On The Brink with Castle Island - Weekly News Roundup 4/24/20 (RenTech trading Bitcoin, It's Time to Build, dForce) (EP.71)

Episode Date: April 24, 2020

Matt and Nic review the top stories of the week in the cryptoasset industry. This week's topics include: Deals of the week Our changing view of the halving Renaissance Technologies' announcement that they have the capacity to trade Bitcoin Our reaction to Mark Andreessen's "It's Time To Build" The dForce hack Ripple's lawsuit against Youtube Nic's defense of Coors Light

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of Concentive Easing. You print a couple trillion dollars, and all of a sudden, people start to worry.

So out of this worry, we have something called a Bitcoin. Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And this week's episode is brought to you by CASA, which is one of our portfolio companies. Be honest. How confident are you feeling about the security of your Bitcoin? It seems like every quarter, every week even, we're talking about exchange hacks, a new exit scam, a friend losing their pin, or just someone passing away and having their family come up empty handed.

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you can get started with as little as $10 a month using the coupon code, Castle gets you 10% off. Head over to keys.casa. That's keys.casa in order to get peace of mind that your Bitcoin is safe. Keep those Bitcoin safe when the number's going up, right? Yeah, a number has been going up this week. I feel better on the weeks where it goes up. Yeah, me too.

It's crazy. It's the halving, man. You know, it's not priced in. Yeah, the halving is bullish again, by the way. this is one of the key takeaways the having is bullish again there's a lot of people that own bitcoin that don't even know that the having's coming i've been doing i've been prospecting some folks that i know own a little bit of coin they don't not everyone knows about it but they probably know that it's like capped in supply right yeah they know there's 21 million of them right they don't know the exact

mechanism yeah so maybe it's an informational shock maybe information is so bad at you know, being processed through the markets, that this is actually somehow against all odds a shock. It could be. I mean, it kind of like, you look at like, you know, actual capital markets and, and the, the, the, the, the, the, the, the, the, the, the, the, the emh seems more and more remote every single day. Yeah, it's hard to even remember, you know, that blog post that you wrote. It seems like ages ago. Yeah. Writing EMH apology has put me firmly on the wrong side of history here. How was your week? Did you watch the draft?

I watched, we had pick number two. I believe it's weighted according to how bad you are. So we're the second worst team. And we picked up Chase Young. So very exciting. He looks like a generational player. That's the claim. And I realized that the draft was like the first sporting event I'd watched in like

four months or something. Yeah. Yeah. It was incredibly dull. It was like coaches in their living rooms on Zoom. I made a big event of it. Some of my buddies, we all got together on Zoom, and we watched it for about two and a half hours until the Patriots pick.

We were like, we're just going to watch it until pick 23. And then, of course, the Patriots traded that pick. So it was very anticlimactic. Yeah. You know, the NFL might get lucky here, though, because, you know, maybe when the fall rolls around, will be back to normal or some sort of semblance normality. And so the NFL offseason will just have coincided with COVID. It's possible. Or they're just going to cancel the season and Tom Brady can retire

a Patriot and so can Rob Kronkowski. So let's get into it. A bunch of stuff happened this week. Also had some good podcast this week. So we had Sal Ternolo, who's the co-head of crypto asset services at KPMG. He joined the pod. And KPMG, by the way, is doing some really interesting stuff with clients around crypto asset custody. So they're a big four firm and a consulting firm that is actually not focused on private blockchains, which is super refreshing. Most of these, you know, big four firms are focusing on putting like broccoli on a private blockchain and calling it innovation. But these guys are actually building out custody solutions for a bunch of their clients. So we talked about that, and that was a fun one. And then later in the week, we had Michael Sonnenstein, managing director of

Grayscale investments. Grayscale had a record quarter. So they're a crypto asset management firm. They have 10 products, something like $2.5 billion in AUM. $503.7 million of that came in Q1. So just a monster quarter for them. A lot of that came from institutional investors, largely hedge funds. So really fun podcast there, talked about Libra, talked about the Bitcoin having, and talked about the pace of traditional asset managers getting into this space. So a bunch of interesting episodes. Yeah, I heard some really good feedback on the cell tourneo episode. I mean, I think we've kind of turned a corner here.

