A New DeFi Low Point, Trading NFTs Just Got Easier, & FTX's Cease-and-Desist


August 24, 2022 | Issue #233

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"Leaked" Financials Show Big 2021 for FTX

It is common knowledge that crypto exchange FTX did ridiculously well during the 2021 bull market. Just how well, however, was anybody’s guess.

Well, now we have the numbers to confirm our suspicions.

Leaked financials paint a very rosy picture for FTX. They come out as winners anyway you slice it.

  • Revenue increased from $89 million in 2020 to $1.02 billion in 2021, a 1025% gain
  • Operating income increased from $12 million in 2020 to $272 million in 2021, an 1842% gain
  • Net income increased from $17 million in 2020 to $388 million in 2021, a 2182% gain

Although this isn’t surprising news in the slightest, there are a few potentially valuable takeaways:

  • Two-thirds of FTX’s revenue came from futures trading fees. This really shows just how popular futures trading is and how much it plays a role at FTX. Expect FTX to try to transition their revenue more towards traditional trading, while their competitors such as Coinbase attempt to take futures market share from FTX.
  • FTX had $2.5 billion in cash at the end of last year. This explains how they’ve been able to act as a lender of last resort for embattled crypto lenders. Look for them to continue picking up companies for pennies on the dollar for as long as this bear market continues.
  • Only 5% of FTX’s revenue came from the U.S. Improving this is a major focus for FTX, with FTX planning to commit $900 million to advertising and CEO Sam Bankman-Fried going so far as to say that bringing crypto derivatives to the US is “what I’m paying the most attention to right now.” If FTX does gain a greater foothold in the U.S., that would likely have adverse effects on the current dominant U.S. exchange, Coinbase.
  • It’s fishy for news like this to be “leaked.” It’s likely that FTX has something up its sleeve and wanted to project strength before making some sort of move. Your guess is as good as ours for what this move is, but we’ll be tuned in to find out.


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SudoSwap Looks To Change the NFT Game

NFTs, the big winner of the 2021 bull market, have been in a slump in 2022.

It’s been ugly regardless of which metric you look at. USD volume, number of buyers and sellers, and transaction count are all way down from their previous highs.

Thankfully, it looks like help might be on the way. SudoSwap, a new project that is making waves on Crypto Twitter, looks to completely revolutionize how NFT marketplaces function.

Previous NFT Marketplaces
For those who aren’t well-versed in ridiculously valuable JPEGs, NFTs are traded on marketplaces, which are exchanges for NFTs.

Historically, all NFT marketplaces, including kingpin OpenSea, used a centralized off-chain orderbook. Sellers would list their NFT, it would be stored in an orderbook by OpenSea, and then buyers would browse this orderbook.
This works decently enough but contains three key weaknesses: 

  • There is a central point of failure
  • Liquidity is fractured and poor, leaving ambiguity over how much NFTs are actually worth
  • Sellers have to manually list each NFT they own

SudoSwap’s unique design addresses all three of these issues.

Instead of an off-chain orderbook, SudoSwap uses an Automated Market Maker (AMM). This means that instead of having an orderbook brochure of orders, each collection on SudoSwap has its own liquidity pool containing the NFTs and ETH.

This design has several advantages over traditional orderbook marketplaces: 

  • Users can trade with this liquidity pool at any time to instantly buy and sell NFTs. No longer do you have to wait for offers
  • Liquidity is unified for each NFT collection, as each has its own liquidity pool
  • Users can provide liquidity to earn trading fees
  • Sellers can list as many NFTs as they want at one time

A Big Opportunity
Many of you probably don’t care too much about NFTs. That is fair, as they are a difficult concept to wrap your mind around.

However, it is undeniable that NFTs are a huge market and are the vertical of crypto that has most appealed to the average Joe. There has been almost $70 billion of secondary NFT sales even though NFTs are just altcoins with pictures in their current state. The opportunity here is massive.

Dominant marketplace OpenSea, valued at $13 billion earlier this year, is a bonafide goliath. However, they are not invincible. They have real drawbacks, and SudoSwap appears to address them.

With how big the NFT market is, if SudoSwap can somehow cut into OpenSea’s dominance, you are looking at a very valuable project. With a token on the way, SudoSwap is definitely something you want to keep your eye on.

Controversial Proposal Angers DeFi

An ugly situation is currently unfolding in decentralized finance (DeFi).

Fei Labs, the team behind the Fei stablecoin, has released a controversial proposal that has the creator of the Frax stablecoin, Sam Kazemian, very upset. What happens next could have lasting consequences for DeFi and DAO governance.

