Macauley Peterson

MakerDAO, creator of the DAI stablecoin, has a good problem: Demand for its product is high.



SparkLend, a borrowing and lending platform organized as a sub-DAO within Maker, has issued so much DAI in recent weeks that it needs authorization to lend more.



In a governance vote <a href="https://vote.makerdao.com/polling/QmVGDsvm">approved</a> Thursday at 12:00 pm ET, Maker voted unanimously to double the D3M maximum debt ceiling to 2.5 billion DAI.



&#8220;D3M&#8221; stands for Decentralized Debt Markets Module, a mechanism designed to optimize the DAI liquidity across different DeFi platforms. The module automatically adjusts the DAI borrowing rates on external platforms (like Aave) to be in line with the Dai Stability Fee within the MakerDAO system.



Read more: <a href="https://blockworks.co/news/makerdao-crypto-backed-loans">MakerDAO balance sheet now majority crypto-backed loans</a>



Motivating the change is the rapidly accelerating demand for loans at SparkLend in the past week, which left available <a href="https://blockworks.co/tag/dai">DAI</a> falling to 250 million. Maker’s risk experts lobbied in favor of the increase, arguing there’s no need to keep it so constrained.



“With recent bull market conditions, it is becoming increasingly difficult to keep up with borrowing demand,” Monet-Supply, analyst with Block Analitica <a href="https://forum.makerdao.com/t/mar-6-2024-proposed-changes-to-sparklend-for-upcoming-spell/23791">wrote</a> on the Maker forum, noting that the protocol blew through its last debt ceiling increase and is <a href="https://spark.blockanalitica.com/v1/ethereum/markets/DAI/?days_ago=30">growing</a> at an average rate of around 20 million DAI per day.



“This poses a risk of unintentionally hitting the D3M maximum debt ceiling and artificially limiting Spark’s growth,” he wrote.&nbsp;



<a href="https://blockworks.co/tag/makerdao">MakerDAO</a> recently more than doubled stability fees across the board on March 10 following an executive <a href="https://vote.makerdao.com/executive/template-executive-vote-out-of-schedule-executive-vote-increase-edsr-increase-stability-fees-decrease-gsm-delay-usdc-psm-throughput-change-trigger-spark-proxy-spell-march-8-2024#proposal-detail">vote</a>. The Dai Savings Rate (DSR) jumped from 5% to 15%.



<a href="https://blockworks.co/tag/stablecoins">Stablecoin</a> yield opportunities have been on the rise, leading traders to swap DAI borrowed at low rates for higher yielding USDC or other stablecoins used in DeFi.



For instance, in addition to promising high yields, a new entrant to the stablecoin market (<a href="https://blockworks.co/podcast/empire/4633d178-d215-11ee-9575-aba4a06687b1">Ethena’s USDe</a>) is incentivized by a points-like system called “shards.”



Read more: <a href="https://blockworks.co/news/stablecoin-liquidity-ethena-labs">Stablecoins need to focus on liquidity, not decentralization — Ethena Labs founder</a>



That dynamic puts downward pressure on DAI’s dollar peg and pushed Maker’s PSM module, which allows swaps between DAI and USDC, down to record lows.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-us.googleusercontent.com/-V9Q47oGDUcjVcE8V9B1hfdGLxJ6bGr3UOFGiA7fVbmAwvDhN57ysF4FLKWN6_QHL_ov-N_WdGCw6UHc17CqzF-tVmmgplasjJmDfRfYL3Ut5-IbHL90LHkap0ZiMiJC0gYSKeN4Pl37T7vi_jloM-g" alt=""/></figure>



Read Blockworks Research: <a href="https://app.blockworksresearch.com/flashnotes/maker-dao-organic-demand-doesn-t-grow-on-trees">MakerDAO: Organic demand doesn’t grow on trees</a>



Ethena co-founder, known as Leptokurtic, <a href="https://x.com/ethena_labs/status/1767294768361738290?s=20">argued</a> on an X space this week that his protocol’s contribution to Maker’s rate increase was overstated, noting that Ethena had captured less than 1% of the total value locked (<a href="https://blockworks.co/tag/tvl">TVL</a>) in DeFi to date.



“I actually think the marginal impact that Ethena has had on these changes is probably less than people are giving credit for over the last few weeks,” Leptokurtic said. “These rate changes were going to happen with or without Ethena being there — it’s just now people make that connection a bit easier between rates in [centralized finance] and DeFi.”



