting new loans after repaying its customers, a company spokesperson told Blockworks Thursday.&nbsp;



The move comes after <a href="https://blockworks.co/news/whats-next-for-ftx-and-its-customers-after-bankruptcy-filing" target="_blank" rel="noreferrer noopener">the bankruptcy of crypto exchange FTX</a>, which preceded digital currency prime broker Genesis <a href="https://blockworks.co/news/genesis-halts-lending" target="_blank" rel="noreferrer noopener">pausing customer redemptions and new loan originations</a> within its lending division.



Circle and Genesis parent Digital Currency Group signed a $25 million deal in 2020, aimed at accelerating global adoption of USDC in mainstream finance. As part of the strategic partnership, Genesis was set to help Circle add new USDC yield and lending services.&nbsp;



“Circle has repaid all outstanding customer loans, returning full principal plus interest due to all Circle Yield customers,” a Circle representative said in an email Thursday. “Circle Yield has no remaining loans outstanding to Genesis.”



Total Circle Yield customer loans outstanding were $2.6 million as of Nov. 16, according to a company tweet that day. The loans are “protected by robust collateral agreements,” it noted.



“Outstanding loan balances remain overcollateralized, and Circle will ensure loans remain protected from potential losses,” the company added in a separate tweet.&nbsp;



Circle did not immediately comment on exactly when the company began halting loans.



Built on USD Coin (USDC), Circle Yield allows people to allocate cash into a crypto-based investment that is overcollateralized by bitcoin and earn yields higher than traditional bank rates, according to the company. The fixed rates for one month, three months, six months and 12 months stands at 0%.&nbsp;



A Circle spokesperson told Blockworks last month that the company chose to change its yield from 0.25% to 0% before Genesis — a counterparty to Circle for the product — closed its credit lines. 



“Circle Yield has historically been driven by demand to borrow in crypto capital markets,” the representative added at the time. “As the macroeconomic environment has shifted, there is a much lower appetite to borrow with over-collateralized loans, which has driven USDC yields in CeFi and DeFi down to 0-0.5%.&#8221;



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Circle Yield Pauses New Loans After Repaying Customers

Decentralized financial services giant MakerDAO is hiking the savings yield for its stablecoin DAI from 0.01% to 1% after the latest governance vote.



All DAI holders are able to deposit their stabletokens into a Dai Savings Rate contract for a 1% annual yield — equivalent to an APY percentage.&nbsp;



An increased savings rate will enable DAI to be more competitive than retail TradFi offerings.



Sam MacPherson, a protocol engineer at MakerDAO, tweeted, “In my view Maker should take strong action to halt the capital outflows from DeFi.”



The overall value of all assets locked across DeFi protocols is down 75% this year, shrinking from $166.7 billion to $42.41 billion, with MakerDAO making up about 16% of that total.



“This is ultimately good for the DeFi ecosystem as we will be able to keep the economic energy within DeFi,” he added.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The <a href="https://twitter.com/MakerDAO?ref_src=twsrc%5Etfw">@MakerDAO</a> OMC is presenting options to MKR holders to raise the Dai Savings Rate (DSR). In my view Maker should take strong action to halt the capital outflows from DeFi. Banks are offering 4%+ in risk-free yield &#8211; we should do the same.<a href="https://t.co/pqmFigf1QM">https://t.co/pqmFigf1QM</a> <a href="https://t.co/7bF49nrflI">pic.twitter.com/7bF49nrflI</a>&mdash; Sam MacPherson (@hexonaut) <a href="https://twitter.com/hexonaut/status/1595865802783211521?ref_src=twsrc%5Etfw">November 24, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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MakerDAO’s DAI savings interest rate is now higher than a handful of traditional US banks including Wells Fargo, which has a standard interest rate of <a href="https://www.wellsfargo.com/savings-cds/rates/" target="_blank" rel="noreferrer noopener">0.15%</a> for its ​​Way2Save savings accounts and 0.25% for money market accounts.



TD Bank’s Simple Savings rate sits at <a href="https://www.td.com/us/en/personal-banking/savings-accounts" target="_blank" rel="noreferrer noopener">0.02%</a>, while Chase Savings’ annual interest rate sits at <a href="https://www.chase.com/personal/savings/savings-account/interest-rates" target="_blank" rel="noreferrer noopener">0.01%</a>.



MakerDAO’s new DAI rate is still lower than 1-Year US Treasury yields, which currently sit at <a href="https://www.bloomberg.com/markets/rates-bonds/government-bonds/us" target="_blank" rel="noreferrer noopener">4.64%</a>. CapitalOne also offers 3% APY on certain savings accounts.



