On The Brink with Castle Island - Weekly Roundup 06/24/22 (FTX steps in, 3AC postmortem, fraying DeFi governance) (EP.328)

Episode Date: June 24, 2022

Matt and Nic return for a fiery episode of deals and news. In this episode:  Is miner selling backed up by the on-chain data?  Is Massachusetts open to pro-crypto legislation?  FTX provides credit support to embattled crypto lenders  Why private market transactions do not constitute bailouts in the pejorative sense Was 3 Arrows just a case of too much leverage and bad trades, or was it fraud?  Does the 3AC situation stray into criminal territory?  There were significant harms stemming from the 3AC scheme Kyle's infamous On The Brink appearance and his special request  Did GBTC bring down 3AC?  Are we entering the PvP era of crypto twitter?  The story behind 3AC's yacht  Solend requisitions user funds  Wartime versus peacetime governance in DeFi South Korea puts a travel ban on Terraform labs employees DYDX is leaving Ethereum and moving to their own chain  The relationship between lender balance sheets and GBTC  Is there a case to be made for winding down GBTC? How to think about the GBTC trade today How the 3AC GBTC trade is like LTCM  How to think about the "macro"  Is the 'crypto hedge fund that also does VC' obsolete?  Sponsor notes: Subscribe to the Coin Metrics State of the Network newsletter

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. Welcome to On the Brink. I'm Matt Walsh.

And I'm Nick Carter. And this episode is brought to you by Coin Metrics. There is a lot of news around Bitcoin miners being forced sellers. What do we got from Coin Metrics today on the topic? So for this week's Metrics Minute, we are talking about minor flows. Now, these are all the rage these days, but it's a little challenging because all kinds of entities receive flows from the Coinbase. So you have to do a bit more work. You have to look at what's happening at the pools and who's withdrawing from them. You have to denoise and segregate miners from Wales from the old days that

mined on their CPUs. So with that, coin metrics has developed a refined one hot minor metric. And what they found was that in June, these entities held 75,000 bitcoins and they subsequently sold it down to 50,000. So the long and short of it is miners selling is real. There's a ways to go. We don't know if they're going to puke out all of their coins, but there's definitely signs that miners in the aggregate are selling aggressively, both the ones you can triangulate through filings and from the wizards inspecting the blockchain. That's your coin metrics metrics minute. All right. Well, it's been quite a week in the crypto space since the last time we talked. There is a ton of stuff to talk about.

It might not be the most upbeat podcast. I mean, I think there's just a lot of fraud being revealed in the industry is sort of the punchline. But I guess in brighter news, I just got back from the Massachusetts State House and I met with the two elected officials that are running the Boston and the Massachusetts blockchain caucus. So that was fun. So on a scale of Wyoming to New York State Legislature, what is their friendliness to the industry? They're closer to Wyoming. They're not hostile like New York. So I think they're looking to do no harm.

They're looking to promote jobs. They like crypto and blockchain. It's very good. They own Bitcoin. Really? Yeah. Wow. Really good stuff.

I also got a tour. I got to see the Massachusetts inside where the elected officials meet. The perks. room. Chamber? I don't know. The chamber. I was in the chamber.

I was in the private quarters where they hang out. I got to sit in there. That was cool. So is Massachusetts on the cusp of any pro-crypto legislation, or is it a bit of a process? I think they're on a listening tour right now. But the people that I spoke to seem very intent to not harm the industry. And they seemed also very aware that some people in Massachusetts, were trying to harm the industry, which I thought was interesting.

Those people get complained about on a weekly basis on this show. The other interesting politicians adopting Bitcoin news I saw this week was the former president of Thailand, if I'm not mistaken, who was ousted by a military coup, did a video the other day with a block clock in the background. Oh, he got one? They're on backward. I wonder how he got one.

I had four presidents maybe they have special access. So you know, that's the that's honestly how we win hearts and minds. It's just by certain individuals, uh, in power or in this case formally in power, just being bitcoins. You know,

there's no substitute for that. Wow. I did not see that. I'll have to check that out. But the block clock behind you on a Zoom call, that's you have to have one, right? That's a key kind of signifier. Yeah.

I mean, Jack Dorsey. None of us have one visible right now, but yeah, that's just how you signal sophistication in a subtle way. Sometimes I like to change it up a little bit. I don't want the price up there right now, so I'm doing other things, like block height and just other metrics. Yeah, you have to go for other metrics these days. I've never really been in it for the price either, you know. I'm just in it for the underlying technology is sort of what I've always been about. This is like our third or fourth consecutive depressing weekly roundup,

and I'm wondering how many more we can do. Well, I don't know. Do you think people still like listening to these podcasts when the number goes down? It seems like the numbers aren't suffering that much in terms of downloads. So thank you for downloading, subscribing, resubscribing, five-star reviews are always welcome. But people need to hear what's going on in the bear market. And on this podcast, you will hear some news. We will have some hot takes in this podcast around this three hours situation.