Spark developer Sam MacPherson, CEO at Phoenix Labs, said during the same discussion that current rate levels are “almost certainly not sustainable” in the long run.



Read more: <a href="https://blockworks.co/news/spark-protocol-stablecoin-stability-mechanisms">Spark Protocol is re-thinking stablecoin stability mechanisms</a>



“Ethena is performing a great function here in bridging this disjointed rates behavior,” MacPherson said. “Maker is at the mercy of the market just as much as everybody else, it’s just that there’s no smart contract doing it, there’s more of a slower human process that people attribute agency to the rate setting within Maker — but that’s really not the case.”



For stablecoin holders right now, times are good, with many options to receive relatively safe double-digit yields.



The question is, how long can it last?



“You can’t have 30,40, 50% rates on USD that is sustainable,” MacPherson said. “Eventually [traditional finance] is going to come in on size,” and push rates back down.



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Maker moves to meet demand for DAI

Notional Finance has made the jump from Ethereum mainnet to layer-2 with the third iteration of its fixed-rate borrowing and lending protocol.



The new v3 launched publicly on Monday after a month of closed beta testing. It expands beyond simple bitcoin, ether and stablecoin borrowing and lending to emphasize strategies that leverage yield.



An initial suite of leveraged vaults on Arbitrum enables users to borrow substantially against their initial capital. This amplifies their potential yield if the returns exceed the borrowing cost, while also minimizing liquidation risk.



Read more: <a href="https://blockworks.co/news/arbitrum-dao-funding">Arbitrum DAO looking to bet $40M on network protocols</a>



These vaults are designed for advanced <a href="https://blockworks.co/tag/defi">DeFi</a> users who are familiar with concepts like leverage loping and want to optimize their yield, Notional’s co-founder and CEO, Teddy Woodward, told Blockworks.



“Originally, we had thought that people would use Notional to borrow against their crypto at a fixed rate, and then go take that crypto to do something non-financial” like pay off a mortgage or auto loan, he said. “And that is just completely untrue.”



Instead, the biggest use case is leverage, whether for speculation or yield-generation.



Notional strategies can be protocol-specific or involve placing capital in external protocols, such as Balancer. For instance, a vault might deposit ether (<a href="https://blockworks.co/price/eth">ETH</a>) into liquidity pools and stake the resulting LP tokens.



Users must be aware of the risks associated with these leveraged positions. These include smart contract risk, the possibility of negative returns when yields are less than borrowing costs, price volatility in borrowing or lending, and the risk of liquidation if collateral ratios decline sharply.



Notional’s lean 7-person team opted for Arbitrum because it has the largest total value locked (<a href="https://blockworks.co/tag/tvl">TVL</a>) among layer-2 networks, and a DeFi-focused community.



“I think they&#8217;ve consistently led on product, so&nbsp; it seemed like the natural choice and, while we would like to be on other layer-2s — and we do intend to be at some point in the future — I think we&#8217;re going to focus on <a href="https://blockworks.co/tag/arbitrum">Arbitrum</a> right now,” Woodward said.



He remains skeptical of promises made by proponents of cross-chain interoperability.



“When you&#8217;re talking about putting significant portions of your net worth, there is still real risk in pushing those cross-chain no matter how you do that,” he said. “It&#8217;s not like funds are just going to flow seamlessly between chains — at least not at any point in the near future.”



Instead, Woodward predicts that nascent cultural differences between layer-2 communities will persist.



“I just don&#8217;t buy the idea that the underlying layer is going to be abstracted away,” he said, arguing that there are risks of trying to do so, and incentives for token holders of whatever their favored chain may be to prefer transacting within a given layer-2 network.



The role of Notional’s governance token, NOTE, is unchanged in v3, but it may “evolve going forward,” Woodward said. Currently the token can be staked in an 80/20 NOTE/ETH Balancer pool, while maintaining governance rights. The liquidity also acts as a protocol backstop, and in exchange, the protocol directs some of the fees generated towards staked NOTE holders.



Woodward sees a problem with servicing speculative use cases.



“There is an attitude in DeFi that we should be somehow better than this [but] I think that, ultimately, financial speculative use cases is really what has product market fit in DeFi and you kind of can&#8217;t fight it.”



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Notional Finance brings fixed-rate borrowing to Arbitrum

Andrew Thurman

In the wake of Ripple’s historic court ruling, crypto traders have turned on the leverage.