In any case, appetite for crypto borrowing has <a href="https://blockworks.co/news/whats-wrong-with-centralized-crypto-lending" target="_blank" rel="noreferrer noopener">not been high</a> since the downfall of centralized finance lenders such as Celsius and BlockFi, leading to low DeFi yields across the board.



“The DSR is the base rate of DeFi — it sets the lower bound for yields. Due to Maker&#8217;s size, increasing the DSR is akin to a rising tide that lifts all boats,” MacPherson told Blockworks.



“Aave, Compound and other money markets will be able to incorporate this yield into their protocols and pay users more for lending their Dai. This will slow down / halt capital searching for better returns at a bank and leaving the DeFi ecosystem,” he said.



MakerDAO’s latest decision to hike savings rates will likely make DAI a more attractive asset for risk-averse investors — especially those keen to look outside Wall Street for their savings interest.



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MakerDAO Now Offering Savings Yields Higher Than Wall Street

In an ironic turn of events, Sam Bankman-Fried’s choice for cryptocurrency legislation could have prevented the collapse of his exchange and protected users, Commodity Futures Trading Commission Chair Rostin Behnam said.&nbsp;



The Digital Commodity Consumer Protection Act (DCCPA), which received vocal support from now-disgraced FTX founder Bankman-Fried, could have, in theory, kept the exchange and associated trading desk, Alameda Research, in check, Behnam said during a hearing before the Senate Agriculture Committee Thursday.&nbsp;



“Based on what we know thus far, a lot of the issues that have arisen and sort of come to light are significant conflicts of interest, significant allegations of commingling customer money and house money, lack of books and records, lack of corporate governance and risk controls, just to name a few,” Behnam said. “And these are, from our understanding in working with [bill sponsors] on the DCCPA, core elements of the DCCPA.”&nbsp;



The core of the DCCPA is “to give the Commodity Futures Trading Commission new tools and authorities to regulate digital commodities,” Sen. John Boozman, R-Ark., <a href="https://www.boozman.senate.gov/public/index.cfm/2022/8/boozman-stabenow-booker-and-thune-introduce-legislation-to-regulate-digital-commodities" target="_blank" rel="noreferrer noopener">said</a> in a statement from August.&nbsp;



The bill received significant criticism from much of the industry, particularly the <a href="https://blockworks.co/news/leaked-draft-of-us-congress-defi-killer-bill-sparks-debate" target="_blank" rel="noreferrer noopener">DeFi community</a>, for excluding people who develop or publish software from the term “digital commodity trading facility.” Bankman-Fried acknowledged that the DeFi community made some important comments, but maintained that the key focus of the bill is to promote safe cooperation between centralized companies and DeFi.&nbsp;



The industry also largely disagrees that the DCCPA could have done anything to stop the collapse of FTX.&nbsp;



“DCCPA would NOT have prevented the failure of FTX International,” Blockchain Association executive director Kristin Smith said on <a href="https://twitter.com/KMSmithDC/status/1598339064645779462?s=20&amp;t=bDT7mTI8OgyY0N5vKrbdCg" target="_blank" rel="noreferrer noopener">Twitter</a> during the hearing.&nbsp;



While the bill text does mention that commingling of consumer funds is prohibited, it does not address the issue of the CFTC overseeing a foreign exchange.&nbsp;



“FTX.com is a foreign registered entity, so, unfortunately, greater CFTC jurisdiction over US entities would have had little impact in preventing the fallout,” Georgia Quinn, general counsel of Anchorage Digital, said. “There are lessons the industry should learn, however, from the failure of FTX.com to help protect consumers.”



Behman did add that Congress will need to take a closer look at the bill in the wake of the FTX crisis.&nbsp;



<h3>CFTC wants to stop Americans skirting prohibition</h3>



The DCCPA is sponsored by Sens. Boozman, Debbie Stabenow, D-Mich., Corey Booker, D-N.J., and John Thune, R-S.D. Boozman and Thune received campaign donations linked to Bankman-Fried and FTX, Federal Election Committee <a href="https://blockworks.co/news/ftx-donations-campaign-finance" target="_blank" rel="noreferrer noopener">records show</a>. Neither senators’ offices responded to Blockworks’ request for comment.&nbsp;



FTX, being based offshore and prohibited in the US, is a unique case in terms of jurisdiction, Behnam said, but US customers were impacted regardless and lawmakers need to act accordingly. Two percent of customers impacted by FTX’s failure were US citizens, Behnam said, citing recent bankruptcy filing documents.&nbsp;



“Folks will find a way to get exposure to offshore entities or activities, even if it&#8217;s prohibited in the US, and we have to do something about that,” Behnam said.&nbsp;



When asked if the outcome could have been different had FTX had registered with the CFTC as an exchange, Behnam said that his agency could have prevented the collapse.