Yeah. So the listenership remains strong. So thank you. But yeah, there's some kinks in the industry, man. There's some new things have come to light, you know? Say that. Yeah, there's been some meltdowns this week. So before we get into it, just to plug a podcast that Ria did earlier this week,

She sat down with Eli Ben Sassouin and Yuri Kalladne, the co-founders of Starkware, talked about Stark's, zero-knowledge systems. One of the more interesting pockets of the space for sure. So I enjoyed that podcast. It's nice to see right back on the podcast, Banwagon. Ria always does these sort of highly intellectual podcasts, and I edit them, right? I do the editing. That's a little known fact about this show. And so I listen to them.

and I will confess. I don't always understand them, but the modular miniseries is super, it's been super well received. And this one I thought was very strong. So well done. I agree. Yeah, very well done. All right. Let's hop into some deals of the week. And what we're going to start with here is just a kind of a landscape of the lending market. So FTCX had a pretty busy week this week. So they have provided BlockFi with a $250 million revolving credit facility. They have also provided a $200 million U.S. dollar credit facility to Voyager Digital in addition to a $15,000 Bitcoin revolver to Voyager Digital. They have also made some moves on the M&A front. So they've acquired Canadian trading platform BitVo and they're also acquiring, it looks like, embed financial technologies, which is a

stock clearing business. So really busy week from FTX. I guess. the so the Voyager and the BlockFi ones are really just them standing in and providing these credit facilities to folks that have been impacted by the Three Arrows Capital situation. So I guess the first thing to talk about here is let's talk about the kind of the backstop deals. So BlockFi comes out, announces this 250 revolving credit facility as a signal of strength to the market. Voyager, it looks like, based on their public disclosures here, has has basically lost this amount of capital to three arrows. We're going to talk about three arrows,

but I think the first thing to talk about here is just FTX playing kind of a crazy role in the industry right now, just stepping up and doing some of these deals that sort of remind me of Warren Buffett doing deals in the financial crisis or JP Morgan doing deals during an early panic, sort of a 1900s panic. And what's going to happen here is I think FTX is just going to be a lot bigger coming out of this crisis of confidence than they were before. And they're really the only ones in the industry that's being aggressive right now. Yeah, I mean, props to them, honestly.

And to be clear, they have, I think they were on the cap table of Voyager. So it's sort of in their interest to smooth things over here. Voyager, I think, was it they had a $600 million unsecured? loan out to three arrows was that the 660 million it looks like that's remarkable so FTX you know

not acting purely out of effective altruism shall we say here but they have a you know A I think it's good business to scoop in and you know lend at favorable rates in terms to distressed entities but B of course

stemming this credit contagion, I think, is good for the whole industry. I'm a little bit surprised that we haven't seen other well-capitalized firms step up to the plate here. Yeah, I'm really surprised, too. I mean, if you're in exchange or you're sitting on any sort of balance sheet right now, now's the time to go, you know, on a buying spree. I mean, this is what Corp Dev is all about. I mean, so you have Sam here just running a chess game against a lot of his competitors that are just not doing anything,

which is, you know, he's going to come out of this just a lot bigger. And I saw this, people referring to these lending facilities as bailouts. And like that might be true in kind of like a very strict literal sense. But I think that that is totally a misnomer. And people were comparing it like to the original Bitcoin, you know, the first block where it says chancellor on brink of bailouts. Obviously that's where the name for this podcast. comes from. But it's not a private, it's not a public sector bailout, right? There's no public funds. There's no socialization of losses. And so that's the thing. It's bailouts aren't bad because

of bailouts. They're not bad in sort of like an essential sense. They're bad because risk is taken and the principles that take the risk, they might profit from the initial risk taking. And then when there's a loss, it's the taxpayers and society collectively that pays. That's why a public funds bailout is bad, right? Because there's an asymmetry. Private agents, they are able to capture the upside, and then they are able to socialize the downside, socialize the losses. That's why bailouts are bad. People forget this. They're not just bad because the word bailout is evil or something. So in this case, these are private market transactions between private entities with no influence, really, on society more broadly. It's just smart business.

It's capitalism, right? This is exactly the process of capitalism. Consolidation, you know, aggressive action during times of distress. That's capitalism. So people's, you know, pejority of referring to it as a bailout, I think, are true. just way, way off the mark here. I think that's exactly right. This is just a private market transaction, a series of them, really.

And so I think we'll see more of them. I do want to talk about three hours. So, you know, if you're living under a rock, just kind of give some of the highlights here. So three hours capital, a Singapore-based hedge fund. I hesitate to call it a prop shop anymore because it turns out they had a ton of outside capital. We thought they were proprietary. Thought they were proprietary. is run by Kyle Davies and Suu.

