Welcome to The Node. This is Daniel Kuhn and Xinyi Luo, here to take you through the latest in crypto news and why it matters. This week the newsletter will feature guest essays from CoinDesk’s Crypto 2023 series – where some of the sharpest minds in crypto have made their predictions about the months and years ahead. In today’s newsletter:
Ethereum founder Vitalik Buterin tweeted out his support of Solana, causing the token’s price to rally some 15%. “Some smart people tell me there is an earnest smart developer community in Solana, and now that the awful opportunistic money people have been washed out, the chain has a bright future,” Buterin tweeted shortly before SOL’s Thursday recovery began. Meanwhile, in another sign state-backed alternatives to distributed digital ledgers could have legs, the Central Bank of Turkey has conducted the first tests of its digital lira, according to a statement released on Thursday. The project, which will eventually involve banks and other stakeholders, is particularly focused on “digital identification” and integrations with the central bank’s identity and payments system called FAST.
Custodying Crypto
The Bahamian Securities Commission has taken custody of FTX deposits valued at more than $3.5 billion as of Nov. 12 – and will hold them reportedly until directed by the Bahamas Supreme Court, according to a Thursday press release. The country’s securities regulator cited the $372 million hack of FTX by an unknown perpetrator hours after it declared bankruptcy on Nov. 11 as well as the potential for theft by former employees for taking control of remaining customer and creditor funds. Speaking of, on-chain data from crypto research firm Arkham Intelligence shows $1.7 million worth of tokens thought to be held by Sam Bankman-Fried’s hedge fund Alameda Research have been sold into the open market on Wednesday. Finally, FTX Japan, the best surviving subsidiary, will allow customers to withdraw funds again beginning in mid-February.
Phishing for Suspects
The FBI is investigating a recent data breach of 3Commas, which saw 100,000 Binance and KuCoin API keys linked to the trading platform leaked by an anonymous Twitter user, according to two users reportedly contacted by the Federal Bureau of Investigation. The API database leaker insinuated that someone inside 3Commas had sold customer information leading to customer funds being traded away without their consent, a phenomenon that 3Commas chalked up to widespread phishing schemes. 3Commas denies the allegation.
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“This increase in adoption of digital collectibles is something that will continue to rise.”
– NFT artist Ovie Faruq, aka OSF, on CoinDesk TV’s “First Mover”
The Takeaway: Making Tether Trustworthy
Stablecoins shouldn’t be the instruments that the public sells in a panic. They’re supposed to be the opposite; the life vest that people grab on to. Competing stablecoins USD Coin and Binance USD performed as one would have expected, neither experienced a barrage of redemptions during these two episodes. Tether could do more to ensure the next time the crypto economy undergoes a shock, tether stays steady.
1) Tether needs to get rid of its corporate bonds, funds and “other investments.”
A stablecoin’s number one job is to be steady, and that demands holding safe assets like cash and Treasury bills. But Tether’s balance sheet – including its commercial paper, corporate bonds and funds, secured loans and “other investments” – suggest it operates more like a hedge fund than a stablecoin.
Tether has been slowly addressing this problem. It spent much of 2022 replacing its massive $30 billion horde of commercial paper with Treasury bills, and now holds zero. It needs to sell all of its risky assets and move to a 100% safe-asset allocation. Next time a crisis hits, users will be less likely to unload their USDT.
2) Tether needs to cancel its 0.1% redemption/withdrawal fee.
The price of Tether tends to fluctuate randomly, unlike competitors – this instability hurts the company’s reputation. Tether’s 0.1% redemption fee is causing the issue. It may not sound like much, but the 0.1% fee leads to the price of USDT weaving randomly in a wide band around $1. That’s because it adds to arbitrageurs’ costs who are meant to trade to keep the token pegged. Remove the fee, remove the costs associated with arbitraging the token to a $1 peg.
3) Tether needs to open redemptions up to more people by removing its $100,000 floor.
Stablecoin issuers like Circle and Paxos allow people to withdraw or deposit any amount, while Tether’s places a $100,000 limit on redemptions anywhere the token can be withdrawn for cash. This floor creates perverse trading patterns on exchanges like Binance and Kraken, which further exacerbate fears about Tether.
In short, Tether’s $100,000 minimum pushes the majority of USDT users who want to sell en-masse on exchanges. If Tether removed its $100,000 minimum and allowed everyone to redeem at source – they could simply send their 100 USDT directly to the company and get $100. This would relieve price pressure on exchanges and bring an end to Tether’s crazy on-exchange price movements.
4) Tether needs to be more transparent.
Lack of transparency is an old criticism of Tether, but it deserves to be re-enunciated. Tether falls short of the current standard for stablecoin transparency. This lack of transparency helps create a trust gap that leads to Tether selloffs during market panics.
– J.P. Koning, a CoinDesk columnist and author of the Moneyness blog
Off-Chain Signals
Memes were top asset class of 2022 as madness prevailed (The Block)
The Status of Proof of Reserve as of Year End 2022 (Nic Carter)
Crypto Sleuth ZachXBT Exposed Chicanery For a Grateful DeFi Community (The Defiant)
The approach to designing Undeads’ in-game economy takes its cues from inflation and deflation. The trick is to make the in-game economy balanced and efficient without veering into oversupply. Undeads augments its in-house economy design team with expertise from industry veterans BrightNote and Machinations.io.
Developing the game economy structure required this all-hands-on-deck approach because of the 1,000-plus in-game items and assets, each with unique properties, value and other parameters. This process took around three months, while Chainlink is used as the oracle to securely connect smart-contracts with off-chain data and services.Continue here.