LedgerX, also known as FTX US Derivatives, is a subsidiary of the now-defunct exchange that was able to escape the bankruptcy filing, a luxury <a href="https://blockworks.co/news/crypto-industry-must-report-bad-actors">many </a><a href="https://blockworks.co/news/crypto-industry-must-report-bad-actors" target="_blank" rel="noreferrer noopener">authorities</a> attribute to its registration with the CFTC.&nbsp;



The firm is notably absent from the bankruptcy filing, CFTC Commissioner Kristin Johnson said in November at the Blockchain Association Policy Summit in Washington, DC, in part thanks to the company&#8217;s due diligence in complying with the futures watchdog’s regulatory requirements. In 2017, LedgerX applied to register with the CFTC as a derivatives clearing organization (DCO).&nbsp;



The CFTC has independently confirmed LedgerX does not belong on the list of FTX bankrupt subsidiaries, Johnson said.&nbsp;



“Not $1 of customer assets have been compromised, to the best of our knowledge,” Johnson said of LedgerX.



“Given what we know, from the presence of conflicts of interest, commingling funds, books and records, we would have been able to prohibit it,” Behnam said. “I would point to what we&#8217;re doing with LedgerX on a daily basis.”



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SBF-Backed Crypto Bill Could Have Prevented FTX Catastrophe, CFTC Chair Says

DeFi, for the most part, has held up better than more-centralized cryptocurrencies as ripple effects from FTX continue to spread throughout the asset class. TradFi is paying attention.



Case in point: CME Group and CF Benchmarks are rolling out institutional-grade tools for the price discovery of a handful of DeFi protocols.&nbsp;



The new reference rates and real-time indexes — for Aave, Curve and Synthetix — are set to launch Dec. 19, the companies said in a statement Thursday. Bitstamp, Coinbase, Gemini, itBit, Kraken and LMAX Digital would initially supply corresponding pricing data.



The rates aim to price each digital asset in dollars daily, and each index is set to refresh once every second. Both types of tools, neither of which are tradable products, look to help institutions and others manage price risk around blockchain-based projects.



CME’s planned DeFi offerings come after the company launched 11 new cryptocurrency reference rates and indexes in April, including Uniswap — a decentralized exchange (DEX).



Along with the existing Uniswap reference rate and index, the three new benchmarks capture more than 40% of the total value-locked (TVL) of DeFi protocols that run on Ethereum, according to <a href="https://www.linkedin.com/in/gvicioso/" target="_blank" rel="noreferrer noopener">Giovanni Vicioso</a>, CME’s global head of crypto products. 



“These rates are designed to provide traders, institutions and other users transparency and price discovery across a much broader range of tokens, allowing them to confidently and more accurately value cryptocurrency sector specific portfolios and manage price risk around various blockchain-based projects,” Vicioso said in a statement.



A CME spokesperson did not immediately return a request for additional comment.



A subsidiary of <a href="https://blockworks.co/news/kraken-layoffs-30-percent" target="_blank" rel="noreferrer noopener">crypto exchange Kraken</a>, CF Benchmarks is perhaps best known for its reference rates of bitcoin and ether, employed by CME Group to settle its digital asset futures contracts. CME Group began offering bitcoin futures contracts in 2017 and later launched ether futures in February 2021. The marketplace has expanded its crypto products throughout this year, <a href="https://blockworks.co/news/cme-group-to-offer-options-on-ether-futures" target="_blank" rel="noreferrer noopener">bringing options on ether futures</a>, for example, in September. 



CF Benchmarks CEO Sui Chung <a href="https://blockworks.co/news/qa-cf-benchmarks-ceo-says-institutions-more-interested-than-ever-in-crypto" target="_blank" rel="noreferrer noopener">told Blockworks in August</a> that the company had been fielding more calls from traditional financial institutions during the crypto winter than the crypto index provider received during the bull market.



BlackRock CEO Larry Fink said at the <a href="https://www.youtube.com/watch?v=PSVpth7uqb4" target="_blank" rel="noreferrer noopener">New York Times DealBook Summit</a> Wednesday that he <a href="https://blockworks.co/news/blackrock-ceo-still-in-crypto-for-the-tech-despite-ftx-scandal">be</a><a href="https://blockworks.co/news/blackrock-ceo-still-in-crypto-for-the-tech-despite-ftx-scandal" target="_blank" rel="noreferrer noopener">l</a><a href="https://blockworks.co/news/blackrock-ceo-still-in-crypto-for-the-tech-despite-ftx-scandal">ieves in crypto’s underlying technology</a> —  despite the crash of crypto exchange FTX. He added that the tokenization of securities will play a key role when it comes to growth.