A <a href="https://blockworks.co/news/judge-rules-ripple-xrp-not-security">New York court judge ruled</a> on Thursday that XRP cannot be considered a security in secondary sales on exchanges. The ruling simultaneously found, however, that institutional sales of XRP could be considered securities offerings.&nbsp;



Despite the mixed messages, shortly after the news broke, traders responded by piling into leveraged positions.&nbsp;



Open interest for Ripple’s <a href="https://blockworks.co/price/xrp">XRP</a>, according to <a href="https://www.coinglass.com/BitcoinOpenInterest">data</a> provided by Coinglass, increased a staggering 99% on a 24-hour basis across major exchanges to a total of $1 billion in outstanding contracts.&nbsp;



<a href="https://blockworks.co/price/eth">Ether</a>, meanwhile, has booked an increase of 16% in open interest, up to $6.77 billion in contracts, while fast risers <a href="https://blockworks.co/price/matic">MATIC</a> and <a href="https://blockworks.co/price/ada">ADA</a> are up 30% and 20%, respectively, to a cumulative $3.32 billion in contracts.&nbsp;



Spot XRP has soared 77% by publication, <a href="https://blockworks.co/news/xrp-altcoins-pump-post-ruling">leading the charge for an explosive market-wide rally</a>.&nbsp;



<h2 class="wp-block-heading">Aave markets roiled</h2>



The levered-up mania was not limited to centralized services: A lone trader singlehandedly pushed interest rates for Aave v3’s <a href="https://blockworks.co/price/usdc">USDC</a> pool as high as 43%. Fellow stablecoin <a href="https://blockworks.co/tag/dai">DAI</a>, meanwhile, sits at just 4.05%.&nbsp;



In a series of dozens of transactions over the course of two hours Thursday afternoon, a single <a href="https://debank.com/profile/0xb0898b883de7f7f49ab8622f2185f5d0ca25b2ad">address</a> built up an $8 million USDC debt on the lending platform with $11.5 million in <a href="https://blockworks.co/price/steth">stETH</a> collateral.&nbsp;



The user in several transactions would withdraw USDC, swap to ETH, convert to stETH, then deposit the stETH to enable more borrowing power.&nbsp;



The outlier position pushed Aave’s v3 $243 million USDC pool well above the optimal utilization <a href="https://app.aave.com/reserve-overview/?underlyingAsset=0xa0b86991c6218b36c1d19d4a2e9eb0ce3606eb48&amp;marketName=proto_mainnet_v3">rate</a> of 90%, causing interest rates for borrowers and lenders to skyrocket. 



As of publication, the rate for depositors stood above 37%. Aave’s overall total value locked (TVL) has climbed $300 million to $9.3 billion on the day. 



While traders have responded to the XRP outcome with rising bullish bets, multiple legal observers have opined that, in reality, the news may be a mixed bag for digital assets.&nbsp;



“A word of caution: that order in the Ripple case is a partial summary judgment from a single district court judge. While persuasive, it&#8217;s not binding precedent on other courts and will likely be appealed and could be reversed,” wrote Brown Rudnick LLP partner Stephen Palley on <a href="https://twitter.com/stephendpalley/status/1679562623564632069">Twitter</a>. “Don&#8217;t yolo into anything based on that decision.”



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Crypto traders pile into leveraged positions following Ripple ruling

David Canellis

On the romance front, SynFutures’ new NFT trading app, NFTures, probably can’t help. But its interface is no doubt familiar to anyone who’s been unlucky enough to use dating apps like Tinder and Hinge.



Swipe left to short the CryptoPunk. Swipe right to go long — with up to three times leverage either way.&nbsp;



It’s a hilariously degenerate way to think about NFTs. But it moves to reinforce personal taste at a time when NFT marketplaces are catering to high-volume traders.



Instead of gamifying speculation with impersonal aggregators, low fees and zero royalties, NFTures places the actual imagery tied to NFTs front and center.&nbsp;



Just like how potential dates instantly determine date-ability with one glance at a profile picture, traders can immediately wager whether a blue-chip profile picture NFT is overvalued or undervalued, with all bets collateralized and settled in ether (ETH), all on-chain via browser wallet MetaMask, among others.



<a href="https://www.nftures.com/" target="_blank" rel="noreferrer noopener">NFTures</a> (a portmanteau of “NFT” and “futures”) is currently in alpha, and went live this morning for a portion of SynFutures’ waiting list. The list has so far garnered around 14,000 signups, chief marketing officer Mark Lee told Blockworks, with a few thousand now able to start swiping.