Suu has a podcast called Uncommon Core that he does with Hasu. He's a very known person in the industry. Kyle Davies has been on this podcast back in 2020. That's a whole different story. They blew up. And so what is happening now in the industry is you have a lot of folks that have exposure to this. Either their investors in Three Arrow's and their money has gone to zero or three arrows borrowed from them and there is various levels of contagion in that borrowing. Some of these lending

firms have been public that they were in over-collateralized situations. They start to liquidate collateral. They may or may not have taken some hits on that collateral. Some like Voyager have publicly disclosed that they did not collateralize them. They were lending against no collateral, which is just, I mean, that is shocking. So, you know, I think there's sort of one angle here that is a little bit frustrating to me just seeing it a lot of people just saying oh you know sorry to hear that type of vibes on uh twitter but you know this is not just some bad investing you know based on what we're starting to learn about three arrows this is a massive fraud this is a Bernie made off style fraud these are bad people these are very very bad people that have made some pretty

cataclysmic fraudulent decisions and so let me just kind of run through sort of what we know based on what has been talked about in the industry here that people don't really seem to really want to engage on. So number one is that they falsified records to their lenders. And so they have gone and they've provided false diligence in order to get these borrowers. There is evidence out there in the industry that they have put in email that some of these records, basically. So that is just explicit fraud.

they were representing to certain OTC desks that they had relationships in place on certain types of transactions that they just explicitly didn't. So those will all be made public in a court of law. The fact that they, you know, submitted phony records to the lending desk. That's all going to be, you know, come out in a court of law. Let's talk about what else we know. We know that they swept money from affiliated venture funds. And so they had venture capital firms that they were involved in at the GP level and they just took all that money. so those firms now have no more money. That seems like a pretty bad thing. They were managing

project treasuries for defy projects and took a bunch of that money. So that's just outright theft. That's another criminal act. They were allowing certain market participants, certain firms, to trade through their account on venues. And so think about that as running an unlicensed prime broker. Bank Secrecy Act comes to mind in terms of something that could come to light there, wire fraud, there's any number of issues with that whole side of it. And certainly if, you know, if the Bitmex folks can get dinged the way they got dinged on Bank Secrecy Act, this could have the potential to be even a lot worse than that. And so I guess the net net is, we're starting to find out that these guys were just borrowing from everyone under the sun.

There have been a ton of people defrauded on this. A lot of high net worth individuals have exposure to this, it turns out. These guys were out there saying that they were going to raise a $5 billion public fund and move to Dubai. So I, like, I'll talk more about my theory on how they went underwater. But I guess my first comment is, the industry needs to wake up here and stop just, you know, say, hey, these are some bad bets. You know, everyone loses sometimes. These guys are frauds and they're going to jail. Yeah, or worse. You're absolutely right. This isn't just, oh, they blew up on leverage. It's not even an Arkego-style situation. I thought it was like that at first, but it's clear that they're not who we thought they were.

They were not these smartest guys in the room. They weren't this high-flying proprietary firm. It's not clear how much proprietary capital they had, if any, right? Their prop capital could have been vanishingly small. They used their reputations to borrow at favorable rates and then put on extremely risky trades. And in the process, they constructed effectively a Ponzi, which then took down half the industry. And as things were dying out, as it was clear that they're insolvent underwater and they're blowing up, they tried to effectively amass even more deposits under false pretenses with this bogus, you know, GBDC Arb trade, which was not an Arb.

that was just in the final weeks here. They swept funds, as you say, from entities that they had a relationship with. They tried to raise capital by soliciting to their investees to manage their treasuries. I mean, this is not normal. This is just not the behavior of a venture fund or nothing close to it. It's not how venture funds operate. and I think it's clear that they're operating with no regard for the law whatsoever. They were in Singapore and then relocating to Dubai.

It's not even clear what jurisdiction they're under. Apparently, Suu is now back in Singapore. But yeah, you know, what's interesting is this isn't even anybody that's had a professional engagement with these guys will know that there were orange flags, right? There were orange flags around them. Not enough. Not enough was evident to say, hey, they're probably running some sort of enormous, like gigantic leveraged Ponzi, basically. But there absolutely were orange flags. I think we can attest to that. But yeah, they ran an extremely persuasive confidence scheme. And it's just a shame

that this is actually going to take down the savings of hundreds of thousands or millions of retail individuals through stuff like Celsius, right, which was exposed to them. So it's, they've created it. And you might say, like, oh, the depositors into Celsius, bear some, you know, Celsius itself bears some blame. That's fine. But these guys constructed an edifice that as it blew up is now destroying the savings of many, many, many people who thought it was safe. And they had reason to believe it was safe. And so, amount of real world actual harm they've promoted is very, very significant. And as you say, this is a criminal case. It's not just a case of bad trades. This is definitely a criminal case.