You know, these service providers like KBMG are actually interested in dealing with crypto assets and, you know, helping their clients use them as opposed to just doing blockchain pilots or any of that nonsense. So it's like we've reached like a threshold of normalization here, which is kind of impressive. Yeah, I was thinking the other day that one of the big categories that's hurt by this COVID situation is just the innovation theater around private blockchains where you get like 40 people in a room and you just pontificate around putting some arbitrary asset on a chain and having some consortium, a reached consensus and in a way that's more scalable than Bitcoin. Those businesses are just not happening anymore. And KPMG rightly is just seeing this as, look, one of these things is growing and one of them's not. We've got a bunch of people that are wanting to add support for Bitcoin, add support for stable coins, add support for potentially security tokens.

And then you have these kind of innovation theater, just people that are trying to do things just so they can say they're doing a blockchain project. And it's not that interesting to them. Although Bloomberg did have this piece with a whole bunch of quotes from IBM talking about how, you know, now more than ever we need like these private blockchains for supply chain management, and so on. So there's still a residual amount of that nonsense going around. Yeah, well, we don't really need any of that IBM, but thanks for coming out.

Yeah, they are very devoted to their idea that their own private database, which they call a blockchain is somehow going to solve the world's supply chain problems. And they haven't abandoned it, which is almost impressive in a way. Yeah, they're sticking to it. So let's talk about some deals. There's a couple of deals this week. or not how much we want to talk about any of them, but overstocks T0 business unit, which is their, I guess their exchange for security tokens and a bunch of other assets.

They raised $5 million led by GSR Capital. Then we had a project called Kava Labs, which is a tokenized project. They raised $750,000 in a token sale from Framework Ventures. And then lastly, a company called Applied Blockchain, which is an enterprise blockchain company, they raised about $2.5 million in a round led by a QBN capital. So a couple deals this week, nothing crazy. Kava Labs, Boston-based, they are doing effectively MakerDAO on Cosmos. So local Boston startup.

Well, let's move on to some news. Ripple. So Ripple is suing YouTube. So Ripple and Brad Garlinghouse are alleging that the platform has failed to halt a bunch of scam videos, which are definitely all over YouTube. I mean, they're all over the internet in general. It's just trying to get people to buy XRP and send XRP and all sorts of stuff. So what did you make of this?

I mean, the jokes kind of right themselves, right? Like Ripple suing a third party for enabling scam. it seems like it's inverted, you know? It's pretty crazy. This is what they're spending their time doing. Good for them, you know? You've got to protect your brand because the Ripple brand is so high quality.

It's just so many things you could say about Ripple and I just don't even feel like talking about them. One interesting story this week that caught my eye was a ADV filing from Renaissance Technologies revealing that their medallion fund has the ability to transact in the CME Bitcoin Futures contract. So it looks like some of the big boys are moving in here. Yeah. And for those of you that don't know Rentick, well, probably should. Their medallion fund is arguably the most successful hedge fund in history in terms of capital

generated and returned. And they employ quantitative strategies. They kind of pioneered the idea. So I don't know if it's good or bad. I mean, my take on this is that probably they have realized there's huge inefficiencies in the Bitcoin market. And they believe that there's a lot of alpha to be found in arbitraging them away. And maybe the market is at a sufficient size where they can actually do this in volume. But, you know, I don't know if it's, you know, strictly speaking good or bad for Bitcoin. my interpretation of this is it's a pretty rocky and efficient market and they have decided that they can earn a few bips by by employing like you know systematic strategies yeah i think that's the right take i think that it's this is not them taking a long view on bitcoin this is not them taking a short view on bitcoin this is just them

seeing a market that they can exploit and it's an inefficient market so um it talked about this a little bit uh on an upcoming with Peter Johnson from Jump Capital. It's pretty unlikely, I think, that these guys are dipping their toes into the spot market. That would be a whole different ballgame. But trading these futures contracts, you know, makes sense. And obviously, there's more and more venues that are coming out and offering these type of contracts.

So more and more opportunities to arbitrage. It does validate the infrastructure that's been built to support these markets. I mean, you know, it's not like. Rent Tech is the first, you know, Wall Street hedge fund that has taken a position in Bitcoin. But they are definitely one of the bigger players. And it certainly indicates that there's a certain threshold of maturity, which we've reached. Yeah, definitely. Along those lines, speaking about one of the providers for some of this infrastructure backed,

the CEO of backed Mike Blandina, is stepping away after only four months on the job. And so it seems like a pretty abrupt departure, and he definitely is leaving for new job, which maybe we can talk about that next week or whenever it gets announced. But he'll be replaced by David Clifton, who's the head of M&A and integration at the Intercontinental Exchange. So I don't know really what to read into this other than it'll be interesting to see where he goes because you don't always see someone leaving after four months to take a new job. So I don't think we could read this and say back to struggling or, you know, I've seen a couple hot takes like that, but I just think it's, it'll be interesting to see what lured him away.