Users won’t be longing or shorting fully-fledged NFTs, which in the case of Bored Apes and CryptoPunks cost upwards of 58 ETH ($100,000). NFTures instead offers exposure to a basket of floor price CryptoPunks via a SushiSwap price oracle.


<div class="wp-block-image">
<figure class="alignright size-large is-resized"><img loading="lazy" decoding="async" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/nftures.jpg?w=1024&amp;h=1024" alt="nftures nft trading app" class="wp-image-49776" width="257" height="370" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/nftures.jpg?w=950 950w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/nftures.jpg?w=208 208w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/nftures.jpg?w=711 711w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/nftures.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/nftures.jpg?w=178 178w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/nftures.jpg?w=181 181w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/nftures.jpg?w=152 152w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/nftures.jpg?w=56 56w" sizes="(max-width: 257px) 100vw, 257px" /><figcaption class="wp-element-caption">Are you into this CryptoPunk? Click the heart to go long | Source: SynFutures</figcaption></figure></div>


The basket of CryptoPunks is an NFTX treasury filled with 135 NFTs, all equally valued. The treasury is effectively a floor-price CryptoPunk index fund.&nbsp;



Users deposit their NFTs in return for an ERC-20 vToken, PUNK, which represents claim on a random NFT contained within the treasury. Those tokens can then freely be exchanged, or even used to access a special Curve pool for further leverage.



By indexing those CryptoPunks, NFTX offers an alternative to floor prices (the lowest-valued NFT in a collection). Floor prices can be easily gamed: wash trading far below the lowest going price can immediately tank them, opening up all sorts of concerns for leveraged positions.



PUNK, on the other hand, trades on decentralized exchanges SushiSwap and Uniswap, allowing better price discovery on that particular collection. SynFutures new app offers exposure to that spot price, rather than transacting any individual CryptoPunks.



SynFutures plans to add more NFTs treasuries in the future, with Bored Apes and Pudgy Penguins and other top-10 collections floated as potential candidates.



<h2 class="wp-block-heading">Ethereum for NFT derivatives, Polygon for crypto</h2>



Another advantage of offering exposure on an index, rather than actual NFTs, is that it opens markets up for smaller bids. Trading CryptoPunks directly demands six-figure capital, but NFTures allows much smaller positions to be taken.



There are other concerns. Positions are all settled on Ethereum, which has recently experienced an uptick in usage, translating to increased transaction fees.&nbsp;



Trades on the app cost around $10 in gas fees right now and, to begin with, the app only allows users to take a fully-collateralized position worth up to 0.1 ETH ($168), eating into potential upside.



“It’s important for us to increase the position size. If the position size is too small, there’s just not enough financial incentive for someone to pay these fees,” SynFutures’ Lee said.



Liquidity can also be a problem on DEXs, especially for more exotic derivatives like these, resulting in unavailable trades and slippage.&nbsp;



Similar to SynFutures’ primary protocol, which supports futures trading for certain cryptocurrencies, NFTures is bootstrapped by capital provided by some of SynFutures’ strategic partners. The two platforms are completely separate, with separate liquidity pools, but NFTures does use SynFutures’ trading infrastructure.



“It all comes down to demand, which is why we&#8217;re doing it in phases. If we opened it up for everyone and there wasn&#8217;t enough liquidity, that would be an issue,” Lee said. “So we just want to make sure we monitor our liquidity, make sure it&#8217;s able to support the demand that comes in.”



Lee noted that as more demand comes into the app, the firm will expand liquidity either internally or through some of its external partners. SynFutures will continue to open access every week.



SynFutures opted for Ethereum rather than its native Polygon to power its NFT app, despite the fees, as it doesn’t anticipate people coming in and out of positions too much, unlike actual crypto derivatives, which demand higher volume.



“All of the popular NFT collections — the major ones that actually have enough liquidity and market depth — also happen to be on Ethereum,” Lee said.



<h2 class="wp-block-heading">Tinder for NFT leverage, a gateway to DeFi</h2>



Lee expressed that NFT trading isn’t meant to be like crypto derivatives trading, which at the top end is typically earmarked by high volume.&nbsp;



By creating a trading platform in the style of modern dating apps, SynFutures hopes to attract a wider audience than only seasoned NFT traders (SynFutures&#8217; <a href="https://www.synfutures.com/terms" target="_blank" rel="noreferrer noopener">terms</a> prohibit a number of jurisdictions, though, including the US and UK).



