Plus, Ethereum sets a new record.
DeFi continues to be bananas, with yet another predictable, yet sophisticated multi-protocol hack, which took half a million dollars from Balancer. No wonder, DeFi insurer Nexus Mutual has been maxed out by the yield-farming craze. Despite the risks, volume on dexes is surging, reaching new all-time highs, while still remaining tiny compared to volume on centralized exchanges. Meanwhile, the Ethereum community ponders and improvement proposal that could help the price of ETH capture more of the value of this activity.
This week, I launched a new series, Why Bitcoin Now, which looks at Bitcoin in this current macroeconomic environment. We kicked off what will be multiple conversations with a lively discussion between Mike Novogratz of Galaxy Digital and Raoul Pal of RealVision. And on Unconfirmed, we took a closer look at a new way of looking at the liquid supply of a coin, created by Coin Metrics, which has implications for market caps, valuations and traders.
This Week’s Crypto News…
First a heads up, due to a copy/paste error (yes, crazy, I know), in my recap last week, I neglected to include the biggest news story, which was that PayPal and Venmo will be launching crypto buying and selling. Although it’s not clear which tokens would be available, the service could roll out as soon as within the next three months.
Now, onto this week:
The hacks in DeFi continued this week, with another multi-protocol attack draining about $500,000 worth of tokens from automated market maker pools on Balancer. The attacker took out a flash loan of Wrapped ETH on dYdX, and swapped it for a so-called deflationary coin called Statera (ticker S-T-A), which means that there’s a 1% transfer fee charged from the recipient per transaction. However, the Balancer pool did not recognize that it was receiving 1% less of STA. The hacker then made the same transaction 24 times, to drain STA from the pool. And then used the last single 1 weiSTA to get the pool to release more Wrapped ETH and drain that pool. The hacker repeated this with WBTC, SNX and LINK tokens. Then, because Balancer is giving out liquidity mining rewards right now, the attacker also obtained more Balancer Pool tokens, and then used those to get more wrapped ETH. Whew!
This was similar to the Lendf.me attack in that this stems from a certain type of technology being used in a system that could not account for it, as well as the fact that this potential problem was known beforehand; someone had previously flagged this as a potential issue to the team. Balancer decided to fully reimburse all liquidity providers who lost funds due to the attack.
Monthly trade volume on dexes reached $1.51 billion in June, up 70% compared to May’s volume, which was just shy of $900 million. It’s also up 46% compared to the previous all-time high of $1 billion in March. Uniswap and Curve lead the pack when it comes to DEX volume, though total DEX volume is still just 2% of the volume on centralized exchanges.
The Block also did a nice deep dive on DEX aggregators such as 1inch.exchange, Totle and Paraswap. Unsurprisingly, prices are best on the aggregators as opposed to single dexes, especially for larger orders. And this week, the 0x protocol launched its own DEX aggregator, called Matcha.
Well, the graphs certainly looked credible. People may have heard of the stock-to-flow valuation model for Bitcoin espoused by the pseudonymous PlanB Twitter account. We mentioned it here on the show such as in the Bitcoin halving episode and potentially also in the episode with Dan Morehead on Unconfirmed. In case you don’t recall it, it says that Bitcoin has an “unforgeable costliness” because it takes a lot of electricity to produce new bitcoins, so bitcoins cannot be easily faked. It then posits that there’s a large supply of gold compared to the new supply introduced to it, hence it has a high stock-to-flow ratio, and that Bitcoin’s stock-to-flow ratio is now about half that of gold’s but will someday become even higher. And that will be a driver in the price rising. It seems to make sense, since we all know that the new Bitcoins minted with every block will asymptotically reach zero. However, a few posts, including an op-ed this week by Nico Cordeiro, the chief investment officer and fund manager at Strix Leviathan, points out a fundamental flaw in the theory: there is zero correlation between the stock-to-flow for gold and its price. There’s an extremely striking chart in the ope-d that shows this. In his op-ed, he says, “we believe the model’s accuracy will likely be about as successful at forecasting bitcoin’s future price as the astrological models of the past were at predicting financial outcomes.” Eric Wall, CIO of Arcane Assets, wrote up a post chronicling all the people who determined the model was flawed.
In his newsletter, the Daily Gwei, Anthony Sassano of Set Protocol, ETH Hub, and Into the Ether, broke down how he thought that if Ethereum Improvement Proposal 1559 were passed, it would both improve the user experience on Ethereum as well as help ETH accrue value. First, EIP-1559 would make it less common for people to over-pay miners’ fees, while maintaining the ability to skip ahead in line by paying a tip to miners. There’s also a function by which the base fee is burnt, so that only the tip goes to miners.
Anthony breaks down how apps are currently parasitic on Ethereum since, as he puts it, “their on-chain activity does not add fundamental value to ETH.” What now happens is that the fee goes back and forth between users and miners. He explains the cycle thus: “user buys ETH > user pays fee > miner takes fee > miner may sell the fee (ETH) back into the market > cycle begins again. If EIP 1559 were to be implemented, however, since the base fee would be burnt, the rewards paid out to stakers in Ethereum 2.0 will be less than what miners currently make. And overall, that would have a deflationary effect on Ethereum, since the issuance would be smaller than what is burnt.
On a related note, BlockTower Capital’s Ari Paul tweeted that he thinks EIP 1559 is “make or break” for Ethereum and said the reason was because right now the main issue for Ethereum and DeFi is to get big fast, since the space is so small still. And, he said, “growth (and ETH market cap) has to keep up with the growth in the market cap of tokens on ethereum or you incentivize a wide range of game theory attacks.”
A German trader named Dennis Nowak sued Bitcoin wallet provider Xapo and crypto exchange in Indonesia called Indodax, after 500 BTC stolen from him, about $4.5 million at press time, were found to have been moved to wallets at Xapo and Indodax. As The Block puts it, “While lawsuits arising from hacks and stolen funds are common in the crypto space, this one stands out due to the degree to which it relied on asset tracing. Firms like Chainalysis and Elliptic have developed proprietary systems for analyzing blockchain data, tracking the flow of illicit funds, and even identifying the individuals behind it. But they tend to cater mostly to exchanges and law enforcement agencies. The Nowak v. Xapo case suggests that crypto-asset tracing may start making regular appearances in civil lawsuits, too.”
Steven Zheng, head of research at The Block, tweeted a chart showing that Ethereum’s transaction fees have only surpassed Bitcoin’s twice, and the current streak is for 26 days and counting. He says that, since the start of the streak, the average daily fees on Ethereum have totaled $791,571, while on Bitcoin, they’ve been at $341,430. Similarly, it turns out the Ether options market has now reached the size of the Bitcoin options market in December 2018.