CryptoAM: Synthetix Attack, LedgerX Licenses and Dai Saves
|Jun 25, 2019|| 3|
Happy Tuesday CryptoAMers. Shaping up to be another full on week of price action, announcements and hacks…just another week in crypto 🔥
Three things you need to know:
One: Synthetix Suffers from an Oracle Attack
Synthetix, a decentralized protocol focused on creating synthetic assets, suffered a problem with their price feed (oracle) yesterday that allowed a savvy trader to mint $37M of synthetic Ether, and generate $1B in paper profit over the course of a few hours.
The issue was a simple, but dangerous one. Synthetix employs a variety of different price feeds in order to value their synthetic assets, and determine conversion rates. Normally, a user will take SNX, the native token, and stake it in order to mint synthetic assets such as sUSD or sKRW.
In this case, the price feed being used was misrepresenting the value of a Korean Won (KRW), claiming it was in fact 1000x worth the true value. This allowed a trader to take advantage, mint sKRW, and buy sETH with purchasing power that shouldn’t have existed.
In response, the Synthetix team halted trading, reversed the trades and negotiated a bug bounty payout with the trader who exploited the system. The Synthetix team has been very responsive to the ordeal, and the SNX token rebounded quickly after the fix.
This hammers home a crucial point: Decentralized finance is not all that decentralized yet. There are a variety of different issues that can crop up in these systems, and building them without a failsafe is a surefire way to get yourself in major trouble. It’s import to be diligent and realize that these protocols still carry a significant amount of smart contract and operational risk. Savvy market participants may be able to figure out how these protocols work on a core level, and extract value from using them in a way that it was not designed to be used.
Go Deeper: Read the re-cap from Synthetix
Two: CFTC Approves LedgerX to Settle Futures in Real Bitcoin
The CFTC has given LedgerX the blessing to begin trading physically settled Bitcoin futures on their exchange platform. With this announcement, LedgerX beat Bakkt, ErisX and the CME to the punch, solidifying their place as a leading regulated Bitcoin exchange.
LedgerX is currently known for their options trading platform, and have historically focused on building products for institutional investors. Recently they’ve started to push into the retail markets, opening a platform called Omni which only requires a $10,000 deposit to begin (vs a $5M asset requirement for their institutional version). The physically settled Bitcoin swaps will be available for trading on Omni.
LedgerX has proven themselves to be a leading figure in the realm of exchange compliance, and have spent much of their time focused on getting the relevant licenses, a long and arduous task.
With our new license granted today, both retail and institutional customers can interact in the same transparent marketplace, LedgerX Omni, the first and only regulated US institution to offer these capabilities to the retail audience.
We can now provide a robust market for a much broader audience, providing access to individuals who want to get exposure to the fast-growing crypto investment sector via derivatives products that they could not access in the past.
In fact, we are the only company to have received both a Swap Execution Facility (“SEF”) and a Derivatives Clearing Organization (“DCO”) registration to enable regulated trading of bitcoin derivatives.
By operating both the exchange and clearing house, we can uniquely offer clients a vertically integrated trading and custody solution.
Currently the CME and CBOE offer cash settled futures, meaning that at expiry the positions are settled in USD rather than actual Bitcoin. The CME has seen strong volume coming into these contracts, and have posted new highs over the last few months.
As a note, the majority of traders currently on the CME are hedge funds and institutions. Large traders are generally short on these contracts, with smaller traders and asset managers generally being long.
Why this matters: Pay close attention to the cryptocurrency derivatives market — it’s growing at breakneck pace. New products and platforms are popping up every day, and generating significant amounts of volumes. Venues like BitMEX, Deribit and LedgerX are becoming larger market forces, and paying attention to these market participants and their clients will become increasingly important as this market grows.
Three: Sempo and Consensys run humanitarian pilot in Vanuatu
After a disaster, international organizations often struggle to get aid to those who need it most. An additional complication is how to make sure these aid recipients can get access to the necessities they require.
Sempo and Consensys recently wrapped up a 200 person blockchain pilot program to help solve this problem in the small Pacific island of Vanuatu. The pilot used the Dai stablecoin instead of cash and was run in conjunction with Oxfam, one of the largest nonprofit organizations in the world.