“NFT prices don’t change that much anyway, so this is really more a mid-term bet that you’re making. You’re saying: ‘Okay, I think in the next month or two, I see CryptoPunks dropping, so I’ll open a position here,” Lee said.



Other startups are building NFT derivatives products, too. NFTPerps is currently in private beta on Ethereum Layer-2 network <a href="https://blockworks.co/tag/arbitrum" target="_blank" rel="noreferrer noopener">Arbitrum</a>, for one, but that’s pitched towards more crypto native speculators.



Lee sees NFTures serving a different purpose: introducing the broader NFT collector audience to the idea of DeFi. That means making them comfortable with the idea of speculating on NFTs in other ways than by simply buying and holding them.



“If you&#8217;re holding a piece and you don&#8217;t necessarily want to get rid of it, you could open a short position to cover some of your downside risk,” Lee said. “We call NFTs a gateway into crypto, we want this product to be a gateway into DeFi.”



Then again, some NFT collectors are in love with their JPEGs. Shorting them would just be rude.



Updated Mar. 22, 2023 at 2:21 pm ET: Added terms and conditions.



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Swipe Left To Short, Right To Long: Tinder for NFT Leverage Goes Live

Bessie Liu

Gearbox, a composable leverage protocol, has released a V3 upgrade that aims to redefine leverage and lending.



This latest upgrade will build on top of Gearbox’s V2 capabilities by bringing on new liquidity pools, tokens, and the introduction of an immutable smart contract — which is designed to enable better user experience (UX) and allow for further cross-chain deployments without increasing risk.



A composable leverage protocol, in Gearbox’s case, aims to improve capital efficiency by giving users access to leverage across various DeFi protocols.



In V2, the experience around limit orders and portfolio automation is largely restricted to centralized exchanges or layer-2 protocols, where much of the work is handled off-chain, the pseudonymous <a href="https://twitter.com/mugglesect?lang=en" target="_blank" rel="noreferrer noopener">mugglesect</a> told Blockworks.&nbsp;



“We will be bringing automation on-chain, where you can effectively create bots, which are scripts that would run a trading strategy without you having to custody the customer’s funds,”&nbsp; &nbsp; mugglesect said. “Effectively, operating a trustless fund on-chain becomes possible with V3.”



<h2 class="wp-block-heading">Liquidity pool expansion</h2>



Liquidity pool providers will have the option to remain on the existing Main Bluechip lending pool or move to a new “Alpha passive” lending pool.



Unlike traditional DeFi lending protocols — where borrowers maintain custody over borrowed funds — mugglesect said Gearbox borrowers would not have custody over the assets they borrow from liquidity providers.&nbsp;



“Borrowers actually never have custody over [assets], and [aren’t] allowed to swap them or put them into protocols that can be considered unsafe or illiquid,” he said.&nbsp;



The up-and-coming upgrade, however, is set to allow liquidity providers the option to opt into higher risk exposures and reap a higher annual percentage yield (APY) in return.&nbsp;



“Effectively the decision will be made by the lenders,” he said.&nbsp;



<h2 class="wp-block-heading">Potential tokenomics revenue share</h2>



The V3 upgrade is also bringing to market “Minimum Viable Tokenomics” for GEAR, the protocol’s native token.



GEAR stakers, as a result, will be able to determine where the revenue earned through the Alpha Pool should go — and how it should be distributed.



Although profit sharing for GEAR holders is not yet available, the protocol has indicated that profit sharing is possible down the line.&nbsp;&nbsp;



“What is important is that there is an extra revenue source now,” mugglesect said. “Effectively, the devs create the capability of token utility via staking while the DAO decides how they want to actually execute the value accrual.”



Code for Gearbox’s V3 upgrade is currently being audited. A launch date is likely to be finalized by the end of the second quarter.



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Gearbox Is Releasing Its V3 — Here’s What’s New

Ben Strack

<div id="highlights-block_61f1ab5410c1e" class="highlights">
 <ul>
 <li>FTX.US’s first external funding round — including participation from Paradigm, Temasek, NEA and Multicoin Capital— values the company at $8 billion</li>
 <li>Company could look to acquire companies as a way to access their users, gain licenses, president says</li>
 </ul>
 
</div>



Fresh off a hefty funding round, the US affiliate of crypto exchange FTX is looking to build its derivatives business as the company eyes acquisitions to bolster its user base.&nbsp;



FTX.US closed a $400 million Series A funding round Wednesday, valuing the company at about $8 billion.&nbsp;



Participants in the round include Paradigm, Temasek, NEA, Multicoin Capital, Tribe Capital, Ontario Teachers&#8217; Pension Plan Board, SoftBank Vision Fund 2, Greenoaks Capital, Steadview Capital and Lightspeed Venture Partners.



