Genesis collapse will be more impactful than FTX
If this is really the end for Genesis, this could be more impactful than FTX.FTX hurt liquid funds and consumers. Genesis impacts nearly every company in crypto.Let's dig in.
— Yano 🟪 (@JasonYanowitz) November 16, 2022
1/ For those who aren't familiar, Genesis started as the first OTC Bitcoin desk in 2013. They're now crypto's largest lending desk.Genesis is part of DCG, Barry Silbert's holding company that owns CoinDesk, Foundry, Genesis, Grayscale, and Luno. DCG also runs a huge VC firm.
— Yano 🟪 (@JasonYanowitz) November 16, 2022
2/ At the height of the market, Genesis was moving SIZE.Check out these Q4 2021 numbers:– $50B in loan originations– $12.5B active loans– $31B spot volume traded– $21B derivatives traded pic.twitter.com/AiW8uLPcwt
— Yano 🟪 (@JasonYanowitz) November 16, 2022
3/ Then 3AC happened.Genesis was the biggest creditor to 3AC having lent them a whopping $2.4 billion.Genesis then filed a $1.2B claim against 3AC. DCG (parent co) stepped in and assumed the $1.2B claim, leaving Genesis with no outstanding liabilities tied to 3AC. pic.twitter.com/KwvMEpyQF8
— Yano 🟪 (@JasonYanowitz) November 16, 2022
4/ But then things continued to unravel.Genesis also had large exposure to Babel Finance, the CeFi platform that got hit hard in the June unwind.In August, longtime CEO Michael Moro resigned. Nearly everyone I know who was at Genesis is no longer there.
— Yano 🟪 (@JasonYanowitz) November 16, 2022
5/ By Q3 2022, their numbers had fallen drastically.– $8.4B in loan originations– $2.8B active loans– $18.7B spot volume traded– $9.6B derivatives tradedStill, everyone felt like they were crypto's safest counter-party. pic.twitter.com/N9jdEYva9f
— Yano 🟪 (@JasonYanowitz) November 16, 2022
6/ So why is the downfall of Genesis so bad?Dozens of companies like Gemini use Genesis to help their consumers earn yield.If you're a CeFi platform that offers yield, you probably use Genesis.Using some rough numbers and simplifying the process a bit, here's how it works.. pic.twitter.com/WhYtqbz2F1
— Yano 🟪 (@JasonYanowitz) November 16, 2022
7/ You give your crypto to Gemini → Gemini gives your crypto to Genesis → Genesis lends your crypto to a fund → the fund borrows from Genesis X+2% → Genesis gives Gemini X+1% → Gemini gives you X%Voila! You now earn yield. pic.twitter.com/S4m4dxAVYP
— Yano 🟪 (@JasonYanowitz) November 16, 2022
8/ But! This only works if the counter-parties that Genesis lent to can actually repay their borrow.If Genesis can't get their crypto back, they can't give the crypto back to Gemini (or insert any other crypto CeFi platform), which means Gemini can't give you your crypto.
— Yano 🟪 (@JasonYanowitz) November 16, 2022
9/ Beyond that, nearly every whale I know that plays in crypto gives money to Genesis.Instead of earning yield on the BlockFis and Geminis of the world, they give direct to Genesis to earn yield.Now those institutions, family offices, and whales can't get their crypto back.
— Yano 🟪 (@JasonYanowitz) November 16, 2022
10/ And this is why Genesis halting withdrawals is so bad.They sit at the direct center of crypto capital markets. They custody funds. They help institutions earn yield. They are the yield product for CeFi platforms.It's not good.
— Yano 🟪 (@JasonYanowitz) November 16, 2022
11/ Where do we go from here?Hopefully DCG has the funds to backstop this. I would assume they don't and that they're racing to raise money right now.They raised at $10B in Nov 2021. I'd guess they raise at a valuation roughly 10-20% of that.
— Yano 🟪 (@JasonYanowitz) November 16, 2022
12/ Stay safe out there. If you have funds on a CeFi platform, think about going to cold storage using Ledger.If you really don't want to go to cold storage, use Coinbase.Long live DeFi.
