On Voyager, Celsius Network, Three Arrows Capital, And Luna
Luna used a design that was always going to fail. In fact, that kind of design was proposed and discussed on a newsgroup called cryptofinance back in 2014, and rejected by people and by me back then, for multiple, fairly obvious reasons. You could call it an unstable stablecoin design. Luna demonstrated yet again that it’s easy to mistake a rising token price for technical competence and substance.
The tale of Voyager, Celsius and The Arrows Capital is really a tale about what can happen when you combine CeFi and DeFi. People were depositing their tokens into CeFi crypto banks to obtain yield without any real idea how the yield was being generated. In the end, they found out their deposits were being lent to hedge funds who hid their leverage and took irresponsible risks, without proper guarantees, and that their deposits may be unretrievable. DeFi can solve this kind of problem by making things like leverage transparent, and automatically applying smart contract logic when exposure gets out of hand — trust needs to be taken out of the equation.
A final note on Voyager. Its bankruptcy filing revealed that Sam Bankman Fried/Alameda Research owes them $377m. Very likely this reflects borrowing to short the market. Extrapolating that across multiple lenders, it would seem they shorted crypto markets to the tune of billions of dollars. If we want to fix crypto, we need to fix these kinds of serious conflicts of interest, where those without an outside influence on the functioning of crypto financial markets can also play within them.
On The Bear Market
Crypto markets are unpredictable, but there are a couple of reasons this bear market might be protracted. On one hand, macroeconomic conditions are reducing people’s appetite for risky assets across the board. On the other hand, crypto losses and contagion resulting from numerous own goals scored by the industry will make investors cautious for some time.
To flip the market back into bull mode, we are going to need real growth and value creation, rather than more mysterious yield generation, which people now know comes with serious risk, or simple NFTs. The good news is that web3 provides plenty of opportunities for that. We are seeing hundreds of extraordinary projects being built on the Internet Computer, ranging through social media, gaming and the metaverse, which often blend in DeFi, most of which will soon place a DAO in control and fully tokenize.
The price falls have been pretty brutal, and hopefully we have reached the bottom, but there are no guarantees. I suspect we may begin to see crypto assets decorrelate as token buyers develop new investment theses, and look for safe havens. Even if the overall market falls, there may be some new winners.
On Regulating DeFi
Any wrongdoing involving CeFi has to be their first port of call, which means they need to hold Three Arrows Capital to account if they misrepresented the extent of their exposure to the CeFi crypto banks they borrowed from, and must investigate the risk management policies of those banks, and whether they properly disclosed the risks to depositors seeking yield.
In my view, DeFi actually fared pretty well given the extreme market volatility and downturn. There was no central bank to bail it out. DeFi will continually evolve as a result of passing through these challenges and eventually become far more robust than traditional finance, so regulators should stay back and let it continue to develop naturally.
In the USA, the battle over which tokens are securities, and which are commodities, is going to rage. This will continue to spur crypto innovation around the world where regulators are less hostile, with the result that opportunities in web3 will be far more distributed than opportunities in Web 2.0, which were concentrated in California.
On Aave’s New Stablecoin
Fully decentralized stablecoins are very important for the DeFi ecosystem. That’s because over time, regulatory challenges may restrict the use of stablecoins that are backed by traditional cash-equivalent assets, which are issued and redeemed by a central party, such as USDC. The question is whether Aave’s proposed design will successfully stabilize their coin when the crypto assets used to collateralize them are subject to extreme volatility.