Terra's Anchor Protocol Faces Market Stress ~ CEOM Coin

The biggest crypto news and ideas of the day

Jan. 28, 2022

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Welcome to The Node.

In today's newsletter: Goldman Sachs says crypto can't escape Fed policy. Terra-based protocol Anchor sees reserves halve. And the America COMPETES Act might grant the Treasury secretary unusual power over crypto firms.

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–Daniel Kuhn

Today's must-reads

Top Shelf

CORRELATED? Goldman Sachs said bitcoin and altcoins will become increasingly "more correlated" with traditional market variables like the Federal Reserve's planned tightening monetary policy. That said, crypto investors are accumulating bitcoin and moving it off-exchange, seeming to shrug off prospects of faster interest rate hikes from the Fed, CoinDesk's Omkar Godbole argues. Glassnode data shows more than 18,000 BTC (about $670 million) left centralized exchanges on Thursday – the biggest single-day net outflow in over a month.

SUITS & TIES: Digital asset firm Galaxy Digital has taken another step in its relocation from the Cayman Islands to Delaware by filing a registration statement with the U.S. Securities and Exchange Commission (SEC). Meanwhile, asset manager WisdomTree said its crypto assets portfolio surged fivefold to an average of $406 million in the fourth quarter from the year-earlier period; hedge fund manager Brevan Howard has hired a Jump Capital partner and Gemini Trust's former security lead for its crypto team; and Wanxiang Group's blockchain wing, HashKey Group, has received $360 million in commitments from investors for its new blockchain fund focused on Asian startups.

CLOSE-KNIT: Valkyrie Investments will oversee a $700 million multi-sig token treasury for NEM and Symbol, two crypto protocols that recently merged. Leah Wald, CEO of the Wall Street-based manager, says there's "huge potential" in servicing DAOs' treasury management needs and her firm is "talking with a few other protocols," demonstrating the increasingly close ties between modern-day asset managers and the digital realm. Separately, Fidelity Investments has filed an application for a metaverse exchange-traded fund (ETF) that will aim to track public companies with exposure to the blockchain-based digital worlds.

SO POLITICAL: A crypto brain trust, including FTX and SkyBridge Capital execs and hedge fund manager Anthony Scaramucci, has founded and invested $5.3 million in a political action committee called "GMI PAC" to support candidates running in November's midterm elections. That comes as U.S. Sen. Elizabeth Warren (D-Mass.) sent letters concerning crypto mining's "extraordinarily high energy usage" to six bitcoin mining firms and as congressional authors of the proposed America COMPETES Act slipped in a provision giving the Treasury secretary sweeping power to block financial institutions from interacting with crypto exchanges and non-custodial wallets passed into law. Halfway around the world, Russia's government agreed on a "road map" for crypto regulation, with the central bank, which proposed an all-out ban, the only dissenting voice.

MORAL BUT HAGGARD: Decentralized finance (DeFi) is an experiment in building complicated financial tools – everything from savings accounts to collateralized debt instruments – without middle men. Given the experimental nature of this industry, which champions self-reliance and supposedly abhors moral hazard, things often go awry. There are two notable examples this week of code-heavy, crypto protocols dealing with the very human concerns of a market downturn:

Terra-based savings protocol Anchor has seen its reserves halve to 35 million UST (Terra's native U.S. dollar-pegged stablecoin) over four weeks amid the crypto market crash. The protocol is also experiencing a loan-demand shortage of over 300%, given that total deposits are now 5.71 billion UST while the amount borrowed is just 1.37 billion UST. Users, who are paid 20% annualized percentage yield (APY) on deposits, are concerned not enough is being done to reverse this decline, though Terraform Labs' CEO Do Kwon took to Twitter to address concerns, saying if worse comes to worst, a reserves-less Anchor would function as a regular DeFi money market. LUNA, Terra's native token that's minted and burned to maintain UST's dollar peg, dropped below the $50 mark.
The morning after a "liquidation cascade" on Avalanche-based money market Wonderland, triggered by fears that project leaders were selling their tokens, it came to light that its pseudonymous treasury manager has a checkered past. Michael Patryn, the co-founder of a notorious Canadian crypto exchange Quadriga that defrauded investors of upward of $190 million, was doxxed and has since stepped back. He reportedly has a history of fraud extending well before his involvement in the crypto industry. The news sent Wonderland's TIME token and the semi-related projects under the "Frog Nation" building group – Popsicle Finance's ICE and Abracadabra's SPELL – tokens into a tailspin. But it also raised concerns about the nature of "pseudonymous" development and how communities should treat former fraudsters looking for redemption in crypto's frontiers – of course the matter is being put to vote by a DAO.

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What others are writing...