Certainly a turbulent time for them, especially on the, uh, the heels of the developing Kelly Loeffler scandal, unfortunately. Yeah, so how's that looking? I haven't kept up on that. Well, it seems like she'll survive it, actually. But, um, the optics are certainly not good. Yeah, yeah. Another story around some executive moves. So Coinbase has hired a head of institutional coverage, Brett Tejpal. He's a former Barclays executive. So that's another important development. Coinbase definitely is, you know, has previously had very strong heads of institutional with Asif over there and Adam White before him. So this is a good ad for them. Coinbase certainly. you know, if you look at that platform, I think institutional is really important. So

beefing up that team makes a ton of sense. Another interesting piece of news is the CFTC approved bitnomial to operate as a designated contracts market. So they will now be able to offer Bitcoin features and options joining a very select group. So congratulations to them. Yeah, another good development. It's good to see that the CFTC is approving some of these things during this, during this time. Did you, I can't wait to talk about this with you. I know we've gone back and forth this week about it, this story about DeForce. So it's just so crazy. So last week in this, in this newsletter and then the podcast, we talked about multi-coin investing in a decentralized finance company called DeForce. You know, it's a platform

that allows for you to do a bunch of, I guess, lending activities, DeFi Lend. activities. And then the project was hacked, like two days after the fundraising was announced and $25 million and user funds were stolen. And so the story does not end there, because later in the week, apparently the attacker, in trading some of these assets and kind of like laundering them away inadvertently revealed their IP address and, you know, I guess therefore their identity, which led them to return the money. So you can't really make this stuff up. yeah this is like a microcosm of the crypto industry i mean it has everything right you know like uh it it it's really astonishing so de force had been the topic it had been criticized for effectively

lifting code from compound right to create a a product similar to compound um so they'd already been and and actually robert lushener the the founder of compound had accused them of being lax with their security practices. So he was very much vindicated. The way they were exploited was basically with an off-the-shelf hack, which had already been revealed. It was known. Anyway, so the attacker took this kind of off-the-shelf hack, which I believe involved

this novel standard on Ethereum called ERC 777. Yeah. Which is like meant to be a beefed-up version of ERC-20 because he's, you know, ERC 20 is kind of simple and not very comprehensive. And due to the use of this ERC 777, combined with this wrapped version of Bitcoin called IMBT, the whole pool got drained. So it's like complexity piled on top of complexity.

The DeForce team didn't react quickly enough to realize that there was this vulnerability, which had been made public something like 24 hours before. And, you know, the whole pool got drained, which is something, it's becoming something of a pattern, actually, in DFI. Basically, the standard attack seems to be exploiting some relatively illiquid form of wrapped token to represent, to make a loan that's not really. backed. But the interesting thing is that it looks like deep force will survive this on account of the attacker turning benevolent. So all is well that ends well. I feel like I'm taking crazy pills here with these D5 projects and these DFI stories and I'm going to sound like a total

whatite. And it's kind of crazy. But like what is the end game here? I mean, so you hear some of these some of these people that are big proponents of defy talking about how this is going to scale up and we're going to have like real institutional traders trading on some of these platforms. And there's a couple of things that I think we just have to acknowledge here that make that very unlikely. One is that if you have to introduce a KYC or some sort of like a trusted onboarding process for these things, then you're introducing points of centralization that really defeat the whole purpose of quote unquote defy. And so at that point you're sort of in the same like classifications as a centralized project or centralized exchange with just less performance.

