The Pandora Box of FTX's case
The Pandora Box of FTX's case
JP Morgan is leveraging tokenization, while hackers found a new way to launder funds through ThorSwap
This week has seen huge upgrades, with Frax Finance finally unveiling its V3. On the other hand, the FTX trial keeps us attached to the news for the amount of (unpleasant) insights coming out of it.
No need to sift through the chaos - we've distilled it all for you.
in today’s edition:
Sam-Bankman Fried and the FTX trial
Real Estate backed stablecoin USDR de-pegs
JPMorgan making blockchain moves
North Korea loves laundering funds using ThorSwap
Why are gas fees so cheap?
Frax Finance takes its stablecoin next level with V3
Reading time: 6 min
This week's market performance has been red. All top-tier coins have been struggling and the DeFi TVL experienced a notable 5.4% decrease. $LOOM was the only one that showed strong performance, mainly attributed to its listing on major exchanges like Binance and Gate.io. Meanwhile, $RUNE is responding to the concerning news about Thorchain entering maintenance mode, a story we’ll delve into today.
Sam-Bankman Fried and the FTX trial
Everyone’s against Sam, or so it seems. Most executives at FTX are testifying against him in his ongoing US court case: most notably Caroline Ellison, Gary Wang, and Nishad Singh — all pleading guilty to the crimes committed during their time at FTX. SBF is accused of defrauding customers, ending up with a balance sheet hole hovering around $8B — but Alameda Research, a trading firm with strong ties with FTX, plays a huge role in the case. The trading company could execute orders faster than others on FTX, never get liquidated, and use a backdoor to steal FTX’s customers’ money.
The insights coming out of the case are staggering, including Alameda selling FTX’s customers BTC to keep it under $20K (under what motive?), and massive losses of up to $200M caused by phishing attacks due to low-security measures.
Getting back on Alameda using customer’s fund, it is estimated that up to $14B have been subtracted from FTX customers, with nearly $5B used for loans to SBF and other execs.
Among other things, a clear desire from SBF emerged to favor Binance’s sinking to capture its market share, leading to strong tensions at the end of 2022.
The list goes on and on, and a whole newsletter wouldn’t be enough. We’ll keep you updated. Special thanks to Decrypted for their investigative work on the case.
Real Estate backed stablecoin USDR de-pegs
Another day, another de-peg. USDR, short for Real USD, has been created by Tangible in an effort to take real-world assets on-chain by tokenizing them and leveraging their yield.
So far, so good. Tangible takes assets such as Real Estate, Gold, Fine Wine, and Luxury watches, then proceeds to tokenize them using NFTs — through this process, NFTs can be sold to investors with multiple benefits: fractionalization, greater liquidity, no operative burden, and increased transparency.
This sounds great, right? The problem lies in the fact that in order to entice investors the whole thing has been stretched too far: yields (i.e. rent from real estate) and capital appreciation of assets minus a management fee have been redirected to USDR holders, coupled with an issuance of TNGBL tokens so that a ~ 20% APY could be achieved in the competitive stablecoins market.
USDR was said to be redeemable 1:1 with US Dollars, which is true as long as redemption time is taken out of the picture. That is because only roughly 50% of USDR was backed by other stablecoins (USDC, DAI, USDT) while the rest was backed by their insurance fund (other volatile tokens) and their RWAs — hence, in a bank-run where Tangible is flooded with redemption requests they can either (1) rush to sell assets (incurring losses) or (2) take their time, and sell assets at a fair value.
Following the de-peg, the Tangible DAO is set to switch to a real estate index token. USDR is currently trading at $0.57 with a collateralization rate of 92.7%, presenting potential arbitrage opportunities.
JPMorgan making blockchain moves
JPMorgan’s Onyx blockchain was used by BlackRock to tokenize shares in one of its money market funds. Through the Tokenized Collateral Network (TCN), BlackRock Inc. turned shares of one of its money market funds into digital assets and transferred them to Barclays Plc as collateral for an OTC derivatives trade.
JPMorgan’s TCN is the second application launched on the Onyx blockchain, which, according to the Head of Blockchain at JP Morgan, allowed for the collateral to settle in less than 2 seconds, compared with over the course of a day. At scale, this drastically speeds up transactions in the $25 trillion collateral industry and increases capital efficiency by freeing up locked capital so that it can be used as collateral.