Off-Chain Signals

Texas Governor Greg Abbott Is Inviting Bitcoin Miners to Stabilize Electrical Grid (Decrypt)
How Crypto Became the New Subprime (NYTimes)
How MakerDAO's Content Team Was Fired by MKR Holders (Decrypt)
Reddit May Soon Add NFT-Based Profile Pictures (Crypto Briefing)
Visa says crypto-linked card usage hit $2.5 billion in its first quarter (CNBC)
Missoula businessmen building $1.9B crypto-mining center in North Dakota (Missoulian)
Ethereum-BSC bridge of Qubit Finance hacked for $80 million in 'largest exploit of 2022' (The Block)
Google Cloud Hiring Blockchain Specialists in Bid to 'Drive Decentralization' Efforts (Blockworks)

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Putting the news in perspective

The Takeaway

Diem: Derailed, Deferred, Now Dead
Reports surfaced this week that Facebook, now known as Meta Platforms, is planning to sell intellectual assets from its proposed digital currency, originally dubbed Libra, and shutter the project. Drinks are on me, because there's nothing quite so gratifying as watching Facebook and Mark Zuckerberg fail – and Libra, later known as Diem, was a glorious trash fire of unforced screwups from beginning to end. If you dream of a future in which our online world isn't dominated by predatory data hoarders, the ineptitude displayed by Facebook here should keep you warm until spring.

The collapse of Libra/Diem is a huge positive, not just for the crypto industry, but for privacy and social justice more generally. A successful launch of Diem would have disastrously muddied the waters about what constitutes a real cryptocurrency, since Facebook's token was never going to be properly decentralized or uncensorable. The project also appeared poised to give a new stream of transaction data to a company that will go down in history as the Standard Oil, United Fruit or R.J. Reynolds of digital surveillance. That such a rapacious and destructive entity has been rebuffed from creating its own currency is a win for humanity.

And there are broader positive lessons to be learned – above all, that wealthy and influential people still have to exhibit at least a shred of competence to get what they want. The Libra effort was a shambolic mess from the jump, with Facebook showing again and again that it hadn't thought through the implications of either its overall goal or its specific proposals. That it went down in flames shows there's at least still some justice in the world. These are the supposed masters of the digital universe, and they still failed because their ideas were so fundamentally terrible and consistently half-baked. All the money in the world can't buy brains – at least, not if you're Mark Zuckerberg. (For a full rundown of the mess, check out CoinDesk's complete Libra chronology.)

The saga is also a reminder to give some serious side-eye to the public relations claims of any tech company, especially Meta. That's particularly worth remembering as the former Facebook now attempts to build the virtual-reality based social network Horizon Worlds. While the regulatory landmines may be fewer, Zuck's "metaverse" pitch is just as conceptually flawed and morally bankrupt as Libra was, and will be largely overseen by the same C-suite that guided Libra off a cliff.

Probably the clearest sign of how badly Facebook screwed up its coin ambitions is that the name of the overall project was changed from "Libra" to "Diem" in December of 2020, just after the "Calibra" wallet that Facebook was building rebranded to "Novi," and barely 18 months after the initial announcement. Facebook framed the change as an attempt to affirm the project's independence from Facebook, but Occam's razor suggests it was really to wash off the stink of the torrent of white-hot hostility that greeted Libra's initial launch.

That tarnishing began almost immediately, with project lead David Marcus' hapless performance before the House Financial Services Committee in July of 2019. Facebook was clearly on hostile ground – the hearing opened with California Congressman Brad Sherman comparing Libra to the 9/11 hijackers.

But Marcus made things even worse by failing to clearly address a laundry list of really, really obvious uncertainties about Libra. Those included whether Libra could be used to pay for, say, illegal drugs – and if not, who had the power to censor transactions? Marcus also failed to allay concerns that Libra's use of a basket of currencies as backing for a global stablecoin would destabilize national currencies, including the U.S. dollar itself. Close listeners heard him weaseling about plans for collecting and sharing Libra transaction data, even as Facebook was still in the midst of a privacy scandal.

The privacy questions were closely linked to legislators' skepticism that the Libra project would be a "nonprofit" independent of Facebook's control. Facebook's hilariously inept attempt to make it seem like it wasn't in control of Libra involved creating a "Libra Association" made up of companies including, for about 10 seconds, Visa, PayPal and Uber. To set up this group, Facebook, a massive public company, basically copied and pasted the "Swiss nonprofit foundation" legal structure that was popular among sometimes-shady initial coin offering-driven crypto projects circa 2017-2018.

This structure was generally a convenient fiction when used by small-time crypto-native projects, and Facebook's group seemed just as much of a paper-thin misdirect. Facebook had invited all the members, most of them had preexisting ties to Facebook, and some even suggested they had felt pressured to join. Harvard tech scholar Primavera De Filippi told Wired at the time that the Libra Association created only "a facade of decentralization." The fact that lawyers for a then-$400 billion market cap public company looked at the scheme and assumed it would convince U.S. lawmakers that Facebook wasn't really in charge suggests nothing short of gross incompetence up and down the org chart.

For critical-minded crypto insiders at the time, all this was high-grade surrealist comedy. My immediate reaction to Marcus' testimony was nothing short of befuddlement – it was simply hard to believe that an executive in his position was so painfully unprepared for immensely important testimony.

Taken as a whole, the list of fumbles in the Libra saga is so long that it nudges you towards conspiratorial speculation: What if Libra was never actually meant to launch? A full-blown tinfoil-hat theory might speculate that it was all an elaborate attempt to undermine open systems like Bitcoin, perhaps an echo of Zuckerberg mentor Peter Theil's affinity for tightly moated tech monopolies. More reasonably, commentators like CoinTalk's Aaron Lammer figured the "decentralized" elements of Libra would be slowly scaled back until it was just another attempt at doing payments in-house at Facebook.

But in the end, Facebook couldn't even salvage that much from the wreckage. So farewell, Libra – and thanks for all the laughs.

–David Z. Morris

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