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CME Plots More DeFi Products Despite Broader Crypto Carnage

Shalini Nagarajan

Both Canadian crypto quant fund Gadze Finance and its prominent CEO were victims in FTX’s implosion, with founder Mike Silagadze personally losing around $1 million.



Silagadze, known for building online learning firm Top Hat, switched focus to the crypto and decentralized finance (DeFi) by launching Gadze last October.



The fund didn&#8217;t directly invest in crypto but operated as a liquidity provider for exchanges in return for yield. It also employed arbitrage strategies in a bid to shield itself from volatility and provide predictable returns, with Silagadze reportedly pitching up to 10% to 12% per year.



Gadze was apparently doing well right up until FTX crumbled. The fund’s managed $40 million when trouble bubbled over earlier this month, up from $25 million at its <a href="https://www.prweb.com/releases/gadze_finance_launches_us25_million_defi_crypto_fund/prweb18257986.htm" target="_blank" rel="noreferrer noopener">launch</a>. Of that, the firm kept $5.4 million on FTX directly, funds now relegated to bankruptcy proceedings and may never come back.&nbsp;



He told <a href="https://www.theglobeandmail.com/business/article-ftx-collapse-hits-gadze-capital-crypto-fund-led-by-top-hat-founder/" target="_blank" rel="noreferrer noopener">The Globe and Mail</a> the funds were being used to short sell crypto on FTX as part of a hedging strategy — betting against digital assets to capitalize on their anticipated decline to balance overall risk.&nbsp;



Bitcoin and ether both shed up to a quarter of their value as FTX bombed.



Gadze attempted to retrieve its asset in time but was unable to do so, <a href="https://blockworks.co/news/ftx-users-band-together-had-entire-net-worth-on-there-oops" target="_blank" rel="noreferrer noopener">alongside swathes</a> of FTX users. Silagadze anticipates overall losses of 10% to 15% to the fund.&nbsp;



Silagadze hopes to recover 20% to 50% of Gadze’s missing funds but doesn’t expect it to happen for another few years. Gadze is backed by prominent Canadian investors including Boris Wertz’s Version One Ventures and BlueCat co-founder brothers Michael and Richard Hyatt. Blockworks has reached out for comment.



Silagadze told Globe and Mail he’d used FTX as he believed it to be more secure and reliable than its competitors. Those feelings were bolstered by founder Sam Bankman-Fried’s high political profile and FTX’s suite of suitors, which counted Silicon Valley veteran <a href="https://blockworks.co/news/crypto-vcs-sequoia-multicoin-reckon-with-failing-ftx-investments/" target="_blank" rel="noreferrer noopener">Sequoia</a> and state-owned Temasek, among many others.



He also cited the Ontario Teachers’ Pension Fund’s $95 million <a href="https://blockworks.co/news/ontario-teachers-fund-sank-95m-in-failed-ftx-empire" target="_blank" rel="noreferrer noopener">investment</a> in FTX, which contributed to its credibility, stating the fund was “clearly asleep at the wheel.”



But Silagadze told reporters he feels awful for his fund’s investors, of which there are 65. He said he let people down because he was “supposed to be protecting their own money — and my own.”&nbsp;



Gadze investors are said to still be supportive, with one explaining that everyone was happy with the fund but failed to spot FTX as a counterparty risk.&nbsp;



The quant is now switching crypto strategies somewhat. Gadze’s market neutral fund is reportedly out for higher returns via higher risk strategies, commenting that its new style is more interesting with greater upside.



Silagadze said he initially thought twice about continuing in crypto but remains bullish.



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Quant Fund’s Lost FTX Millions Were Meant to Short Crypto

Talk and excitement around the zero-knowledge rollup is heating up as layer-1 protocols take significant steps toward implementing the solution at scale. The technology promises to remove a critical bottleneck in the development of Web3: cost and scaling ceilings. Layer-1 blockchains such as Ethereum struggle to meet full user demand because of high transaction fees and congestion, which work in conjunction with one another.&nbsp;



While various types of rollups and layer 2 solutions have been created to address this problem, the ZK rollup hasn’t been tested at the scale needed to open Web3 to the masses. While rollup technology introduces new advantages, it also brings some new challenges in regards to how they manage data availability in a way that is decentralized and censorship resistant. Implementing rollups without first addressing this issue is like putting the cart before the horse. The path to mass adoption needs to lead with decentralization and security first in mind.&nbsp;&nbsp;&nbsp;



