Contagion, Cascades and Capitulation
Death spiral first, De-risk after ?
Welcome to the Crypto Dosed substack written by myself @dosed1, where I basically record a ton of my thoughts on key events in the third web of the world. This substack has no pattern, no promises, and 100% no financial advice; it’s simply one degen’s commentary on the community he has grown to love. I hope you find some joy in anything I have written and DM me on Twitter if u wish to vehemently disagree or if you’re Rihanna (or equivalent) looking for a Cryptoboy to pay 27% attention to you.
WHY THE BEAR MARKET HAS ONLY BEGUN TO REAR ITS HEAD
SELL IN MAY AND GO AWAY THEY SAID
June 2022 has seen so much carnage, that the above phrase “sell in May and go away” literally haunts anyone that was HODLing that bag of Luna in a way that balls-deep Lehman Bros investors must have felt back in 2008. Even if you didn’t have Luna or UST in your portfolio (thank Odin I didn’t) let’s not pretend that the vast majority of us are the most REKT we’ve been in 2 years.
Earlier this month the world of crypto witnessed the disbanding of a Goliath as it was revealed that not only had 3AC borrowed HEAVY from pretty much every major lender in the space but they’d ghosted every last one of them as margin calls began to come in. It has become super clear that 3AC’s reputation and prowess, had clouded the prudence of decision-makers as many of these loans not only have the power to collapse the companies that issued them but it arguably perpetuates a cascade of falling prices across the board due to all the selloffs.
Cue tweet from smart person number one
THE RESCUE OF MISSION CEFI
As prices across the board decline, the true fall out of the centralized fixed return platform is being realized, unlike your profits. Blockfi, Voyager, and earlier on in May Celsius, all have been on the verge of insolvency, arguably since they have been making degen decisions in the non-transparent dark, funds are literally not SAFU. Withdrawals paused, any related emissions tokens are down bad and there is very little that users can do to maintain sovereignty over their funds. BUT ALAS, the (crypto) bank bailout scheme seems to be in full effect, as each of these centralized platforms has secured credit lines from Alameda, FTX, and potentially an interesting takeover bid from Goldman Sachs.
Obviously, you want numbers. Sam Bankman-Fried (FTX/Alameda Research) bankrolled a $250M bailout to BlockFi and a subsequent $485M credit line to Voyager last week, proving that SBF is rolling around with big cash and BDE. Interestingly Tradfi behemoth Goldman Sachs has been rumored to be putting together a bid for previously REKT Celsius for $2bn???
Is this a bid for previously shunned Bitcoin on the cheap or is this just some cope for Celsius holders?? I am personally curious as to what assets Celsius has on its books that GS can’t buy on the open market and whether these bailouts are an admission that there’s something implicitly valuable in ALL of these companies. I mean even for SBF why would he issue credit lines to these Cefi platforms that are so fundamentally flawed when he can just wait for them to collapse? Is this a superman “save the girl, at all costs” move (we are ALL the girl) or is it a Warren Buffet, “be greedy when others are fearful”?
I mean is the bottom in actually? I can’t see it personally, but that’s why I am writing a substack post and not a billionaire mega brain with a Bajan wife called Rihanna….#soon.
THE CURIOUS CASE OF SOLEND
The case of the leading Solana lending platform differed from all of those mentioned above, in that it was DECENTRALISED and ON CHAIN. Therefore anybody that cared to look could see exactly what was happening and arguably there could be no intervention outside that of the user themselves.
TLDR: DAO said to hell with that, we need to prevent this liquidation from occurring naturally to save our protocol by taking over this account and partially liquidating this user’s position to safer levels. Survival 1 Decentralised Protocols 0.
Miles Deutscher will give you the full rundown of what happened
Since this point, the previously absconded whale has returned and discussions happened AFTER the partial liquidation but worrying questions should be on the mind of everyone watching this debacle.
If token allocation in DAOs are HIGHLY concentrated amongst founders, teams, and early investors, then do the vote of the majority number of holders actually even matter?
If Solend, a “Decentralised” platform has the ability to take control of a user’s account then how many other “Decentralised” platforms can do the same in a situation they see fit to do so?
If one protocol makes a decision that could send the underlying asset into a death spiral, should the wider community have the opportunity to vote on the matter?
Given the events of the past weeks and at the risk of hurting my own bags I think the choice that Solend made completely undermined the idea of decentralized governance and I’d personally have a hard time trusting that my gigantic 25-figure position couldn’t get liquidated if a reason was trumped up for it.
I also think that the system of voting simply using tokens is fundamentally flawed and encourages monopoly-like behavior by those with deep pockets. Maybe a different kind of weighting process can be incorporated in the future.
Luna’s death spiral of doom, Cefi on the brink of sector-wide insolvency, and 3AC’s monumental poltergeist move on all the major crypto lenders in the space spells a number of impending events on the horizon, to me at least.
Firstly, tough regulation on platforms offering fixed returns on any stablecoin product. Society dictates that it’s totally ok if degenerate crypto traders get REKT receiving weird tokens for their hard-earned cash but NOT regular (financial) civilians. The consequences of these types of cascades on hardworking people are brutal and arguably Cefi, (which I personally stay away from) while having a place somewhere between Tradfi and Defi, 100% requires a regulatory reform with robust guidelines. I believe this to be the way but am also under no illusion that this probably provides financial authorities a gateway to start telling us we can and can’t do on-chain. Alternatively, let’s just slap a “Capital at risk” disclaimer everywhere and whoever financially dies, dies right?
Secondly, the cascade has only just begun. SBF has managed to put a band-aid on some of the leakages but funds are so interwoven in cryptocurrency that when $40bn of value is wiped out of the market in one fell swoop and arguably the top VC becomes insolvent, the correction required must be VERY violent. Many other smaller platforms would have become insolvent just due to falling prices, add VCs aggressively selling tokens to recoup losses from Luna and Celsius then sprinkle a few loan defaults bigger than the liquidity on hand and I’d think there’d be a lot more than tears rather than the few over this handful of projects to go down. Even SBF isn’t confident that the bloodbath is close to the end, and we haven’t (and won’t) even touched on macro conditions.
Going forward, there needs to be a more scrutinized way (algorithmically and policy-wise) of determining what trades and practices carry too much risk. Voyager should never have been allowed to have a debt-to-equity ratio of almost 7:1 in a market that regularly witnesses drawdowns of more than 50%, and I suspect they are one of many. There is a reality where the best minds in financial policy can find themselves working in Web3, we need it and it probably will come in a bear market. Synchronicity between policymakers, auditors and software engineers to mitigate the large human error of greed is something I believe to be on the horizon. We must remember as an industry, blockchain tech (and its extensions) is still very young but for now in this moment the blood from the mistakes of our fathers must be spilled before a new day can begin.
Thanks for reading, follow me on Twitter for no real reason to be honest. Sometimes I say and share something smart or kind.