The story of a Ponzi game …
Bitcoin received huge validation this week when Microstrategy became the first publicly traded company to buy Bitcoin as part of its capital allocation strategy. As if to underscore the significance, Bitcoin and gold reached a correlation of 70% for the first time.
For those following the DeFi shenanigans du jour (or not), this week’s escapade, $YAM, went from boom to bust in 48 hours, with the moment of truth coming only after the community thought it had gotten whales to save it. Read below for more details, plus why the team could and should have done a number of simple things to prevent this fiasco.
We’ve also got news from Coinbase and ConsenSys as well as a roundup of exploits, scams and crimes in crypto.
On Unchained, we continue the Why Bitcoin Now series with a look at the history of digital currency, which takes us through earlier attempts such as eCash, hashcash, bit gold, b-money and others. Plus, on Unconfirmed, Andreas Antonopoulos explains why the ETH supply debate that raged over Crypto Twitter was a “silly gotcha.”
This Week’s Crypto News…
It seems the pandemic and other macro forces are prompting investors to take a closer look at Bitcoin. For the first time, a publicly traded company has bought bitcoin as part of its investment strategy. MicroStrategy announced on Tuesday that it purchased 21,454 bitcoins at an aggregate of $250 million. MicroStrategy CEO Michael J. Saylor said, “Our investment in Bitcoin is part of our new capital allocation strategy, which seeks to maximize long-term value for our shareholders. This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash.”
Meanwhile, the correlation rate between Bitcoin and gold has reached 70% for the first time, which suggests that at least some agree with Saylor’s view of Bitcoin as a dependable store of value.
YAM, a yield farming token launched on Tuesday, generated tons of community enthusiasm and criticism, had $500 million locked in it, and then collapsed within a couple days. Described as an “Experiment in Fair Farming, Governance, and Elasticity,” YAM came together in 10 days, and combined the features of projects like Compound, Ampleforth, and YFI. Despite being completely unaudited, the YAM token rose from zero to $138 within 20 hours of launch, leading Shapeshift CEO Erik Voorhees to label it a scam, or at least “fairly transparent pump and dump nonsense.”
After rising to a market cap of $60 million in 2 days, the YAM team first found a bug that they thought could be fixed if enough votes — 1.6 million YAM — were delegated for a fix to be submitted before the next rebase, which was to happen the following morning. At first, it looked like it would succeed because enough whales planned to chip in to reach quorum. However, once the votes were submitted, the team figured out that the bug also affected the governance module, so the proposal could not succeed. At that point, the market cap collapsed to zero in 35 minutes and approximately $750,000 worth of funds were lost.
With YAM founders tweeting apologies, and replies condemning their irresponsibility, YAM has said in a blog post that it is planning to launch a new version of the protocol. Hopefully the team will heed the words of Lefteris Karapetsas, a central figure from the DAO, who wrote an amazing blog post that chronicled every step of the YAM fiasco, and why this whole thing could have been avoided. As he puts it, “the minimum precaution that could have been taken is:
- Write contract tests
- Have some soft of security audit of the code
- If you claim it’s an experiment, then treat it as such by:
- Putting deposit limits in the code to protect your users
- Put an escape hatch in the code to protect your users”
It’s also worth a read for his explanation of why this was a Ponzi game in which, as he puts it, “the first farmers were incentivized to pump and shill YAM via social media so they [could] find victims onto whom to dump their tokens after the rebase.”
Ethereum Gas fees reached an all-time high of $6.87 million on Wednesday, beating 2017’s previous high of $4.55 million. Bitcoin transaction fees have remained low in comparison, reaching only $1.43 million in total on the same day.
The numbers reflect a high demand for Ethereum and a willingness to pay for that high demand, but pose questions about entry points for other layer 1s if Ethereum 2.0 continues to roll out slowly.
Coinbase is branching out from its conservative roots. Starting this fall, the exchange is planning to offer cash loans, with 8% interest for Bitcoin-backed loans, and credit lines capped at $20,000. Coinbase’s sales pitch directly appeals to consumers who don’t like paying taxes on what is usually their considerable crypto gains. On Wednesday afternoon, a waitlist opened with the tagline: “Have you ever needed cash for something urgent, like a car or home repair? In the past, you might have sold Bitcoin to cover it and incurred a taxable gain or loss. Now you don’t have to.”
Although Coinbase plans to offer only Bitcoin collateralized loans initially, they have plans to expand into other crypto assets and pursue licenses in other states beyond the initial 17 with which they will launch.
In other Coinbase news, the company resigned from the cryptocurrency and blockchain advocacy group, the Blockchain Association. In a statement issued by Coinbase, the company said that their decision to resign was based on the association’s actions in “recent weeks.” Industry watchers say the catalyst was the admittance of rival Binance.US to the association. A subsidiary of Binance, the global exchange known for playing fast and loose with regulation, Binance.US launched only 11 months ago, but already has around 40 crypto-USD trading pairs. In contrast, Coinbase, which has a reputation of being more cautious with regulators, has about half that.
The Block is citing unnamed sources to report that JPMorgan plans to invest $20 million towards Ethereum infrastructure firm ConsenSys, which has been trying to raise money for months. The plan is part of a $50 million convertible debt deal with other investors. As part of that deal, ConsenSys would also take over the maintenance and support of JPMorgan’s Quorum assets. ConsenSys has previously been involved in several high-profile enterprise implementations that use Quorum.
Hacks, Attacks and Crimes Roundup
Coming five days after the August 1st attack, Ethereum Classic suffered yet another assault, which took $1.7 million, adding further scrutiny to the question of whether or not the blockchain possesses the ability to protect itself from meaningful exploits.
The team released a detailed analysis and response to the exploit, however the fact of the matter is that they cannot turn the protocol off, and so once the exploit was discovered all they could do was minimize further damage.
This deep dive into the methods used in 2019 that led to $283 million worth of cryptocurrencies being stolen from the South Korean exchange shows that they moved funds over 10 hops or created multiple intermediate wallets before sending them to an exchange.
DOJ says that it seized bitcoin from 155 addresses allegedly used by Al Qaeda, having obtained the money through Telegram channels. Fortune gives the details on how federal agents tricked Hamas into sending Bitcoin straight to the US government.
Fred Ehrsam on Crypto-Native Insurance
With all the hacks and exploits in DeFi, insurance is on the minds of many in the space. Fred Ehrsam of Paradigm Capital wrote a comprehensive post about crypto-native insurance and the design challenges in store, including the especially tricky question of whether or not to make manual or programmatic payouts. While entirely programmatic systems sound ideal, as Ethereum creator Vitalik Buterin pointed out, if it is programmed to make a payout when X happens, then token teams know in advance that they should build their protocols so that X does not happen.
Coin Jazeera weighs in on the ETH supply debate, in a story reporting that Vitalik will abandon Ethereum 2.0 to find the true supply of Ethereum and asking whether the fact that it is unknown is due to Ethereum’s infamous LSD themed sex parties.