Some blockchains are closer than others. For example, <a href="https://syscoin.org/" target="_blank" rel="noreferrer noopener">Syscoin</a> announced a PoDA (Proof-of-Data Availability) solution, which is already working on testnet, that will work hand in hand with rollups once they are deployed on mainnet. Unlike other approaches, its rollup can effectively inherit the security of the base layer, which is Bitcoin in Syscoin’s case, by protecting against censorship and centralization vulnerabilities. But before explaining how they achieve this we need to explain zero-knowledge proofs and the various approaches to ZK rollups.



<h2>What are zero-knowledge proofs?</h2>



Zero-knowledge proofs (ZK proofs) are a digital verification method where the prover can show that they have access to a piece of information without necessarily revealing it. MIT students Shafi Goldwasser and Silvio Micali introduced the concept in a <a href="http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.419.8132&amp;rep=rep1&amp;type=pdf" target="_blank" rel="noreferrer noopener">research paper</a> in 1985.&nbsp;



ZK proofs have evolved significantly since then, finding real-world use cases in developing privacy and security-oriented systems. Unsurprisingly, ZK proofs also enhance cryptography and powers privacy-oriented coins such as Zcash.&nbsp;



However, ZK proofs can do much more for cryptocurrency. They are a fundamental block for building rollups — solutions that significantly improve scalability and performance for blockchain networks.



<h2>What are rollups, and how do they differ?&nbsp;</h2>



Rollups are layer-2 scaling solutions that bundle millions of transactions into one, which is then submitted on the base layer (e.g., Syscoin) as a single transaction. Rollups spread the single transaction cost across many users, thus making them a cheaper option. Additionally,&nbsp;the off-chain process ensures that rollups offer a faster settlement, thus easing the load on the base layer and unlocking mainstream-level capacity for blockchain networks. There are currently two main types of rollups: Optimistic and ZK rollups. Both approaches solve the blockchain scalability issue but with unique advantages and disadvantages.



<h3>Optimistic rollups explained</h3>



Optimistic rollups are layer-2 scaling solutions that scale throughput by assuming (optimistically) that each transaction bundled within a rollup is valid. Hence, even though transactions on the layer-2 network are processed instantly, there is a window (usually seven days) for users to contest fraudulent transactions. However, these users are not required to wait 7 days, as there are bridges that front liquidity across the chains that let people exit. Barring any challenges, the network automatically adds the rollup transactions on the parent chain for final settlement at the end of the window.



The waiting period guarantees security as the second layer can reverse fraudulent transactions before updating the state on the parent network. However, it also introduces a significant bottleneck. Users must wait a long while to withdraw deposited funds from the layer-2 network. Further, the model fosters censorship, as the project team or a limited group of validators manages core infrastructure and can potentially reverse transactions. This is true for ZK rollups as well if the sequencer is centralized. Therefore, one must decentralize the sequencer as Syscoin is doing, so it’s not an issue on either type of rollup.



Arbitrum and Optimism are the most popular examples of layer-2 solutions already utilizing optimistic rollups to scale Ethereum. However, another type of rollup – ZK rollups – seems to be the end game for the technology because of the unique capabilities it brings to the table.



<h3>So what are ZK rollups?&nbsp;</h3>



ZK rollups are another suite of layer-2 scaling solutions that handle computation and process dozens of transactions off-chain before submitting a rolled-up version on the parent chain. The critical difference is that zero-knowledge rollups offer near-instant settlement on both layers, unlike optimistic rollups.&nbsp;



ZK-rollups tap into their zero-proof technology to submit regular validity proofs to associated smart contracts on the parent network, confirming the accuracy of the transactions on the layer-2 network. The reliance on zero-proofs also reduces the volume of shared transaction data,&nbsp; thus making ZK rollups privacy-focused by default.



In addition to privacy, ZK rollups eliminates the need for users to wait several days before withdrawing funds from the layer-2 solution. However, the technology&#8217;s nascent nature is its most significant disadvantage.&nbsp;



ZK rollups are more complex to build, requiring a heavy reliance on a few developers to maintain the entire system. Additionally, the network structure often involves setting up sophisticated and otherwise expensive hardware to validate transactions. And depending on the approach, ZK rollups can present some of the same censorship risks if the validation sequencing is centralized. Because not all ZK rollups are the same, these centralization factors need to be examined independently.&nbsp;



The primary ZK solutions utilized in cryptography are zk-Stark, zk-Snark and Validium. The latter is a novel ZK rollup already pioneered by Syscoin to scale blockchain systems.