So I don't know why institutions would get comfortable trading on something that is just like objectively worse from a performance standpoint. And then the second thing is like these things get hacked every three minutes. So like what's going on here? Yeah, like never before have smart, bright individuals with an internet connection had the ability to monetize their knowledge by in such a direct way. But here, these attackers could be literally anywhere. All they need is a knowledge of Ethereum and, you know, a cany logical mind. And these attacks just present themselves. I'm sure there's like all manner of attacks against

virtually all the defy platforms that just haven't been revealed yet. And I think like what this indicates to me is A, there's a really high barrier to entry for creating a new DFI project. So it's not something that anyone can do. You need really expensive audits. And then B, like this actually should be a bit of a

dampener on the pace of development because if you you can't just take someone's code like the way D-Force apparently lifted compounds code and modified a little bit because you need to like truly understand it from a logical standpoint and you know really deeply understand all the

dependencies and all the possible exploits so that because there's money involved I think what it actually means is it's more difficult to have that fast iterative process of experimentation which is one of the things that people are excited about defy for I actually think that this attack and others like it will make that process slower and more ponderous. So I agree with all of that. I guess my overarching question is what is the end game that these things are going for? I mean, what market are you competing for?

Are you going to be trying to compete to bring traditional trading onto one of your platforms, in which case is just not that exciting at all? Because it's very unrealistic to expect that a quote-unquote traditional, institutional market participant would get comfortable with this. If it's an offshore kind of betting platform, I think that's a totally different story and that's maybe a more exciting use case. Yeah, but even for offshore betting,

there's plenty of those. Some of them use Bitcoin except Bitcoin or tether deposits. I think people are actually okay with those being centralized and just trusting them for the duration that they have collateral on the exchange or the casino. Like decentralizing everything, makes it much more difficult to use. I mean, look at Auger.

Auger has had very little uptake, and Auger's been around since 2014, 2015. So, I don't know, count me really puzzled. But let's move on to a couple things that we were reading this week. So the St. Louis Federal Reserve put out a bulletin called Safe Haven Performance in the Age of Bitcoin. And it was an analysis that shows Bitcoin versus gold, versus U.S. Treasuries. And the essential takeaway was that during times of panic, gold sometimes behaves like a safe haven

asset, not always. Bitcoin rarely does, and U.S. treasuries usually do. I thought that it was less the analysis that really intrigued me, but rather the fact that the St. Louis Federal Reserve is putting Bitcoin in the same breath as gold and treasuries in an analysis on their website. it's just really if you told me this in 2012 I would have been shocked

I mean this is just validating the asset yeah and if you look some of just like the general market commentary Bitcoin is present in all of those analyses even if it's just you know a footnote

but it's just it's been normalized as you know just another financial asset you know for better for worse Yeah, it's awesome to see. What did you make of Mark Andresens? It's Time to Build Post this week.

That shook VC Twitter for a couple days there. I thought it was great post. I liked it a lot. I thought it was awesome. But to be clear, I think it's time to build, but it's not time to build the 37th decentralized smart contract platform. Yeah, let's build with purpose. Let's build with purpose.

Generic building, this was like a mean. in the Ethereum community for a long time, just like if we build, you know, eventually our system will be great. Opinionated building is more like it as opposed to just sort of, you know, scatterbrand building. Yeah. It was a good rah-rah. It was really, I enjoyed the piece. Along those lines, you had sent me earlier in the week, Howard Marks's latest, knowledge of the future. I thought that was a phenomenal post, too. Howard Marks is one of my favorite investors. His notes are so good. and they've taken a pretty dark tone lately, actually.

So basically he's getting increasingly nervous about what the Fed is doing here, how the Fed is responding to this crisis, as a lot of people are. Yeah, it's worth checking out. I think it's a seven or eight page blog post, but worth it, worth the time. This week in regulatory filings, I came across BitGo, has a small contract with the DEA, and it says it's to buy-in-store Bitcoin. So my guess is that the DEA is going to be seizing some drug-related crypto assets in the next, or maybe they already have, but it's interesting to see a DEA contract out there recently.

It was like early April. Or the other thing could be that they're buying Bitcoin to transact on some of these dark markets in like sting operations? Yeah, I guess that's possible too. They were probably one of the first agencies that actually touched Bitcoin directly, right? Well, I think, yeah, the U.S. Marshals probably, right? Because the U.S. Marshall sees the Silk Road coins. We're kind of coming up on the halving here.