“There was such interest that we felt it was a good time to fully capitalize the entity and establish ourselves with the public-facing raise and valuation — and be able to acquire funds to take our business to the next level,” FTX.US President Brett Harrison told Blockworks.&nbsp;



FTX.US’s users increased from less than 10,000 at the beginning of 2021 to roughly 1.2 million at the end of the year, Harrison said.&nbsp;



Spot crypto traded on the exchange last year totaled $67 billion. Its total average daily volume grew 608% over the last 12 months as peak daily volume hit $812 million in November.&nbsp;



<h3 class="wp-block-heading">Making derivatives a priority&nbsp;</h3>



Crypto derivatives are essential to the exchange’s growth plans this year, Harrison said. The company in August <a href="https://cms.blockworks.co/ftx-us-brings-crypto-derivatives-to-users-with-ledgerx-acquisition/" target="_blank" rel="noreferrer noopener">acquired</a> digital currency futures and options exchange LedgerX, now known as FTX US Derivatives.&nbsp;&nbsp;&nbsp;



FTX.US has applied to the Commodity Futures Trading Commission (CFTC) to offer bitcoin and ether futures to retail and institutional customers.&nbsp;



Former CFTC commissioner Mark Wetjen <a href="https://cms.blockworks.co/ftx-us-hires-former-cftc-commissioner-to-lead-policy-and-regulatory-strategy/" target="_blank" rel="noreferrer noopener">joined the company</a> last year as head of policy and regulatory strategy. FTX.US also <a href="https://cms.blockworks.co/ftx-us-vying-for-margin-trades/" target="_blank" rel="noreferrer noopener">recently added a board of directors</a> — a prerequisite of the CFTC permitting the exchange to offer leveraged trading. 



The business is also trying to increase the reach of the NFT marketplace it <a href="https://www.prnewswire.com/news-releases/ftx-us-launches-ftx-nfts-301397216.html" target="_blank" rel="noreferrer noopener">launched in October</a>.&nbsp;



“There’s a lot of potential to be able to integrate with various blockchain gaming and other metaverse companies that are looking to use exchange technology as the backend of their platforms,” the FTX.US president said.



FTX.US could look to acquire companies to tap into their users, according to Harrison, who highlighted&nbsp; FTX’s buy of portfolio tracker Blockfolio. The business may also look to acquisitions to gain certain licenses.



“With FTX US Derivatives, it was a faster process to acquire a company with existing licenses then to be able to obtain them de novo,” he said. “There might be opportunities for acquiring companies with licenses that give us regulatory approval to offer different kinds of business lines.”



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FTX.US President: Crypto Derivatives are 2022 Priority

<div id="highlights-block_617930d35ef4a" class="highlights">
 <ul>
 <li>$500 million in liquidations on crypto derivatives, though DeFi blue chips AAVE and 1INCH buck the trend with double-digit gains</li>
 <li>Eth 2.0’s &#8216;Beacon Chain&#8217; completed its &#8216;Altair&#8217; hard fork shortly before 7:00 am ET.</li>
 </ul>
 
</div>



Bitcoin and the broader digital asset market fell sharply during early morning hours in New York, with BTC notching a roughly 5% decline and ETH tumbling over 8% in the space of a few hours, driven by cascading liquidations of traders using dangerously high levels of leverage.



In recent days both the amount of leverage and the open interest in crypto derivatives markets have been climbing to levels not seen since the September 7, 2021 mini-crash. This has been a frequent theme of the current bull market rise, and the third such drawdown in the past week alone.



Ether’s drop was more pronounced, though also similar to an 8% drop <a href="https://cms.blockworks.co/ether-follows-bitcoin-to-all-time-high-but-meets-extreme-volatility/" target="_blank" rel="noreferrer noopener">seen on October 21</a>, after the second largest cryptocurrency registered an all-time high.