<h3>zk-Snark vs. zk-Stark</h3>



Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-Snark) are proof systems that enable the prover to publicly verify that they own vital information, such as the private key to a cryptocurrency address and the amount they&#8217;re trying to transfer. Once the user provides cryptographic proof, they can transfer funds without disclosing essential details such as the associated addresses, transaction history and balances. The Zcash cryptocurrency project implements zk-Snark to enable anonymous and private transactions for users. Notably, zk-Snark has a fundamental risk. The requirement of trusted third parties to set up the system increases centralization and makes it vulnerable to attacks.&nbsp;



Zero-Knowledge Scalable Transparent Argument of Knowledge (zk-Stark) solves the initial setup risk with zk-Snark by eliminating the involvement of a few trusted parties. It handles off-chain computation and immediately relays only an insignificant amount of secure data on the parent chain for validation. Zk-Stark technology provides excellent scalability, and privacy features which are immensely valuable to smart contract blockchains.



<h3>Validium on Syscoin</h3>



Validium, a ZK-rollup solution deployed on the Syscoin network, is a unique kind of zero-proof technology with potentially higher throughput than both zk-Stark and zk-Snark. Validium&#8217;s core proposition is its data storage location.&nbsp;



Validium enables Syscoin to handle up to four million transactions per second (TPS), a remarkable feat for a smart contract blockchain. Unlike existing ZK-rollups that store such transaction information on-chain, <a href="https://docs.syscoin.org/docs/intro/syscoin-roadmap/#validium" target="_blank" rel="noreferrer noopener">Validium stores data off-chain</a>. This allows the technology to free up additional space on the base layer.



<h2>The different ZK rollup projects</h2>



Despite being in their infancy, ZK rollups are seeing broad adoption across the crypto industry because of the immense benefits the system brings to decentralized applications. These applications expand far beyond the Ethereum ecosystem, with more use cases expected to emerge as the technology improves.



For example, zkSync is a popular scaling solution utilizing ZK rollups. The earliest version of the protocol enabled privacy-focused and cheap token transfers and payments. However, the solution recently launched zkSync 2.0 will unlock the ability for developers to deploy dapps on the network.



StarkNet is another ZK rollup project enabling Ethereum-based applications to scale throughput. Leading decentralized protocols like dYdX and ImmutableX already implement StarkNet’s solution, allowing low-cost transactions and fast settlement on their platforms.



Outside of Ethereum, advanced networks like Syscoin harness ZK rollups (and Optimistic) in a way that provides full scalability without sacrificing decentralization by storing data off-chain.&nbsp;The result is unprecedented scaling and a mainstream-ready solution for dapp developers.&nbsp;&nbsp;



<h2>The data availability problem and Syscoin’s solution</h2>



Blockchain transactions involve significant volumes of data that only grow as the network expands. The data demand especially takes its toll on smart contract blockchains where users perform complex transactions. As the data volume increases, every network faces a data availability challenge.&nbsp;



The challenge involves devising a means for participants (both validators with sophisticated hardware and light-client nodes) to verify that a block producer included all transaction data in a proposed block. This verification is essential to show that the block producer did not censor participants by enforcing any restrictions that would prevent them exiting the rollup. The ultimate goal is to inherit the security of the base layer.&nbsp;



There are several approaches to solving the data availability challenge. Ethereum’s previous, vision was to roll out sharding, a process that practically splits the network into different bits (shards). But after a recent change in their roadmap, their plan is to go a different route that uses KZG commitments to shard data blobs.&nbsp;Reducing the data into smaller segments makes it easier for validators and light-node operators to access the data.&nbsp;



Both the Ethereum and Syscoin dev teams independently arrived at similar solutions around the same time. But while Ethereum sharding is at least a year away from production, Syscoin’s PoDA (Proof-of-Data Availability) is already on testnet. It uses the Syscoin blockchain to verify that the correct execution data was provided and confirmed by the network, giving the opportunity for any person the ability to store it and retain censorship resistant properties. In addition, it will automatically use a committee of trusted safe-keepers as well as decentralized storage options such as filecoin/arweave and others for long-term archiving.This approach frees up the base layer for greater scalability. It also minimizes the data availability challenge since a zero-knowledge implementation generates less data than a public smart contract blockchain.