May 12th, it looks like it'll be around six or seven UTC. What are your kind of latest feelings heading into the having here? Yeah, you know, I very loudly proclaimed my view that the halving in of itself was not a positive catalyst or particularly bullish event. You know, even to the extent that it was, I thought that funds would express that view leading up to the having and that we would probably get a sell-the-news kind of event. But the disruption in March and, you know, the just like crazy turmoil in the markets may have meant that some of those funds that, some of those funds that, that were going to position for the having didn't end up doing that. So it's very possible that the having, that the expectations don't end up sufficiently baked in

and that we actually have a relatively smooth having here. I don't think that, you know, some of the more optimistic projections about, you know, these models that insist that Bitcoin's price is solely a function of the issuance, I don't think those are going to come a pass. But, you know, like moderately positive catalyst in my book. Are you monitoring hash rate pretty closely here? You think we're going to start to see a drop in hash rate? Well, miners just tend to do

this sort of auto rebalancing thing. So with other halvings, for instance, BSV, BCH, they don't anticipatorily drop their hash rate. They just, they effectively mine, they rebalance their hash rate on a real-time basis between the three blockchains, the Shaw-256. So it'll drop on the moment of the halving and not before, if I had to guess. So, yeah, that'll be interesting to see. We'll be keeping an eye on it. The other thing that I thought was an interesting analysis this week is coin metrics had some analysis around the Bitcoin futures market size before and after

Black Thursday, which I guess that's what we're calling March 12 these days. So the open interest on the futures contracts is really just plummeted, which indicates that there's just a massive de-leveraging and they were sort of working our way out of it. Volumes have sort of hung in there, but that open interest is really collapsed. What did you make of that? Yeah, so if you haven't seen it, so Antoine wrote this great piece in the Coin Metrics newsletter, which I, you know, heartily recommend assessing the long-term fallout from March the 12th, which has been really material. So open interest has dropped across the board. Liquidity has become structurally worse. So spreads have become wider and they're still wider than they were before the crash. And traders have been shuffling around different venues. Some funds blew up,

some funds exited the market and other traders are reallocating their capital. So something like 90,000 bitcoins have left the Bitmex vaults. So we've seen a really significant reshuffling here. And fundamentally, the amount of leverage applied to Bitcoin has been reduced. So in my book, that's probably good. You know, like I think less leverage is good for Bitcoin. But certainly the kind of more speculative side of the market took a really, really significant hit. back in March.

Yeah, so what do you think it's going to take to get some of these market participants back going? You think this will just naturally take care of itself? Yeah, just time. Bitcoin's still a fun asset to trade, so that's never going to change. Yeah, well, we got Renaissance dipping their toes in it. Did you read any other interesting articles this week? Yeah, I liked JP Koenig's piece on Maker. So Maker doesn't have this arbitrage mechanism like Tether does, for instance. It relies instead on this more blunt instrument of setting interest rates, if that sounds familiar. And they've been unwilling to set what they call the die savings rate to zero. And apparently it's impossible within the contract to have it go

negative. But it's been trading at the structural premium for a while now, for over a month. So it might actually be time to see negative interest rates on die as well. Although you can see why participants in the system would have a very strong version of that. It kind of reminds me of that Matt Levine, just technologist discovering finance and economics for the first time. Yeah, crypto is just a microcosm for the markets. That's absolutely right. So negative interest rates on die, I think that would be a very unpopular move. Yeah, but I mean, Dye has been failing to track the peg for a while now.

So that may be what it takes. All right. I think that's it for the week. Any plans for the weekend? Well, I've been trying to do activities that differentiate the weekend from the week, you know, to break up the tedium. So the weekend is for grilling and I'll make a rare trip to the bagel store. you know so you got to you got to mix them up a little bit yeah what about you a lot of people were surprised that you drink cores light that was last friday you tweeted out about that

how are they surprised i love cor's light this is a well-known fact about me that's my favorite beer you know because it's it's great because like it has a visual cue informing you of how cold it is, which, you know, we don't have another mechanism to assess the temperature of something, right? So we need these visual cues. Just tap in the Rockies. What did you say? It's time for grilling meat, drinking Coors Light, and arguing with Keynes. That's your Friday night activity. I couldn't imagine anything better. That's fun. Well, I hope you have a enjoyable Friday night. Hopefully the price of Bitcoin gives us something to talk about over the next week or so here. and I'm sure we'll have a few other new stories.

Got a couple of good podcasts coming out. Yeah, we have an very interesting guest on the topic of Tether. We're going to add that to our crypto dollarization miniseries. And then on Monday, we have Peter Johnson coming up. Peter Johnson of Jump. And then also next week we have Mois Kahari, formerly leader of State Streets, blockchain efforts. He has a startup in the data privacy space. So we're going to talk about data privacy.

So we've got a lot of content coming your way. Hope everyone has a great weekend. And we'll see you next week.