The Breakdown - Circle Drops Tron

Episode Date: February 22, 2024

The latest scuttlebutt from the world of stablecoins Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Wednesday, February 22nd, and today we have some stablecoin talk. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it. Give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link at the show notes or go to bit.ly slash breakdown pod. Hey, hello friends, bunch of things happening today, but we are, like I said, going to start in the world of stable coins. Big news there is that Circle is discontinuing support for

USDC on Tron, effective immediately. Minting USDC on Tron has already been halted. Circle will support the transfer of USDC to other blockchains until February of next year. Retail customers without a direct relationship with Circle have been advised to transfer their stablecoins onto another blockchain using a centralized exchange. In a press release, Circle explained the decision by stating that, quote, our decision to discontinue support for USDC on Tron is the result of an enterprise-wide approach that involved the business organization, compliance, and other functions across our company. This action aligns with our efforts to ensure that USDA remains trusted, transparent, and safe, characteristics that make it the leading regulated digital dollar on the internet.

The move come several months after Circle first received criticism for supporting Tron. In an open letter written in October, the campaign for accountability, said that USDC on Tron was problematic because the network, quote, has been named in multiple law enforcement actions involving billions of dollars in transactions by alleged organized crime groups and sanctioned entities. They also accused Circle of banking Tron founder Justin Sun, who they claimed has ties to the Chinese government. Circle denied the allegations, stating that their stable coin had been detected in only

$160 worth of transactions between sanctioned wallets, none of whom had a direct customer relationship with Circle. Further, Circle has said that they had discontinued all customer relationships with Justin Sun, Quibi Global, the Tron Foundation, and other Sun-affiliated companies in February 2023. They also noted that Sun is not on any sanction list currently. So, while Struggle did not go into details on their reasons for cutting off Tron support, it seems clear that the firm is addressing the perception that dealing with Tron at all is a compliance or political risk. Only 335 million in USDC circulates on Tron, around 1% of the Stable Coins' overall market cap.

This pales in comparison to the $51 billion worth of tether issued on Tron, which is larger than USDC's entire supply. The community commentary is just about what you would expect. Brad Gentile writes, very interesting. Tron is ranked number four on all networks of USDC liquidity. Circle doesn't explain the removal of USDC from Tron, but my guess is that the Tron network is a liability from regulated asset insurers and Circle is trying to go public soon. Adam Cochran writes, I mean, this should come as no surprise to anyone who has been paying attention to Tron or Sun's recent movements with TUSD and his exchanges. Kachevraza writes, Circle knows something that is not in the general public domain. There are, of course, a ton of speculative possibilities

around what that might mean. There is a current SEC enforcement lawsuit against Sun and Tron, but it's still in early motion stages. It could just be circle tidying up any potential black marks ahead of IPO. It could be the de minimis business on Tron not being worth the headache in general. The main question, really, is whether this is circle acting on knowledge of some incoming enforcement or legal action, or it's simply an abundance of caution in advance of an IPO. We don't know right now, but I'm sure we will find out more about this in the month to come. Now, the other big stablecoin story is around something called Athena. Athena is a newly launched stablecoin offering 27% yield that is giving some traders

flashbacks of the Luna collapse. Athena was launched on Monday and has already gathered $300 million in market cap from over 4,000 users. The project is backed by major cryptoventure firms, including Dragonfly, and seeks to offer a censorship-resistant stablecoin backed entirely by crypto-native collateral. The structure of the product is a tokenized basis trade. Users deposit Lido-staked ETH, which is then used to open a corresponding short position. These offsetting long and short positions should maintain a constant value, while capturing the staking yield and any funding rate attached to the short. According to the protocol's developers, short positions have paid out funding in the majority of market conditions over multiple years,

including during the previous bear market. This means that the days where the position is unprofitable should be relatively few. The developers have said that there will be an insurance fund to cover periods with negative funding conditions, and there are some respected folks who like this idea. For example, this unique structure has been advocated by Bitmex founder Arthur Hayes for a number of years, suggesting it should be a relatively safe way to create an entirely synthetic dollar using only crypto-collateral. Critics noted, however, that the modeling provided by the Athena team, by definition, does not include the distortions introduced by the stablecoin's massive short position, and therefore cannot predict market conditions moving forward.