— Yano 🟪 (@JasonYanowitz) November 16, 2022
New CEO John Ray is scathing about Sam Bankman-Fried’s management
THE FTX FIRST DAY DECLARATIONNew CEO John Ray is scathing about Sam Bankman-Fried's management."Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information."https://t.co/iTGlCA9olr pic.twitter.com/Bd3Pjg4s7L
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
SBF to be investigated in the course of the bankruptcyhttps://t.co/3l369r3wny pic.twitter.com/a45R9NOmLI
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
Sam Bankman-Fried's hedge fund lent billions to… Sam Bankman-Fried (Paper Bird is his entity), so that's at least part of the answer of where the money wenthttps://t.co/3l369r3wny pic.twitter.com/1Y77NPyo62
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
FTX says the "fair value" of all the crypto that FTX international holds is a mere $659!Remember that SBF has been marking it at $5.5bn: https://t.co/NAfRS2gXLC pic.twitter.com/xoBkkGuoE5
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
FTX says that Bankman-Fried didn't include customer liabilities in FTX's financial statements (!)https://t.co/3l369r2Yy0 pic.twitter.com/6tx854Yojj
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
"The FTX Group did not maintain centralized control of its cash. Cash management procedural failures included the absence of an accurate list of bank accounts and account signatories"https://t.co/3l369r3wny
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
This is mad stuff"I do not believe it appropriate for stakeholders or the Court to rely on the audited financial statements as a reliable indication""The Debtors have been unable to prepare a complete list of who worked for the FTX Group as of the Petition Date"
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
"In the Bahamas, I understand that corporate funds of the FTX Group were used to purchase homes and other personal items for employees and advisors" pic.twitter.com/TRSwlF9frP
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
Umm, yeah this is pretty badhttps://t.co/3l369r3wny pic.twitter.com/6n7xrHbUqZ
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
"what may be very substantial transfers of Debtor property in the days, weeks and months prior to the Petition Date"https://t.co/iTGlCA9olr
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
This company was valued at $32bn! Sequoia invested in it! They basically said SBF was the world's greatest genius! https://t.co/6hnwoS0Cfi
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
Apologies, this is $659,000, not $659. I very much regret the error.https://t.co/ILPAUlxzH1
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
There are so many bits of horror in this filing.Island Bay Ventures is the entity that holds FTX's stake in Scaramucci's SkyBridge, according to other records we've seen.Ray can't find the financials for the entityhttps://t.co/iTGlCA9olr pic.twitter.com/gLx06K6sdJ
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
Why did BlockFi borrow $250mn worth of FTX's native token FTT?https://t.co/iTGlCA9olr pic.twitter.com/3QNg8xvkAt
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
This sums it all up:FTX, FTX US and Alameda "do not have an accounting department".FTX raised $1.8bn (actual, real dollars) from Sequoia, SoftBank, Temasek, Tiger Global, Ontario Teachers’ Pension Plan, etc etc https://t.co/iTGlCA9olr pic.twitter.com/1lpn3TIkYq
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
The flight to self-custody is here
Following FTX– @safe saw $800M+ inflow– @ledger sales ATHs– @trezor sales up 300%– @zengo triple-digit growthThe flight to self-custody is here.On private key/MPC/SC wallets, going seedless, & path towards making self-custody the norm for everyonehttps://t.co/ZpMrdjNSOE
— Nichanan Kesonpat (@nichanank) November 16, 2022
2/ Conventional wallets use a seed phrase and a hierarchical deterministic structure to derive private keys, corresponding public keys & on-chain addresses.They have so far served as the main entrypoint for users opting to self-custody their assets and interact with dapps. pic.twitter.com/BINxIFitNt
— Nichanan Kesonpat (@nichanank) November 16, 2022
3/ Today, these irrevocable strings of characters give not only full access to someone’s life savings, but are increasingly associated with on-chain histories that contribute to their online identity.
— Nichanan Kesonpat (@nichanank) November 16, 2022
4/ The incentive to exploit PKs is so large that everyone from amateur to state-sponsored hackers dedicate limitless resources to perform increasingly creative attacks. Today, relying on user opsec is no longer enough.*We need to remove this single point of failure entirely*
— Nichanan Kesonpat (@nichanank) November 16, 2022
5/ There's been significant progress in 2 categories of alternative key management solutions: smart contract wallets (+ multisigs) & multi-party computation (MPC) protocolsBoth remove single point of failure, but have technical differences that give rise to different tradeoffs pic.twitter.com/o4QD97dVId
— Nichanan Kesonpat (@nichanank) November 16, 2022
6/ With MPC, we create and distribute shares of a private key such that no one single person or machine controls the private key entirelyWe can jointly generate a public key by combining the shares without exposing shares between the parties.