I want to talk a little bit about how this probably happened. So Kyle was on this podcast in 2020 when they had publicly disclosed their position in the Bitcoin Investment Trust, that they were one of the largest holders, I think maybe the largest holder of GBTC. And at that point, the GBTC product was trading at a premium to the underlying price of Bitcoin. And I had asked him on the podcast, basically, what's the thesis here? Like, what do you think about this trade? It's obviously trading at a premium, but what's your guys' view on it, basically? And he had effectively said, well, if you just look at the new subscriptions, this thing is not going to trade at a premium. him forever, basically suggesting, like, yeah, it's good for now, but we're going to have to

get out of it was sort of the vibe. He later got in touch with me and asked me to cut that part of the interview, which I did, because I wasn't trying to play any gotchas. Wish I didn't. Hate to see it. I hate to see it, but. You know, we're not out there doing investigative journalism, but the way I viewed it at the time was, hey, I asked you about a trade that maybe if you, if that got out there, it would it go against you? And so we've had people on this podcast say things about portfolio companies that have later cut. We're not trying to get anyone into a gotcha. But my current theory here on what happened is that they were massive in the GBT trade for a couple reasons. One was just they were sort of playing this, this premium

trade for a while. So creating shares, redeeming them and kind of running the circuit. My guess is that sometime around February of 2021, when GBTC flipped to a discount, these guys were stuck in that trade. And every action that they took after that became Ponzi-nomic on top of it. And so they were stuck. They had a bad position on. They were losing money on it. And so what do you do? You kind of have to make a decision if you can unwind your firm or you can kind of go out of business

gradually there or you just start trying to hit home runs. And so what appears they did was they started borrowing Bitcoin from anyone they could possibly borrow Bitcoin from. So they're going throughout Asia, borrowing from high net worth individuals, borrowing from Bitcoin miners. They're taking that Bitcoin. They're creating additional shares with the Bitcoin into the gray scale product, into the Bitcoin Investment Trust. They were taking that GBTC collateral and they were pledging it with certain lenders. And they were getting stable coins back. And then with those stable coins, they're going out and they're trying to hit home runs to try to win it all back, is my guess.

And so put $200 million into this sham project called Luna and obviously lost all of that. So that didn't work out very well. They got involved in this steak teeth. Obviously, that kind of went against them the wrong way. But they basically just started taking more and more risk. And at a certain point, the tide goes out and you see who's not wearing a bathing suit. and these guys were just completely underwater. Now, the interesting thing is that they kind of announced that they were going to Dubai

and trying to raise $5 billion. So there's another world where they get a sovereign wealth fund in Dubai, which we know they're talking to, to bail them out. And then it could have even been worse. But it's a criminal enterprise, really, is the net net of it, is Kyle Davies and Suzer criminals. And we're going to eventually see them go to jail, as my guess. I don't think I've ever heard you this far up.

Normally I'm the one that gets mad about stuff on the show. Well, I just think it's, you know, you have to mature as an industry. And so we all sort of, you know, want to play nice with each other as an industry and no one wants to say bad things about other investors. But a fraud is a fraud. I mean, these guys are Bernie Madoff-style fraudsters. Yeah, the era of being nice is over. People are calling it the PVP player versus president. player era. It's just remarkable to me in the last few months how many of cherished crypto-twitter

characters have been just obliterated in various ways. Like it literally feels like you're on the beach. I told you this before. I feel like I'm on the beach at Omaha, you know, not to trivialize that. And there's like shells landing all around me. It's like you see your buddy out there. And then he's just vaporized the next second. Like that's how it feels right now in this industry. Like lenders are going down. Exchanges are going down. Stable coins are going down. Cherished funds, the most popular and beloved funds are blown up. God only knows what's next. But yeah, I have been thinking about the fact that they were trying to raise this monster fund and imagine if they had kept, if they ten-xed the size of the Ponzi by taking investment from, you know, Mubidala or GIC or Temasek.

I mean, these guys were known as like the most credible and most successful crypto fund out there. It could have been a lot worse. A hell of a track record. So they could have gotten worse. It could have gotten a lot worse. It really could have. So I think we're going to see all this start to unfold. I mean, look, some prosecutor is going to make a name for themselves on this case because it is more salacious than long-term capital management.

It is probably more salacious than Madoff. and the scale of this thing is pretty remarkable. So this won't end well for those guys. And unfortunately it won't end well for a bunch of the firms that they did business with either. This is a bad situation. And so to be clear, I'm unwavering in my view and just the long-term prospects of this industry. But situations like this, we just have massive forced selling as a result of frauds in the industry. We got to get past this as an industry.

This can't mature as an industry without washing out the bad actors. You've got to get rid of these people. I will say, well, you also have to identify them, too. Remember the one MDB scandal? Joe Lowe. Joe Lowe has not been found, right? So there's no guarantee that, you know, that the legal process is able to clear here.

