Cybrid Weekly DeFi Digest - July 1

Market: Hot Take

Total Market Cap for crypto fell below USD$900bn this week, in the face of continued uncertainty for investors. Overall, market sentiment has taken yet another tumble over the past few days, with price action appearing to stabilize somewhat as we close out the week.

The 3AC effect upon the market, following news of its impending liquidation, was unsurprisingly bearish. Fears concerning a potentially ongoing illiquidity contagion, combined with a distressed macroeconomic outlook played out in negative price action for BTC and ETH. With these assets dipping below USD$20k and USD$1k respectively this week, we saw an important psychological support crumble. According to The Block, BTC has suffered its worst quarterly loss since 2011.

In other news, BTC and ETH dominance ratios have remained fairly flat with, no change for BTC and a minor loss of ground for ETH.

News of the Week

Three Arrows Capital Fiasco Ends in Liquidation Order

The fallout from 3AC has officially culminated in its liquidation, according to sources close to the case. In what the Defiant is calling “the biggest failure of a crypto fund of its kind”, a British Virgin Islands Court ordered earlier this week for 3AC’s closure and for its funds to be sold off to creditors.

Fears of insolvency have been overshadowing the fund since it was first discovered dumping over USD$40m worth of stETH on the market just over two weeks ago. A combination of overexposure to the collapsed LUNA ecosystem and overleverage of Grayscale BTC products (GBTC) in the face of tumbling crypto prices are thought to be among the main factors in 3AC’s demise.

Further compounding 3AC’s woes, the Monetary Authority of Singapore (MAS) released a statement yesterday that it will be launching an investigation into the fund over allegations of “providing false information” to the authority and for “exceeding the assets under management threshold allowed for a registered fund management company”.

OP Crypto 'Fund of Funds' aims for USD$100m cap

Yesterday, Venture Capital firm, OP Crypto, announced the launch of a new ‘Fund of Funds’ for supporting crypto fund managers. The fund (OP FOF I) has already secured USD$50m from LedgerPrime (FTX’s investment arm) and FJ Labs.

OP FOF I’s founders revealed that they plan to close out the fund at the end of Q3 and that they are eyeing a USD$100m hard cap. They are particularly focused on fund managers leading early-stage crypto projects across DeFi, NFTs, gaming and metaverse.

Ethereum 'Difficulty Bomb' Delayed

The Ethereum blockchain successfully deployed its Gray Glacier hard fork upgrade yesterday. The upgrade relates to the implementation of the Ethereum Improvement Proposal (EIP) 513 by client software providers. With the EIP-513 in place, the parameters that determine one of the key factors in the merge and launch of Ethereum 2.0 has been delayed by 700,000 blocks, or approximately 100 days.

Following the verification of the final block in that sequence, a mechanism known as the “difficulty bomb” will be activated. Once triggered, it will become extremely difficult, and no longer profitable, to mine blocks under Ethereum’s current Proof of Work Consensus Mechanism. The launch of Ethereum 2.0, which had tentatively been scheduled for August of this year, is now expected to take place in September or October. 

Sam Bankman-Fried Continues Spending-Spree

Shares in the trading app, Robinhood, spiked up to 20% on Monday following rumours that Bankman-Fried (SBF) is exploring a possible acquisition. SBF’s crypto exchange, FTX, appeared to distance itself from the news, stating that there are "no active M&A conversations about Robinhood currently taking place."

Elsewhere, FTX’s proposed purchase of struggling crypto lender BlockFi takes another step closer to being finalized. BlockFi CEO, Zac Prince, denied that there would be a “fire sale”, with FTX rumoured to be close to closing a deal later today for USD$25m. For context, BlockFi’s previous valuation stood at USD$4.8bn, representing a 99.5% disparity with current valuations.

Napster Undergoes the Web3 Treatment

It was officially revealed earlier this week that the online music streaming platform of the early 2000s is making the pivot into crypto and web3.

Hivemind Capital Partners, together with the Algorand blockchain protocol, acquired Napster back in May of this year for an undisclosed sum. The service is now making public its plans to launch its native $NAPSTER token on the Algorand network, which users will be able to redeem for access to events and other artist-led experiences.

News of Napster’s web3 relaunch comes shortly after a similar announcement from rival platform, Limewire, in March.

Crypto 101 - Decentralized Exchanges

One of the most important aspects of decentralized finance (DeFi) is the trustless peer-to-peer marketplace that forms when smart contracts are used as an intermediary, a codified 3rd party. In DeFi Trading, this aspect has created a new technology - decentralized exchanges (DEX)!

Why do you need a DEX? Well, a majority of the time the trusted 3rd party in a trade acts as they should, but there have been a few notable examples where a centralized exchange (CEX) failed to perform their duties correctly, and users’ funds were lost. If you’re interested in a few examples, check out Bitconnect, Quadriga CX, Bitgrail, or MtGox. Likewise, more recently there were news stories being published that focused on what might happen if a company, like Coinbase, went into bankruptcy.

All these examples provided the motivation to research and develop trustless trading marketplaces, or DEXs, and so far there have been a few different architectures and successes! 

A solution with an on-chain, but more classical interpretation of an exchange order book, is the Serum Protocol on Solana and the Polkadex on Polkadot. With the order book architecture, you have standing buy and sell orders which are executed when market activity occurs. 

A solution more akin to “dark pools” is the popular Liquidity Pool architecture. Liquidity pools are created when users deposit their assets into a smart contract, often at a predetermined ratio (e.g. 50/50 USDC and DAI) and left there for other users to interact with for a small fee. The most common interaction is users who are trading back and forth between a pool’s paired assets, but there are more advanced things you can do, like flash loans (which we’ll cover in another article).

For being such a new area of development, DEXs certainly provide exciting opportunities to serve the needs of financial institutions and consumers!

If you haven't done so yet, head over to the Cybrid blog to check out our latest articles!

• Why a Crypto Bear Market is the Time for Fintechs to Build: While the “crypto winter” is officially upon us, now is not the time to abandon crypto but rather to build in prep for the next bull run.

• Making your card “top of wallet” for your customers: Why you should add crypto rewards to your card program. This piece explores why you might want to rethink your standard cashback offerings in favor of a far more exciting - yet accessible - alternative.

How Cybrid Can Help

Cybrid enables FinTechs and Neobanks to unlock crypto-led growth with an array of crypto products including crypto trade, earn, rewards and more. Book a sales demo, or register in our sandbox.