— Nichanan Kesonpat (@nichanank) November 16, 2022
7/ To sign messages & txns, each party inputs its secret share along with a public input (the message to be signed), generating a digital signature.From there, anyone (i.e. validator nodes) with knowledge of the public key should be able to verify and validate the signatures. pic.twitter.com/uXXH3u18fo
— Nichanan Kesonpat (@nichanank) November 16, 2022
8/ A transaction generated from an MPC wallet is indistinguishable from that of a conventional private key wallet.This gives MPC wallets users a degree of privacy. Orgs can keep internal logs of who participated in the signing without it being made public to outsiders.
— Nichanan Kesonpat (@nichanank) November 16, 2022
9/ MPC pros come mainly from off-chain logic– Granular access control & signing schemes adjustable w/o incurring on-chain costs– Lower txn & recovery: gas costs same as regular private key addresses– Chain agnostic: keygen and signing relies on pure cryptography off-chain
— Nichanan Kesonpat (@nichanank) November 16, 2022
10/ Cons:– Low transparency for off-chain signing ops, risk centralized failure– Incompatible with most other wallets & institution-grade secure devices eg iPhone SEP, HSM.– Many custom crypto libs closed-source, hard for ecosystem to audit, integrate, & conduct post-mortems
— Nichanan Kesonpat (@nichanank) November 16, 2022
11/ Today, MPC-based solutions have primarily targeted institutional clients eg. funds, family offices, CEXs, and custodians. @QredoNetwork and @FireblocksHQ enable customers to define their own workflows for different kinds of txns that allow them to remain compliant & secure.
— Nichanan Kesonpat (@nichanank) November 16, 2022
12/ The retail investor base however, remains dependent on independent research and private key wallets. But this is quickly changing@Web3Auth's MPC SDK allows any wallet/dapp to leverage this as a “web3-native MFA”, using iCloud/email as backup.https://t.co/KZyM0TactR
— Nichanan Kesonpat (@nichanank) November 16, 2022
15/ Smart contract wallets (“smart wallets”) are just smart contracts that behave like a wallet, i.e. an interface that allows users to manage their funds, sign in with web3, and interact with dappsSmart wallets come with an initial cost to create, as a SC needs to be deployed.
— Nichanan Kesonpat (@nichanank) November 16, 2022
16/ Multi-signature wallets are SC wallets which require the signature from M-of-N keys to execute a transaction. While MPC only creates a single signature regardless of # of key shares that participated, a multisig uses distinct signatures generated by distinct private keys. pic.twitter.com/wNH18bimXV
— Nichanan Kesonpat (@nichanank) November 16, 2022
17/ Pros:– Extensible: devs can create an ecosystem of modules & add functionality to core contracts– Transaction batching (e.g. approve+trade) to save costs in aggregate– Transparent, on-chain accountability, easier to audit– Alternative sig schemes possible– Open source
— Nichanan Kesonpat (@nichanank) November 16, 2022
18/ Cons:– Higher fees than regular txns originating from private key wallets– Not universally supported: need bespoke implementation on non-EVM chains– Higher creation & recovery costs (on-chain txns)
— Nichanan Kesonpat (@nichanank) November 16, 2022
19/ Smart contract account standards eg. @safe provide a foundational layer for an ecosystem of asset management products and services to be built on top.Features added via modules: define access control logic, spending limits, recurring txns, automation, hierarchical access++
— Nichanan Kesonpat (@nichanank) November 16, 2022
20/ State of wallets today pic.twitter.com/LGLWCWioAG
— Nichanan Kesonpat (@nichanank) November 16, 2022
21/ Despite common “this vs that” framing, MPC and smart wallets are complementary rather than competitive long term.MPC gives shared security at the key generation & management level, smart contracts bring extensibility and an ecosystem approach to feature & app development.
— Nichanan Kesonpat (@nichanank) November 16, 2022
22/ For example:– Augment existing multisig scheme by dividing >=1 of the owners' private keys using MPC & store key shares on independent machines– DAO-managed multisig can own a PKP NFT that manages a decentralized cloud wallet, used for automated investing/DEX interactions.
— Nichanan Kesonpat (@nichanank) November 16, 2022
This year, crypto has been crippled in many ways by the reckless behavior of centralized entities who have eroded trust in the industry, solicited regulatory scrutiny, and most importantly lost users’ funds (and in some cases life savings).
— Nichanan Kesonpat (@nichanank) November 16, 2022
The tech & projects highlighted in this article paves the path towards a future where everyone can participate in the decentralized economy without leaving their fate in the hands of a few.If you are building a wallet solution or have additional thoughts, would love to chat
— Nichanan Kesonpat (@nichanank) November 16, 2022