The Timeline
Unless you really follow DeFi, this situation is a little confusing. So here’s a quick recap of how we got to this point: 

  • Fei is a stablecoin known for using protocol-controlled value (PCV). Basically, Fei is created by swapping other assets for it on a 1:1 basis. These swapped assets are then held and controlled by the protocol. Fei was ultimately able to amass a PCV in the $100s of millions
  • Rari Capital DAO was the creator of a money market protocol known as Fuse
  • In December 2021, Fei and Rari merged into the Fei-Fuse money market
  • In April 2022, the Fei-Fuse money market was hacked for $80 million. Frax, one of the largest backers of Fuse, alone lost $13 million in the hack
  • Following the hack, a vote was held and passed to fully reimburse the victims of the hack
  • However, in June, after the crypto market crashed, a new vote was run that decided not to reimburse victims after all
  • Now, Fei Labs wants to unwind the protocol because of fallout from the hack and future regulatory pressure
  • As part of this unwind, Fei would reimburse most of the hack victims at pennies on the dollar. Frax, for example, would only receive 2% of their $13m lost. This is despite the fact that Fei has more than enough PCV to fully reimburse all victims

The Takeaways
This is another case of what we have called here at CoinSnacks: decentralized in name only.

Simply put, we are running into yet another situation where a crypto project that claims to be decentralized is majorly controlled by the founding members and those that simply vote the way the founders want. What good is it to be able to vote on a decision if more than 50% of the votes are controlled by the founding team?

For us retail investors, there are a few takeaways: 

  • Protocol governance is still very much a work in progress. To expect anything out of it at this stage would be naive
  • Even VC-backed projects that seem legitimate on face value have the potential to make very disappointing decisions
  • Hacks are a consistent threat to both investors and protocols
  • Fei mentions future regulatory risk as a reason for unwinding the project. If this is true, other projects may soon shut down with the same argument
  • DeFi is still the wild west. The rewards are great, but the risks may be even greater. Always exercise the utmost caution when interacting with any DeFi project

Once again, the most important takeaway is that if you are interested in investing money in brand new and exciting projects, you should only put money to work that you would be okay with losing it all.

Otherwise, it’s best to invest in what you know and as always diversify. 


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US-Based Crypto Exchanges: Audit Edition

On the heels of an ugly crypto summer and as regulatory bodies draw more scrutiny towards US-based exchanges, the teams behind FTX US, Coinbase, and Kraken are figuring out ways to better show proof that their users funds are safe.

In traditional finance, US institutions such as JPMorgan and your local bank do this by slapping a big FDIC-Insured stamp of approval on their front door, ensuring customers that their deposits are insured up to $250,000 in the event of insolvency.

In the world of crypto, however, it's that not that easy.

In fact, no such protection exists as the FDIC does not cover crypto. The FDIC, as made striking clear in their latest cease-and-desist order to FTX US over a misinterpreted tweet, only safeguards funds held in insured bank accounts.

Which leads us to the question: How do crypto users actually know their funds are safe?

Currently, because the exchanges themselves aren't FDIC-insured, the cash you deposit into an exchange gets transferred into custodial bank accounts that are FDIC-insured. It's somewhat of a backdoor way to ensure their users funds are safe, but as of today, it's really the only way exchanges are doing it.

That is, unless you're Kraken...

(Reminder: While users find custodial accounts convenient to use, there is a downside. The exchanges, not the user, control the private keys needed to access these account. As the saying goes – not your keys, not your coins.)

A New Method To The Madness?
According to Forbes, the CEO of US-based crypto exchange Kraken, Jesse Powell, is taking safeguarding measures one step further. At Kraken, the proof isn't only in FDIC-insured custodial bank accounts, its in the reserves.

“Kraken just released its third "proof-of-reserves" attestation, a snapshot of the reserves in which clients can actually verify that their balances exist on the exchange. The exercise, completed by top 25-global accounting firm Armanino LLP, covered 63% of the total balances held by Kraken. The covered assets were bitcoin, ethereum, tether USDcoin, ripple, cardano and polkadot.

What’s more, the attestation used a cryptographic tool called Merkle Trees, which is a data structure that cryptographically links together all relevant pieces of information, in this case client balances.”

By proving their reserves on a consistent basis, Kraken is able to give users peace of mind that when using their exchange, they won't run into another Mt. Gox, Celsius, or Voyager situation.

The Bigger Picture
FDIC-insured or not, it's clear that these exchanges are going though hoops to comply with regulators while ensuring their clients' funds are safe, despite having little regulatory guidance to begin with.

While regulators haven't (yet) done anything drastic to change the way these exchanges report their reserves and ensure safety, we wouldn't be surprised if this a conversation we'll have to revisit in the near future.

In the meantime, perhaps all the other exchanges can learn from the preparation of Kraken – the longest lasting US-based crypto exchange – as more foreseeable (and stringent) audits come about.

Furthermore, this appears to us as just one more step that Kraken is taking to prepare for a public listing.


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