The basic idea: Research has shown that giving aid recipients cash to spend on what they actually need is actually more effective that giving recipients things like rice, or whatever the organization thinks these people need.
The problem: Getting cash to people after a disaster is difficult. There is also the added complication of trying to track where this cash is being spent so that aid organizations can be accountable to their donors. These organizations often suffer from a lack of transparency about how donations are used.
Oxfam originally tried to provide villagers in Vanuatu with cash after a recent earthquake. However the effort was hampered by the need for ID checks and visits to the local bank to receive the cash, requiring around an hour in total.
In contrast Sempo and Consensys were able to onboard users in six minutes. Users were provided with a tap and pay card loaded with USD$50 worth of Dai on an Ethereum address. They were then able to spend this at 34 different vendors who were provided with Android smartphones - allowing them to accept payments by scanning the users’ QR code on their card.
The system is also resistant to internet failure, clearly something that is important in a disaster hit area. Aid recipients don’t require internet as they have their cards, and the system stores and updates the user’s balance on the chip of the card itself. This ensures that even in instances where the vendor doesn’t have access to internet, the recipient isn’t able to double spend.
The big picture: Imagine a situation where donors to aid organizations could trace their donations all the way to the end recipient, ensuring that their funds were properly spent.
Why it matters: As we ramp into another bull market, consider the following from the peak of the last one:
Not everyone is motivated by the potential humanitarian impact of crypto, and that’s ok. But whether you care or not there’s no doubt that use cases like this, if they grow in scale, would increase the positive mainstream media attention that crypto receives and change the perception of the industry overall.
Also in the news:
Direction: Bitcoin is looking bullish at these levels. There’s a lot of hot air above 11.5k, and I think it’s far more likely we see 12.5k before we seek 10.5k again. Historically, Bitcoin has not spent much time at these levels meaning that there are few strong support / resistance lines to look at, and the majority of trading should be more based on general market sentiment, momentum and catalysts as of now.
I’m long at these levels, and will find invalidation for that thesis if we end up below 10.5k.
Key Support: 11510, 12750
Key Resistance: 10550
Overall Market: At 8:30am UTC on June 26th, Bitfinex will be going down for maintenance. Be on the lookout and aware that when a large provider of liquidity goes down it often coincides with outsized price movements. Plan accordingly, and if you hold margin positions on Bitfinex it would be advisable to close them out prior to the shutdown.
This “maintenance” is likely the integration of derivatives into the Bitfinex platform, which the CTO, Paulo has been hyping up for some time. It looks like there will be 100x leverage offered…
Alt coins are currently bleeding against BTC, with large movers such as VeChain and Chainlink popping only on announcements. Over the last year its been a fools game to try and dive into the altcoin market, as we were in a strong downtrend. Now that we’ve turned bull, it’s time to start paying attention to announcements, and potential catalysts such as mainnet launches once again.
What I’m reading today:
Why Ether is Valuable - Anthony Sassano
With the price of Ether (the native currency of Ethereum) rocketing past $300, what better time to explore some of the factors that make Ether valuable.
The key value drivers of Ether according to Sassano are:
to pay for Ethereum transaction fees (gas)
as collateral for DeFi applications such as MakerDAO and Compound
can be lent or borrowed (Dharma)
accepted as payment at certain retailers and service providers
as a medium of exchange to purchase Ethereum based tokens (e.g. to purchase any ERC-20 token in an ICO. Also to purchase things such as non-fungible tokens on marketplaces such as Open Sea
as a reward for completing bounties
Last year when the price of ETH was nearly at rock bottom, I saw a particularly useful analysis of some of the fundamentals that drive ETH:
The TLDR of the post was that by the end of last year, two of the major drivers of ETH - ICOs and Dapp usage (contributes to gas fees), were seeing dramatically decreased demand.
DeFi products have helped to ease some of this issue. Although the ICO market is still dead, you now have nearly 2% of total ETH supply locked away with DeFi products, representing an increasingly important driver of ETH’s value.
Ethereum’s shift towards Proof of Stake is also likely to increase the amount of locked up ETH. Validators on Ethereum 2.0 who help want to help secure the network will be required to lock up 32 ETH per validator. That’s locking away an additional 0.25% of the total circulating ETH supply if you assume that each one of the current 8000 Ethereum nodes was to participate as validators with the minimum 32 ETH each.
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