JPMorgan also runs the JPM Coin, which enables wholesale clients to make dollar and euro-denominated payments through the Onyx Network. The bank has used it to process around $300 billion from its launch until June this year. In addition, the company runs a blockchain-based REPO application.
JPMorgan isn’t alone. Goldman Sachs unveiled its digital-asset platform as well in November last year, where clients can issue financial securities in the form of digital assets in areas such as real estate.
North Korea loves laundering funds using ThorSwap
Since Tornado Cash was canceled (i.e. if you interact with it most protocols will ban your address from their smart contracts in order to remain OFAC-compliant), hackers including the famous North Korean Lazarus org had to get creative to launder their hard-earned illicit funds into spendable money. One way of doing so was ThorSwap, a protocol running on ThorChain that lets you swap tokens on different chains (non-EVM as well), making it easier to hide your traces. Many noticed, and ThorSwap couldn’t help but go into maintenance mode whilst figuring out a way to prevent hackers from using that route.
After a few days of radio silence, their team confirmed the feared solution: address screening (i.e. if you interacted with illicit funds, you cannot use our smart contracts). The approach is becoming popular day by day, with protocols sacrificing the permissionless ethos to guard themselves against national regulators (most notably, the SEC).
Why are gas fees so cheap?
Ethereum average gas fees have recently fallen to 8 Gwei, a level not seen since October 2022. Although it means the transactions are cheaper, it implies that user activity on Ethereum is decreasing.
The reduction in gas fees can mainly be attributed to a decline in user activity within NFTs trading and layer-2 networks. As illustrated in the chart below, weekly trading volumes for NFTs have reached their lowest point in two years.
There has been a significant decrease in activity on L2 networks too. According to Nansen, the top gas spenders, including major centralized and L2 networks like Arbitrum, Optimism, and Base, have collectively reduced their spending by 30% compared to the previous week.
Frax Finance takes its stablecoin next level with V3
FRAX is an algorithmic stablecoin, currently the seventh most capitalized one with a $670M cap. Along with DAI, FRAX went big on RWAs in 2023, and its V3 confirms that with the following upgrades:
Full collateralization of FRAX: while previously backed by USDC and FXS (similarly to the LUNA-UST mint & burn mechanism), the stablecoin is pivoting to a 100% collateralization ratio, abandoning the algorithmic backing with FXS.
Non-redeemability: Frax initially allowed users to redeem the stablecoin for USDC and FXS when FRAX went off-peg, incentivizing arbitrage. Going further, algorithmic market operations (AMOs), RWAs, and governance actions will be tasked with maintaining the peg instead of the canonical asset redemption process.
sFRAX: short for staked FRAX, it’s a staking vault that allows users to collect a yield paid in FRAX and distributed weekly that originates from mostly RWAs. Whilst starting at 10% APY, the end goal is to always keep it equal, or higher, than the US dollar risk-free rate (IORB) — currently 5.4%.
FXB: an on-chain bond token convertible to FRAX on maturity, representing the yield for lending FRAX back to the protocol itself.
The upgrade is set to attract ample liquidity to Frax’s ports, giving huge importance to its governance and real-world-assets — with the downside of possibly relying too much on the latter, which is something that many protocols are doing to inflate their TVL now that RF rates are through the roof and capital inflow is scarce.
Trader Joe, the premier dex on Avalanche, has been sued by the US grocery store Trader Joe’s for copyright infringement — link
Bitcoiner drops BitVM paper — bringing Ethereum-like contracts to Bitcoin — link
African state Zimbabwe launched a gold-backed cryptocurrency and made it the country’s legal tender amidst IMF warnings — link
Pfizer-backed VitaDAO launched a community-funded BioTech firm — link
Platypus, a stable swap on Avalanche, pauses its pools while they investigate a suspected exploit — link
Hong Kong and the UAE monetary authorities established a bilateral working group to work on CBDCs, virtual assets, and more — link
Galxe suffered a DNS attack that resulted in a $396,000 exploit, and reimbursed all users affected — link
Solana's latest upgrade introduces "Confidential Transfers", enhancing user privacy with encrypted SPL token transactions.
Mountain Protocol, backed by Coinbase Ventures, launches $USDM stablecoin: a regulated product that pays the 'risk-free rate' — link
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Disclosure: Authors may own crypto assets named in this newsletter. Stay on-chain is meant for informational and educational purposes only. It is not meant to serve as investment advice. Please consult your investment, tax, or legal advisor before making investment decisions.