There's no guarantee for sure. But Joe Lowe, I believe, has been convicted. You know, imagine something. Yeah. I thought he was still on the run. Well, he is on the run, but I think he's been, I could be wrong on that, but I mean, people know he's a fraud. Yeah, so I mean, you're right, though. A lot of people still think it's just a matter of, you know, winding down three arrows.

But there's no good outcome now. No. It's a legal thing now. Yeah, there's an interesting, there's some interesting discourse around this yacht that Suu apparently purchased. Have you seen the yacht tweets? I just saw that he bought a $50 million yacht. I didn't see anything beyond that. Yeah, so he hadn't had it delivered yet.

I mean, so they only paid the down payment on the yacht too. I don't think they were very liquid at that point. I mean, it's amazing. You know, you're in the middle of this trade that's unwinding. You know, you all this money. You know, the writing's on the wall. And you buy a $50 million yacht. Like, what can you possibly be thinking?

at that point. Well, I don't know. Maybe what they were thinking was we need to flaunt some wealth here as we go out in capital raise, and this is going to make it easier for us to get a sovereign wealth fund in the Middle East to give us money. That's my guess. Or, you know, they're planning on becoming true seafaring digital nomads, you know, jurisdictionless. I don't like their chances of based on what we're hearing, and I won't publicly name anyone, but based on what we're hearing, of the people that lost money in this, I think getting on a boat and going into the middle of the ocean trying to hide would probably be the smartest thing these guys could do.

I will say it was a very handsome yacht, and FTX is probably going to end up owning it. I hope I get invited onto it. I mean, yeah, if FTX guys want to invite us on to, maybe you could take it to New York for the next crypto conference, and we could all go on it. That would be great. It's really nice.

It made me think that I'm in the wrong one to work. and I should be starting, you know, $10 billion Ponzi scheme. I don't want to be a part of it. I don't want to be a part of it. I don't know if I could. I don't know if I have the. You're not invited. I'm not, yeah.

If you decide to go Ponzi, just. You're not invited to the Ponzi. We haven't even gotten into the deals, actually. All right. We haven't done the deals. Let's do some deals. All right. So we already did all the FTX deals.

I imagine there'll be more FTX deals next week. Run in the table here. Next one up is Magic Eden, a Solana focused NFT marketplace. There raised $130 million at a $1.6 billion valuation from Electric and Greylock. And keep in mind, some of these deals did not close this week. They were deals that may have been done previously and just announced now in case you're wondering about some of the numbers here. Yeah, I mean, good point. Like, consider every deal that we're announcing this week.

for the foreseeable future, largely being deals that were signed up like four to eight weeks ago. Right. So next up, we have Falcon X there. The institutional digital assets trading platform, there is $150 million and $8 billion valuation from GIC, B Capital, Toma Bravo, Tiger, and others. Next is Prime Trust. This is a digital asset infrastructure company. They raised 107 million from FIS, FinC Capital, Mercado, Krakken, and others. Then we've got Binance US. They are rumored to be raising 50 million at a 4.5 billion valuation. You know, so Binance is on that list of firms that you'd think would be more aggressive here. Who knows what they're dealing with from a regulatory perspective in the U.S. and internationally.

But CZ has the capital. He could be running this FTCS playbook. He's not. It's interesting. Yeah. It's a little surprising. Yeah. There was a Bloomberg article.

they came out saying that CZ's net worth had plummeted from 90 billion to 11 billion, according to their estimate. I'm sure he's not that worried about it. I'm sure, yeah, I'm sure he's coping just fine. Next one up is Astoria. This is an NFT financialization platform. They've raised $8 million from true Arrington Capital and Ethereum. Then we've got Rokes-Sah, Rock.

R-O-X-E. I don't know how to pronounce that. Rocks. Rocks? Rocks. Blockchain payments from, they're apparently planning to go public via $3.6 billion SPAC filing. Good luck. I don't think, I didn't think spacks were still happening. Do you think there's a chance that the intern just put that in there just to mess with us? That's not, that can't be a real thing. Yeah, maybe that's, we're being trolled by our intern. Yeah. Just, uh, I, I don't think. Just see if they'll, if we'll read, just total nonsense. Just number one, I've never heard of that company.

Blockchain-based payments. Like, what are you talking about? I'm looking into this. And number two, SPACs aren't a thing. And blockchain SPACs are definitely not a thing. So, look, I can confirm this traces back to CoinDesk. This is a real article. There's a real press release.

And they plan to list on the NASDAQ. They're called the SPAC. back is called golden stone acquisition. This seems all very speculative though. I don't know how real this is. This don't don't invest in this. Okay. Don't do this. All right. If anyone's like thinking that they might want to check this out, just don't, don't check that out. This show is getting really edgy in the bear market. Maybe we should be in a permanent bear market so it stays interesting. Yeah. I mean, I just had a coffee. I'm ready to go. Yeah. All right.

