Tuesday, August 1, 2023

“We may encounter many defeats but we must not be defeated.” – Maya Angelou  ||

Hello everyone, and welcome to August!

You’re reading the premium daily Crypto is Macro Now newsletter, where I focus on the growing overlap between the crypto and macro ecosystem. Thanks so much for being a subscriber! Nothing I say is investment advice. Nevertheless, I hope you find it useful – if so, please consider hitting the Like ❤ button at the bottom, I’m told it boosts the distribution algorithm.

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The super observant among you might notice that I’ve tweaked the format of this newsletter – fewer long meanderings (although there will be some every now and then when I’m feeling particularly wordy, and of course in the free weekly edition) and more short crypto and macro items with why they matter. I’m not dropping the links section, but today it doesn’t appear since missing yesterday has meant a LOT to catch up on and today’s edition is running late as it is.

Anyway, is this more useful and easier to read/skim? Feedback welcome! And if you’re not a subscriber, please consider becoming one!

IN TODAY’S EMAIL

• DeFi vulnerability hits the crypto market

• Coinbase vs the SEC

• Crypto and political campaigns

• Crypto in Nigeria

• Ukraine offensive

• SLOOS signals

• US bonds

• China weakness

• EU rates outlook

WHAT I’M WATCHING

DeFi vulnerability hits the crypto market

On Sunday, an exploit on the Curve decentralized exchange destabilized the market, sending prices tumbling and volatility up. A hacker used what is known as a “re-entrancy bug” to rapidly repeat operations, draining some accounts. It’s still unclear how much was taken, but I’ve seen estimates between $50 million and $70 million, with apparently $100 million at risk. White hat hackers managed to exploit the exploiter and take back around ~$5 million worth of ETH (the dollar amounts are evolving, will have probably changed by the time you read this).

This spooked BTC traders and sent the price tumbling below $29,000 for the first time since June.

(chart via TradingView)

Why it matters:

This is really bad, as it highlights the risk of smart contract code vulnerabilities. In this case, it seems that the attack was plugged by white hat hackers, but investors may not feel comfortable relying on that. It is likely to dent confidence in the safety of decentralized exchanges and lenders, which in turn will dampen their potential impact on traditional finance.

It also highlights the ripple effects of a problem in any one platform. The founder of Curve had apparently deposited ~$170 million worth of CRV on decentralized lending platform Aave as collateral for a $63 million USDT loan, as well as deposits for other loans on other platforms. These platforms work on the basis that, when the value of the collateral drops below a certain level, the loan gets liquidated and the collateral dumped. The key level for this particular loan is a CRV price of 37c, according to DeFiLlama – mercifully, the current CRV price has recovered to around 59c, and big buyers such as Tron founder Justin Sun are stepping in.

Furthermore, this situation also highlights the lack of liquidity and decentralization in decentralized platform tokens. It turns out that the founder holds almost half of all circulating supply, and has distributed most of his stake across various DeFi platforms in exchange for loans, creating a huge vulnerability for both the token price and the Curve platform itself. What’s more, throughout the ongoing story, the price of CRV has varied widely on different exchanges.

This is an ongoing situation, with risk appearing elsewhere in the ecosystem while new DeFi pools are being deployed to alleviate the situation. I don’t claim to fully understand this all, it’s moving fast, and I might have more to say about it tomorrow. Suffice to say that this episode will end up either highlighting DeFi’s overall vulnerability or its resilience as the ecosystem scrambles to the rescue.

Coinbase vs the SEC