<h2>The future of blockchain scalability and virtual machines</h2>



Syscoin offers the most advanced smart contract platform secured by Bitcoin’s impeccable proof-of-work (PoW) through merged mining. Syscoin also delivers remarkable scalability on the <a href="https://syscoin.org/news/nevm-and-related-changes-to-syscoin" target="_blank" rel="noreferrer noopener">Syscoin NEVM</a>, which supports the deployment of Ethereum-native applications.&nbsp;&nbsp;



Syscoin is paving the future of blockchain scalability and virtual machines by implementing secure rollups and increasing data availability. They are implementing scaling solutions that not only account for technical bottlenecks, but also regulatory ones. They integrated a base layer of opt-in regulatory compliance for all smart contract tokens. This will let token issuers provide users the necessary tools to stay compliant — a tool that would prove useful against complaints from regulatory authorities. They have implemented this feature on their UTXO side and are working on it for the NEVM side for compliant rollups. Mainstream-scale blockchain adoption is possible and can be served over secure and high-performant networks that offer a seamless experience for all network users.



This content is sponsored by <a href="https://syscoin.org/news/nevm-and-related-changes-to-syscoin" target="_blank" rel="noreferrer noopener">Syscoin</a>.



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What Are ZK Rollups? The Future of Smart Contract Blockchains

Sebastian Sinclair

In Indonesia, the central bank has formally laid out plans for a central bank digital currency (CBDC), pitched to combat what it calls rising “cryptoization” of the country’s digital economy.



Bank Indonesia’s new CBDC <a href="https://www.bi.go.id/en/rupiah/digital-rupiah/Documents/White-Paper-CBDC-2022_en.pdf" target="_blank" rel="noreferrer noopener">white paper</a> outlines how “shadow currencies” and “shadow central banking” are furthering unregulated credit creation around the world through crypto.



Two years of pandemic-era investments into the crypto sector have fueled this system. As such, the bank said it has been forced to recalibrate its approach and policies to promote digital forms of “trusted money.”&nbsp;



“Digital rupiah will complement the existing money being commonly used by the public, including physical cash. The task of Bank Indonesia in this regard is to respond to public demand and preferences.”



Bank Indonesia’s CBDC initiative, Project Garuda, will first examine potential use cases of a wholesale CBDC before expanding to include retail tests.&nbsp;



Wholesale CBDCs mostly relate to interbank settlements between financial institutions. They differ from retail CBDCs, which are digital representations of a country’s fiat intended for use by the general public.



In an email to Blockworks, a representative labeled the project “high-level” to be rolled out in three stages. First, testing redemption and transference of a wholesale CBDC. Then, financial markets transactions will be explored including money market business models.&nbsp;



The final phase will explore integrating an end-to-end wholesale digital rupiah into the financial ecosystem alongside further experimentation with a retail CBDC. The spokesperson didn’t offer a timeline for the project.



<h3>Indonesia CBDC adds to long list of pilots</h3>



Project Garuda echoes other nations&#8217; attempts to explore and develop their own sovereign digital currencies.



Around 40 countries have already begun researching their use including in the US and Australia while a further 10 have advanced to a proof of concept. China — the world’s most developed economy to do so — currently has a CBDC in the pilot stage, with tokens distributed in lotteries across several provinces.



Seven nations have developed a pilot which have been tested in real world scenarios while just two countries, the Bahamas and Jamaica, have fully launched a CBDC, data from <a href="https://cbdctracker.org/" target="_blank" rel="noreferrer noopener">CBDC Tracker shows</a>.



“Most central banks are still mindful before taking a decision to issue a CBDC for the public,” the bank said. “There is no one-size-fits-all solution in the development of CBDC as each country has its own unique characteristics and specific policy contexts.”



The bank said it would conclude its findings in a policy stance review.



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Indonesia Wants to Counter ‘Shadow Central Banking’ With CBDC

BlackRock chief executive Larry Fink says he still sees promise in cryptocurrency’s underlying technology despite everything that happened with FTX.



The billionaire money manager touched on the FTX scandal at the <a href="https://www.youtube.com/watch?v=PSVpth7uqb4" target="_blank" rel="noreferrer noopener">New York Times DealBook Summit</a> on Wednesday. “I actually believe most of the [crypto] companies are not going to be around,” Fink said.



BlackRock, the world’s largest asset manager overseeing some $8 trillion, had previously invested $24 million in FTX through a fund of funds. Fink noted Sam Bankman-Fried’s firm may have misled investors.



&#8220;We&#8217;re going to have to wait to see how this all plays out…I mean, right now, we can make all the judgment calls. It looks like there were some misbehaviors of major consequences,” Fink said.