Realistically, the idea behind this token is not so much that it's a crypto-native stable coin, but more that it's a tokenized basis trade. Basis trades where a trader goes long, a spot position, in short a corresponding futures position to capture the funding rate, are often lucrative in crypto markets. Some coins frequently pay above 20% annualized to hold this position, and sometimes even more than 50% during raging bull markets. You obviously miss out on the capital appreciation of the crypto asset,

making this trade only suitable for traders who don't want to hold that risk. By tokenizing this common trade, crypto traders can easily enjoy access while taking advantage of Athena's balance sheet to manage collateral and avoid liquidation. An additional use case would be unlocked if Athena's token became acceptable as collateral in lending protocols, allowing the trade to be looped and leveraged up. The risk, well, the risk is obvious. As we've seen over and over again from novel stablecoin designs, the entire thing could blow up. Unlike most algorithmic stable coins like Luna and UST, Athena is referencing outside collateral rather than its own token. The major risk

appears to be simply running out of collateral if the basis trade goes against Athena for too long. Basis trades often present a negative yield when they become too popular, piling up losses for market participants stuck in the trade. Athena does not pass on those losses to holders, instead chewing through the insurance fund. This means there is no mechanism to encourage holders to unwind their position and no natural end to the losses. The project will also be using centralized exchanges with their associated counterparty risk. If you had to sum up the middle range of the sentiment, that this is, one, a risky product, that two, has the potential to detonate during a bear market, but three, could have a decent shot of surviving as well. In the interim,

it will present a large amount of short open interest on Ethereum, which could mute price gains. Will Clemente from Reflexivity Research writes, Athena is an interesting concept. It's basically the Nakamoto dollar that Arthur has been talking about for years, can think of it as a tokenized version of the basis trade. Biggest risks are managing the short leg, counterparty risk, and that it's limited by the size of ETHP's open interest. ZeroX NGMI writes, I don't get why so many people are focused on Athena's high yield,

instead of the fact that there's been two projects that tried this before and both gave up because they lost money due to yields inverting. When yields invert, you start losing money, and the bigger the stable coin is, the more money it loses. Yield farming at Dillucinator writes, Is Athena the next Luna? No. Innovative, no. Ambitious, yes. Consistently 27% APR? No.

Scalable? Wouldn't worry until 1 to 2 billion circulation. Profitable to participate in? Yes. Is basis carry trading hard? No. offering any form of a money printer at nine-figure size with a clear source of yield is an amazing product. Anthony Sasano wrote, I backed Athena Labs with a small check because I liked the founder and thought the idea was worth pursuing. In saying that, I'm very glad to see lots of people questioning Athena's design and asking how they can offer things like 20 plus percent yield and also exploring what all the underlying risks are. This is very different to last cycle where people questioning

things were in the minority, and they were told that they were just coping over not making money on Ponzi's like Terra, Anchor, and UST. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out.

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Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, DBA, DBA, Cracken. So what should you think of all this? Well, to the extent that you're trying to understand the differences between this and something like Luna, the team is at least openly explaining where the yield comes from. The founder has even pointed out that the yield is not guaranteed and will more than likely

decay. It is different than other Algo stable coins, in that it's really more of a yield generation pass-through from an actual trade, rather than just some Ponzi box. However, that does not mean it's not risky. There are a million challenges that are yet unforeseen, but of course it wouldn't be defy without DGens piling into things that anyone in their right mind would seem more insane. Now, staying in Ethereum slash defy world for just a minute, Ethereum has hit $3,000 for the first time in almost two years on the back of ETH enthusiasm. Ether was up 1.6% on Tuesday and has added

12% over the past week. While the SEC has given no indication that they are taking a closer look at ETFs at this stage, the general sentiment is that an approval in May is possible, if not likely. Multiple issuers have updated their applications, with the latest coming from Vanek on Friday. Some of the spicier updates have included the prospect of integrated staking, but analysts expect this feature wouldn't survive SEC scrutiny. Bernstein Research is currently handicapping a May approval at 50%, stating that ETH is, quote, probably the only other digital asset likely to get a spot EATF approved by the SEC.

Their opinion overall is that if the SEC denies spot EFs in May, their approval within the next 12 months is still almost a certainty. Analysts wrote, Ethereum with its staking yield dynamics, environmentally friendly design, and institutional utility to build new financial markets, is well positioned for mainstream institutional adoption. Ryan Schott Adams from Bankless wrote,

ETH just reclaimed 3K. Last time we hit 3K, we were sitting on time bombs. Terra collapse, three arrows death, C5 failures, Genesis fiasco, 10 billion FtX fraud. This time we're sitting on L2 hyperacceleration, restaking yields, EF, EF, EF, EF. What a foundation. Speaking of ETFs and specifically ones that already exist,

the most notable thing that happened so far this week is that the Vaneck and Wisdom Tree Bitcoin ETFs saw a ton of unexpected volume on Tuesday. Vanek traded around 400 million in volume, more than 23 times its longer run average. Vanek was the third most traded product for the day behind BlackRock and grayscale. Wisdom Tree saw over 223 million in trading volume, over 17 times its average. Both products have relatively few assets under management to support this kind of volume, with each entering the day with less than 100 million.