<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">Bitcoin suddenly fell by 4.5%, falling below 59,000, Ethereum fell below 4,000, and the amount of liquidation in one hour has exceeded 500 million U.S. dollars.&mdash; Wu Blockchain (@WuBlockchain) <a href="https://twitter.com/WuBlockchain/status/1453276571997978630?ref_src=twsrc%5Etfw">October 27, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<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">Someone got hit hard on ETH on Bitfinex. Liquidated for ~35k ETH ($130m) Cant&#39; remember the last time I saw something of this size get liq&#39;d on finex. Insane. <a href="https://t.co/RtxEbK5t51">pic.twitter.com/RtxEbK5t51</a>&mdash; Hsaka (@HsakaTrades) <a href="https://twitter.com/HsakaTrades/status/1453277837897699335?ref_src=twsrc%5Etfw">October 27, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<h3 class="wp-block-heading">Fundamental moves</h3>



Ethereum’s ‘Beacon Chain’ — also known as Eth 2.0 — which will be merged with the current Ethereum mainnet in 2022, underwent a scheduled upgrade at approximately 7:00 am ET. Dubbed Altair — after the twelfth brightest star in the night sky — it’s “the first major network upgrade that will have an exact rollout time,” according to <a href="https://ethereum.org/en/history/" target="_blank" rel="noreferrer noopener">ethereum.org</a>, due to the Proof-of-Stake nature of the new chain&#8217;s consensus mechanism.



The market correction preceded the upgrade, but appears unrelated. There is now over 8 million ETH&nbsp; — still $32 billion in dollar terms, even after Wednesday&#8217;s drop — <a href="https://beaconcha.in/" target="_blank" rel="noreferrer noopener">staked in the Beacon Chain</a>.



Bitcoin has seen a slew of positive fundamental news in recent days, with additional investment avenues in traditional finance being added by <a href="https://cms.blockworks.co/wisdomtree-adds-bitcoin-futures-to-existing-etf/" target="_blank" rel="noreferrer noopener">Wisdom Tree</a> and <a href="https://cms.blockworks.co/valkyrie-files-for-leveraged-bitcoin-futures-etf/" target="_blank" rel="noreferrer noopener">Valkyrie</a>, following a wildly successful launch of the <a href="https://cms.blockworks.co/bito-on-track-to-be-first-fund-in-history-to-hit-1b-in-aum-in-two-days/" target="_blank" rel="noreferrer noopener">first futures-based ETF from ProShares</a>.



“On the heels of the first bitcoin futures ETF being approved last week, many now believe that an ether futures ETF will soon be approved as well,&#8221; wrote Noelle Acheson, Head of Market Insights at Genesis, in an email to Blockworks. &#8220;We are seeing these assumptions drive interest on our desk and the overall price of ether over the past seven days, evidenced in ETH’s outperformance over BTC.&#8221;



But the prospect of an ether ETF is unlikely in the near term, Acheson notes, due to a relative lack of liquidity in the ether futures market on the CME, and the need for greater regulatory certainty, chiefly from the US SEC, as to its potential status as a security.



<h3 class="wp-block-heading">Outliers: AAVE and 1INCH</h3>



New listings on centralized exchanges still can have a strong influence on the price of even well-established DeFi names. The 35% rise in money-market protocol AAVE and and more than 80% for decentralized exchange 1INCH is an apparent consequence of <a href="https://upbit.com/service_center/notice?id=2239&amp;__cf_chl_jschl_tk__=pmd_guFTWzK2W_UTojJrl9oCAFofrIEo5XDft8DTQvUCmEg-1635331274-0-gqNtZGzNAiWjcnBszQil" target="_blank" rel="noreferrer noopener">new listings announced</a> against BTC trading pairs by Korean exchange Upbit.



Both names subsequently gave back about half their gains along with the larger market decline.



<figure class="wp-block-image"><img decoding="async" src="https://lh5.googleusercontent.com/LzNj4rIFAIxxjUcdqIwDBG7X-2hz4FgNG1wELCO9JRF2QCNC7s3IznDC1ax-joEMIXI-l_mJ8MGweakoyRreUqf9E3pdnJCK5y4sSaS9NWEG3ekqEQD85D-yJhVZmS3YSu9_Lx9d" alt=""/></figure>



Bitcoin CME Futures have been trending down since their peak seven days ago at $67,680. Nasdaq and S&amp;P 500 futures are trading flat, falling about -0.3% during the crypto market skid before bouncing.



This story was updated on October 27 at 8:27 am ET.