It looks like Uniswap has officially acquired Genie. I think we had announced this one that maybe they were looking to do it a few weeks ago, but that is a NFT marketplace aggregator. So Uniswap has acquired Genie. And lastly, Alchemy, the blockchain node infrastructure firm, they have announced a 25 million grant program to fund Web3 startups. So those are the deals of the week. Why don't we talk about Soland?

I think there's some interesting stuff going on here in the decentralized, just governance space. So what happened here? Yeah, so Soland had this rushed vote, which was kind of like, it was like Venezuelan-style democracy, shall we say. It wasn't really a very credible, like, you know, this is kind of the thing where it's like a third world country and, you know, the UN sends election monitors. and it's not declared a free and fair election. So they had a vote, but it was a tiny percentage of all wallets that participated, and it was open very, very short amount of time. And the vote basically said the protocol directors, I don't know what you want to call them,

the people in charge can requisition this one big whale wallet, which was absent but super over leveraged and was going to have to be. be liquidated on this lending protocol, and they wanted to liquidate it in orderly manner, instead of letting the on-chain mechanisms clear because there wouldn't have been enough liquidity, and it would have really affected the price of Solana. So basically, it's a case of wartime versus peacetime governance, right? So in peacetime, you represent your governance a certain way. And then when things get really bad, you know, when the rubber hits the road, you actually suspend the rules that you're claiming to abide by and you just revert to autocracy. And that keeps

happening actually all across the defy space. And it's very revealing, I think, you know, what these teams do under pressure. Because that's when you learn where power is really vested. And this is one of those instances. Yeah, yeah, you don't want to be doing this. I mean, this is, if you're a project and you're trying to appear that you're decentralized, this is also just a terrible idea. So if you're just from a securities law perspective, you've got to be out of your mind if you're doing something like this, if you're at the helm of one of these projects. So the SEC is going to be knocking on your door pretty quickly, is my guess, if they, yeah, any of this stuff. Because you're revealing yourself to be like a shadow custodian of all these funds. Yeah. You know,

And the whole point is to decentralize control and represent that there's a smart contract, which is automated and non-human and neutral, which carries out the protocol. And that is clearly not the case here. I've accumulated some other examples of fake decentralization. Angela Wallace calls it the veil of decentralization. You could call it wartime versus peacetime governance. Terra was a good example where the underlying blockchain was paused for similar reasons, because there are going to be, as the Valley of Luna fell,

I think certain other assets that were bridged onto Terra were at risk, and so they just paused the blockchain. That's another good example. Bankor did this recently. They're one of the original automated market makers. They paused what's called impermanent loss protection, which I believe is just token-based subsidies, they stripped those away from Celsius because they felt that Celsius was kind of strip mining the protocol. So you keep on getting these things

where various DFI protocols or even underlying blockchains under duress, they pause things, they put the engineers back in charge and they suspend the way that things are meant to be, which is super bad and really bad for defy optics as well, I'd say. Yeah, it's just a not good thing for optics, but maybe we'll see more of that. I don't actually think that the Solenn thing would have resulted in a cascading liquidations on Solana. The more I sort of looked at that, I'm really having a hard time seeing why that was

actually unwound. Well, we won't know because the vote to expropriate effectively this big whale was then reversed. So as the negative attention flooded in, they changed their minds. So good for them. Did you see that South Korean prosecutors in the Terra Luna case have barred all of the developers and former developers of that project from leaving the country? I think that probably sounds about right. Yeah.

And, you know, I think one of the folks who tweeted that out was on the more junior side. But the thing is, is that and so maybe it's a little punitive, right? Because it's like, you know, if you just work for the guy, you're really implicated. But at the same time, these organizations are so formless and leaderless. And they are always, they are always put together in a really opaque way that I can, see why prosecutors would cast their eye on everyone involved because there's no explicit hierarchy. And in many cases, these things aren't incorporated. And to build on that, it's starting to look like there's some indications that there's

actual protocol level manipulation here with UST. So I don't know if you looked at that this week, but the on-chain forensics are sort of suggesting that there was some irregularities. there and there might have been some funds that were playing a little loose over there. But I don't want to go with accusation mode on that one because I'm just reacting to what's been put out there from these on-chain archaeologists. Yeah, that account Fatman Tara is like a guilty pleasure. I, you know, I think he or they are maybe 60, 70% on the mark.

but none of the claims I can't take any of them too seriously but yeah I mean there's definitely a calling of the herd in terms of the crypto funds you know there's going to be a ton of question marks around the practices that these firms employed and at the end of the day I think the

standard long only no leverage aligned venture funds operating in the orthodox way I think they're going to be the ones that make it. And a lot of the others don't. Yeah, I mean, we're obviously talking to our book right now, but it feels better not to have leverage on. That's for sure. Yeah.