Yesterday ended up as the highest volume trading day since the launch day. One possible explanation for the volume spike is a reduction in fees. Vanek announced a fee cut to 20 basis points effective from Wednesday. This now positions Vanek in line with Bitwise as the cheapest fund. Interestingly, both products were traded by thousands of individual accounts rather than large block trades. These products have typically seen only a few hundred trades per day. The volume also rushed in right from the opening bell, which could indicate that this was a prearranged buy from newly approved investment advisors or asset managers. Could have also been a flurry of

hedging activity as Bitcoin touched both $53,000 and $51,000 during the morning session, but that explanation wouldn't explain why the trading activity was focused on two of the smaller ETS. Bloomberg senior ETF analyst Eric Bocunis was at a loss, tweeting, not sure how to explain. Maybe it was added to a platform over the weekend? Typically, when the daily volume is greater than an ETF's total assets, as in this case, it means one big creation. I've never seen a grassroots trading explosion come out of nowhere like this. When all was said and done, once the trading was tallied in the morning, turns out that only $5.9 million worth of inflows were added for Vaneck and just $2.2 million for Wisdom Tree,

making the entire episode even more confusing. One thing that's not confusing, however, is our last story for today. Senator Elizabeth Warren is up for re-election this year in the state of Massachusetts and now has a new challenger emerging from the pro-crypto army. Lawyer and marine veteran John Deaton officially launched this campaign on Tuesday. Deaton's launch video focused on domestic issues, including inflation and the migrant crisis, with the new candidate pledging to, quote, continue my life's mission to shake things up for the people who need it most. Deaton made a name for himself during the ripple case by collating an amicus brief which highlighted the perspective of 6,000 everyday XRP holders. The brief turned out to be critical to

Ripple's partial win, providing the basis for the argument that XRP holders were not relying on the Ripple Corporation for asset appreciation. Deaton said that he is now bringing that same energy to, quote, taking on the Washington elites. Crypto issues were completely absent from Deaton's launch video, preferring to focus on the plight of everyday people. Deaton also did not comment on which party he would be running for. However, he did send a barb straight at Warren, stating that she, quote, promised to be a champion for those in need. Instead, she gives lectures and plays politics and gets nothing done for Massachusetts. Deaton will have his work cut out for him, taking on a politician with as long-standing a relationship with her state as Warren has will be no easy task.

Still, the launch appears to have rattled Warren, who tweeted on Tuesday, apparently the MAGA Republican machine couldn't find a single Republican in Massachusetts to run against me, so they brought someone in from Rhode Island who will have the backing of the GOP and special interest groups. Deaton did relocate for Rhode Island, but responded preferring to focus on the issues, saying, Senator, no one recruited me and I'm looking forward to a substantive discussion on the issues that are important to the good people of Massachusetts, like income inequality, inflation, housing costs, illegal immigration, the debt crisis, and veterans services. Warren has been paying a lot of attention to the giant campaign war chest accumulated by the

crypto industry. During an appearance on Pod Save America last week, the host mentioned that, quote, your push to regulate crypto is seemingly attracted a potential challenger to you in your Senate race. This could mean a flood of money from crypto super PACs. Warren suggested in response that, quote, corporatists would spend any amount of money needed to back challengers against her. Tony Edward, the host of thinking crypto, said, I smell fear. She wouldn't be given you any attention unless she was afraid. Mark Guscow summed up many people's feelings when he wrote No, Senator Warren, your inability to put the people's interest ahead of your own is what, quote-unquote, recruited John Deaton to run against you for the Senate. J.D. running has nothing to do with the GOP,

MAGA, or any other nonsense you spew to divert attention from your failures as a leader. Uphill Battle or not, this campaign will certainly be one to watch, so I will keep you posted as it evolves. For now, that is going to do it for today's breakdown. One more big thank you, as always, to my sponsor for today's show, Cracken. Go to Cracken.com and see what crypto can be. Until next time, be safe and take care of each other. Peace.