FTX’s valuation shot to <a href="https://blockworks.co/news/ftx-valued-at-32-billion" target="_blank" rel="noreferrer noopener">$32 billion</a> at the start of the year, having raised funds across <a href="https://www.crunchbase.com/search/funding_rounds/field/organizations/funding_total/ftx-exchange" target="_blank" rel="noreferrer noopener">seven venture capital rounds</a> starting from 2018 per Crunchbase, including a meme-bound Series B-1 worth $420 million last October. 



All that quickly crumbled earlier this month after a debilitating $6 billion bankrun triggered by concerns of shallow liquidity and gross mismanagement. FTX is now undergoing bankruptcy proceedings, and the latest figures show it owes $3.1 billion to its 50 largest creditors with up to a million users out-of-pocket. 



Former CEO Sam Bankman-Fried said at the DealBook Summit that he <a href="https://blockworks.co/news/bankman-fried-underestimated-collapse" target="_blank" rel="noreferrer noopener">didn’t intentionally commit fraud</a>, and he was “frankly surprised” at how big Alameda’s position was in his exchange’s native token, FTT — a reference to its leaked balance sheet that surfaced about two weeks before its demise.



Fink reasoned that FTX issuing its own cryptocurrency, especially without appropriately disclosing its own balances, ultimately led to its downfall.



Major venture capital firms <a href="https://blockworks.co/news/crypto-vcs-sequoia-multicoin-reckon-with-failing-ftx-investments" target="_blank" rel="noreferrer noopener">Sequoia</a> and <a href="https://blockworks.co/news/singapore-central-bank-defends-red-flagging-binance-ftx" target="_blank" rel="noreferrer noopener">Temasek</a> were among those exposed to the embattled exchange. Sequoia had been vocally enthusiastic about Bankman-Fried, once <a href="https://www.ft.com/content/67b1899f-4b1f-4676-b264-0d19e205d64e?shareType=nongift" target="_blank" rel="noreferrer noopener">saying</a> in a now-deleted blog that his intellect was “as awesome as it is intimidating.” 



Both Temasek and Sequoia have since marked their FTX equity down to zero, while the Ontario Teachers&#8217; Pension Fund <a href="https://blockworks.co/news/ontario-teachers-fund-sank-95m-in-failed-ftx-empire" target="_blank" rel="noreferrer noopener">plans</a> to do the same with its own $95 million investment.



Despite problems surrounding the collapsed exchange, Fink — once a crypto skeptic — said the tech powering it will be “very important,” harking back to the “blockchain, not Bitcoin” mantra heard across Wall Street in cycles past.



&#8220;I believe the next generation for markets and next generation for securities will be tokenization of securities,” Fink said.&nbsp;



There have indeed been novel and important developments in this area of late, with major institutions <a href="https://blockworks.co/news/jpmorgan-trade-on-public-blockchain-monumental-step-for-defi" target="_blank" rel="noreferrer noopener">dabbling</a> in trading tokenized securities and <a href="https://www.eib.org/en/press/all/2021-141-european-investment-bank-eib-issues-its-first-ever-digital-bond-on-a-public-blockchain" target="_blank" rel="noreferrer noopener">bonds</a> on public, reasonably decentralized blockchains.&nbsp;



On-chain <a href="https://blockworks.co/news/can-defi-handle-new-wave-of-users" target="_blank" rel="noreferrer noopener">decentralized exchanges</a> are indeed increasingly successful, but blockchain-powered traditional markets may still be a ways off. The Australian Securities Exchange earlier this month <a href="https://blockworks.co/news/blockchain-not-bitcoin-is-dead-australian-bourse-cans-dlt-shift" target="_blank" rel="noreferrer noopener">canned</a> its $170 million project to transform its settlement layer into a blockchain-powered system after more than three years of development. 



Consulting giant Accenture found the shift untenable due to the distributed ledger’s high latency.



David Canellis contributed reporting.



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BlackRock CEO Still in Crypto for the Tech Despite FTX Scandal

Westie

Kwenta: Perpetuals Powered by Synthetix

Permissionless is the brainchild of Blockworks and Bankless. Over 5,500 people attended the inaugural event in 2022, making Permissionless the world’s largest DeFi conference.&nbsp;



What sets Permissionless apart? It’s a crypto native’s paradise, crafted specifically for both builders and investors who are dedicated to scaling the industry.&nbsp;



Permissionless is headed to Austin in 2023, and you know what they say… Everything is bigger in Texas.&nbsp;



Permissionless 2023 will feature the biggest names in Web3, a gargantuan exposition hall filled with the top brands in the space, an awe-inspiring NFT Gallery, inclusive, community-focused parties and events, metaverse experiences, and so much more.



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