Let's move on here a little bit. D-YDX, which is the largest exchange operating in the L2 ecosystem on Ethereum, they announced they're going to be building their own blockchain, and this one is going to be based on the Cosmos SDK. So I think we'll see more of that over the next couple years, just L2 ecosystems deciding to become L1 ecosystems. Yeah, that's a curious one, actually. A, I would say it's a blow to the Ethereum L2 thesis

if they find it easy enough to build their own blockchain. B, I think it's a little bit challenging because kind of like the lunus situation where the blockchain itself stops working when the native token sells off, You could imagine the same thing. If the security of this system is based on the token, which is a function of the, you know,

applications usage and interest in the application, then as usage drops, the security drops as well, which is probably not a situation you want to be in. So I don't know. That seems to me like excessive verticalization. I don't know if applications need to be building their own blockchains. I think block space ends up being a pretty good thing to be selling. So maybe there's some financial motivations to do this too.

So we'll keep an eye on this one. I remember I think compound was at least considering going, certainly going cross blockchain, but maybe building their own. Yeah, they were looking at that. I don't know where that stands. One thing I just maybe to not to go back to the three arrow situation, but one of the more interesting dynamics in this market right now is just the behavior of GBTC as a financial product. Think about it this way, I guess.

So a lot of the collateral that Three Arrows had with all of their counterparties was actually GBTC. And as I described earlier, they were creating this in kind and just levering up like crazy because it was just the easiest financial product to lever up. But imagine a world where the SEC actually approved Grayscale's ETF proposal and this 40% discount just swung back to a, you know, at par product where it just tracked the price of Bitcoin perfectly. You actually would have had a dynamic here where, you know, FDX wouldn't be stepping in because all of these lenders, at least the ones that had collateral, but like they would have been fine. So it's kind of a crazy financial weapon of mass destruction here that was, A, very easy to use by three arrows, B, swung to a discount. It's just like the worst possible time to be at a discount. And, you know, it all would have really been okay, I think, for a lot of these market participants if this thing just traded at par.

Yep. And so I would say a lot of that blame lies with the SEC, frankly, for letting it get so bad. I don't think you've ever had a situation of this magnitude, which could be so easily resolved by a simple approval of a spot ETF. Meanwhile, they approve an inverse Bitcoin ETF, so you can bet against the price of Bitcoin, which is just comical in the extreme. Yeah, it does make you think that a lot of balance sheets would be repaired if there was a one-time redemption of units of the trust for the underlying Bitcoin, which is I think, I'm not even sure that's possible, or this thing was converted. Or the trust was simply wound down and liquidated for the underlying units, which would also be really challenging because there's so many brokerages and different

venues where it's traded and things like that. So logistically it'd be a nightmare. But, you know, let's say Grayscale decided, okay, we need, you know, the industry is on the precipice here. one easy thing that will fix a lot of these balance sheets and save some of these firms is to get GPDC back to par. How do they do that? All they have to do is just announce that they intend to liquidate the trust. Yeah. And you wouldn't actually have to do it. You could say we're going to do it in three months.

And then it becomes like a merger ARB situation where the discount reflects the probability of them doing that. But yeah, that would basically solve it. But, you know, they're still harvesting a lot of fees from it. And it's their golden goose. So they don't have an incentive to do that. Yeah. So as you point out, there's no incentive for Barry to break that up, right? You would be effectively eviscerating your asset management franchise.

You're getting paid fees on actually the, I believe you're getting paid fees on the, as if you were at Nav, right? So it's not like they're charging fees at the discount rate. And so it's a great business. I think he's one of the best entrepreneurs in the entire space. And so it's a little bit of a stretch to say, hey, you know, go bail out the industry. But in doing so, just crush your asset management franchise. You know, I guess the flip side of that is like you're running a closed end fund

to this 40% discount. Like what, it's like pretty ugly, right? When do you throw in the towel? Like it's going to be impossible to raise money into those things. going forward. And they want to hear back from the SEC here before July 4th, I think, is I think the deadline's coming up. So I don't know.

It's a tough spot. It's hard to just say to a, you know, a guy, hey, just go crush your business to save the industry. What do you think? I mean, a GPDC generational buy at a 35% discount. It's closed a little bit now, actually. I mean, look, if you are long-term aligned on Bitcoin, you're looking at GBTC and here's your opportunity to buy it at a 40% discount. I mean, Bitcoin's trading at 21,000 right now and you can buy Bitcoin for 14.7K in the Bitcoin Investment Trust, not financial.

Yes, obviously you might be stuck in that thing for a while. It could go, it could widen. But yeah. Yeah, I mean, look, if you're long Bitcoin, like, that's a great way to be a long Bitcoin. ultimately. You know, this is the same. It's basically the long-term capital management trade of having two instruments that are effectively the same and should trade at par with each other, but they didn't. And LTCM blew up on leverage before the convergence could occur. Right. So it actually has a lot of parallels with, let's say this was the trade that took down three arrows. It has a lot of parallels.

has a lot of parallels there. So, yeah, if you are enticed by the GBDC discount of 35%, make sure you're doing it unlevered because it can go wider. And so only, and there's also no guarantee of any time horizon in which it closes, either through ETF or something else or maybe an activist comes in, although that's also difficult. Yeah, I think this thing is iron tight. I don't see an activist being able to do anything there.