Bitcoin and Ether Lead Market Lower in Washout of Leverage

Sam Reynolds

<div id="highlights-block_611c3e6ef7e15" class="highlights">
 <ul>
 <li>In the last few weeks major exchanges have reduced the amount of leverage available to retail traders citing regulatory concern </li>
 <li>Tranchess seeks to offer leverage to traders but also doing so in a responsible manner with no forced liquidations</li>
 </ul>
 
</div>



There once was a race to the moon with the leverage exchanges offered to their retail traders. However, in the last few weeks major exchanges have reduced the amount of leverage available to retail traders citing regulatory concern.



In the not-so-distant past, bitcoin billionaire and BitMEX founder Arthur Hayes <a href="https://www.youtube.com/watch?v=qlZukhN_C6c" target="_blank" rel="noreferrer noopener">bragged</a> about his company offering retail traders 100x leverage, a number soon matched by Binance and FTX.



But in July 2019, the <a href="https://cointelegraph.com/news/cftc-probe-of-bitmex-a-result-of-roubini-vs-hayes-taipei-tangles" target="_blank" rel="noreferrer noopener">CFTC </a>opened an investigation into the Seychelles-based BitMEX for allowing US traders to trade on its platform. In May, the <a href="https://cms.blockworks.co/crypto-crash-when-musk-the-environment-tax-day-and-china-collide/" target="_blank" rel="noreferrer noopener">Musk-inspired crypto crash</a> and cascading series of sell-offs liquidated leveraged positions, further dragging down the price to dip under $30,000.



During May’s crash, the drop was so quick that some traders couldn’t react fast enough to close their positions, thereby finding themselves “rekt.”



Looking back, “having no cap on leverage isn’t very wise,” Danny Chong, co-founder of Tranchess told Blockworks in an interview.&nbsp;&nbsp;



He pointed out that compounding the problem was the fact that web servers hosting some exchanges crumbled under the pressure. This meant that even if traders were online, they couldn’t order a stop to the madness.&nbsp;



“You could see this happening on the bar charts, with the fast sales,” Chong said. “It was a huge loss for exchanges.”



While BitMEX still offers 100x leverage, FTX and Binance had a <a href="https://cms.blockworks.co/token-metrics-parallels-with-ftx-and-binance-leverage-downgrade-uniswap-delistings/" target="_blank" rel="noreferrer noopener">change of heart</a> — or a stern talking to by regulators — and decided to cap leverage at 20x for most retail traders.&nbsp;



<h3 class="wp-block-heading">There’s always a place for leverage</h3>



Leverage is not a bad thing. It’s a tool that has been used in trading since the birth of modern markets. It’s just that when used irresponsibly and traders get “rekt,” regulators aren’t going to be happy and will start to intervene. This is where Tranchess comes in. Tranchess proposes something different compared to the wild west of leverage that was previously offered by some exchanges.



Tranchess is a protocol composed of subunits with chess-themed names. Queen, the main fund, which is a simple bitcoin tracking fund where each token simply tracks the price of bitcoin. Next is Bishop, which is a USDC token that creates yield for its holders. Bishop can create yield because of the next token, Rook, which borrows from Bishop to buy shares of Queen on leverage.



In the end, Rook holders get leveraged exposure to bitcoin via Queen, while holders of Bishop generate yield through extending credit.&nbsp;



And what if there’s a precarious drop in the price of bitcoin? Chong explained the protocol has a rebalancing mechanism in place which will attempt to reallocate assets in order to preserve the position of Rook holders, and the yield generation of Bishop lenders.



Plus, Chong said that the maximum leverage available is 2x (currently it&#8217;s at 1.61x per a decision by holders of its governance token), meaning that there’s not quite the same risk owing to lengthy lines of leverage as there would be from similar products offered by exchanges.&nbsp;



In the end the market hasn’t completely decided what to do with Tranchess and its offerings.



Its token is trading at $1.31, down 22% from al all-time high of $1.71 from earlier this month, according to <a href="https://www.coingecko.com/en/coins/tranchess" target="_blank" rel="noreferrer noopener">CoinGecko</a>, but its total value locked is approaching $500 million.



Of course the market gyrations of DeFi tokens in their early days aren’t indicative of their actual value, but it will be interesting to see if the market will embrace tools for more moderate leveraged trading.&nbsp;



Want more investor-focused content on digital assets?&nbsp;<a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Join us</a>&nbsp;September 13th and 14th for the Digital Asset Summit (DAS) in NYC. Use code ARTICLE for $75 off your ticket.&nbsp;<a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Buy it now</a>.