Yeah, as we've sat on the show, they amended out that 75% liquidation threshold. Tragically, I believe, in the Fourth Amendment to the Charter. I went and read all the charters one time. I'm glad I did that, honestly. That must have been fun. That's Alpha. Yeah, you learn something. That's the pursuit of Alpha that'll drive it.

to do a thing like that. Wow. Did you act on any alpha there? I mean, I learned that there was no activist campaign materializing. I've talked to a bunch of activists about GBTC, but none of them have been sufficiently enticed to do anything. It's pretty airtight. They have good lawyers on that.

We could do it an activist or two these days, I would say. Oh, yeah. This industry needs more. Harry Markopoulos is that are, you know, it probably, frankly, needs less anonymous accounts that are just putting out false statements. Like, you'd reference, I'm not going to say the name, but the one that you referenced, like, I'd say half the things there I just know to be actually incorrect. Yeah, but it's still entertaining. I don't know. Yeah. I mean, it's your, it's your decision to trust an anonymous Twitter account with the bone to pick, you know?

That's how the truth was went so wrong. Yeah, it's just a lot of noise. I mean, I'd much rather listen to people that are actually willing to put their true names on things. Like I think we've just done on this podcast. If these even are true names. Yeah. Yeah. Nothing is as it seems anymore. Who knows who to trust?

I was just going to say, I think the show is so much more interesting now, now that everything is broken and the world is on fire. Well, I know. It's, look, the macro environment's not great right now. But nothing about the thesis for public blockchains has changed. I would say leverage is being flushed. And I've never in all of my time in crypto seen more forced selling. There is pain selling right now, but people that need to be selling, which is just a really interesting time for the industry.

Yeah, I mean, it's just undoubtedly the worst month in the worst quarter, in the worst year in crypto history. That's just a fact. and it's happening. You know, you just got to stay alive. I think I tweeted about a year ago, the only thing you have to do now is survive. Yeah, you just got to survive in advance.

And not everyone did, you know. You have to be paranoid. And you got to protect your interests. And it turns out we're swimming with sharks here, you know. And there's a lot of bad hombres in this industry. And it's taken almost everyone down. but ultimately, you know, has the fundamental case for non-state money, for neutral financial infrastructure, has that been altered in any way? Definitely not.

As bad as things seem in crypto land, outside, it's just like total chaos as well. Complete chaos. We could talk about that next week. I mean, Europe is on the brink of an actual genuine energy crisis, like literally the gas getting turned off 100%. and then you're going to get rationing. I mean, that's going to be total chaos. Every financial indicator in the world is pointing us towards recession. We're hiking into a recession for the first time in literal recorded history

with the most fragile balance sheet we've seen. Clearly, the Fed is making a mistake. That much is clear. So, you know, elsewhere, there's also chaos. And all these fiat currencies are going to be. be the only exit valve here. It's the only way to repair the situation that these sovereigns have gotten themselves in. So in my view, nothing's changed fundamentally.

Are we going to have to rethink a lot of the ways the crypto industry works and how defy works totally? So I guess that's our task for the next year. And these are the times where reputations are built. So if you're running a startup, you're going to go through some hard times right now. And you're going to find out, you know, who's there and who's got your back, whether that be people that are working at the startup, the investors, people in the community, counterparties. This is where reputations are built. They're not built during the great times.

They're built during the bear markets. So I think it's a put the hockey helmet on here and just get through it is sort of the message we're giving to folks in our circles. Yeah. And one thing I'll say is like the crypto hedge fund structure where they did venture deals, these funds would be shorting the tokens of their own portfolio companies. They'd be liquidating insta dumping. You know, they would vest and dump. They'd be, you know, actually three arrows did this. They would invest heavily in an ecosystem and then publicly deride the protocol and be like,

yeah, we've lost faith. You know, so like these are very capricious entities. They're not long-term focused. And because they're liquid funds, they're always trading in and around. They're always getting in and out of positions. They're changing their mind a lot. That's the antithesis of what it means to be an aligned long-term equity investor.

And so frankly, I think the idea of the crypto fund, the liquid crypto fund that does both hedge fund style trading and venture deals, it just doesn't work. It's not aligned. And we're going to realize this as an industry. And the people that were lionized and beloved, there's going to be some really, really tough questions asked to them and some of them are not going to make it out the other side. All right. So this was a hot takes podcast.

We'll see how this one lands. We'll be back next week for more. All right. We'll see you on Monday. We'll be back next week. Have a safe and healthy weekend, everyone.