A weekly recap of the most insightful news, analysis, and capital flows in the wild west we call crypto.

Hello and welcome back to the Web3 Rewind! Per usual in this industry, lots has happened this past week. Here's what we have in store for you:

• SBF on trial

• Binance recovery fund

• Crypto funding drops

• On-chain lending failures

The Latest

Look away if you can

Order in the court dept.

SBF in the courtroom

FTX has probably single-handedly caused more financial pain than any other company in history. Ok, other than the time that large US banks decided to package subprime mortgages together and issue credit default swaps on these mortgage-backed securities and subsequently nuke the global economy.

Either way, the Icarus of the decade is probably SBF, who flew too close to the sun. I firmly believe that if FTX hadn’t imploded, SBF would have been worth more than $100B by the end of the decade, at least on paper. This week, SBF continues to stand on trial in Manhattan, facing seven federal charges, including fraud, conspiracy to commit fraud, money laundering, and more. It’s been quite the week in the courtroom, so let’s dive into a few fun tidbits.

For starters, let’s talk about how rubbish Alameda was at trading. Imagine you have visibility into the entire order book, know exactly what everyone’s liquidation prices are, know how much collateral everyone has and can interact with the order book faster than every other trader. (Editor: this is almost the position firms like Citadel find themselves in regarding payment for order flow in the stock market.) Hundreds of millions of dollars are made by HFT firms in TradFi with a minuscule latency advantage, and Alameda had one baked into the system. Oh, how could I forget about the infinite credit line from FTX customer funds. Yet, despite all of that, somehow Alameda lost all the money they allegedly took. Maybe crypto trading is hard? You can tell your mum that at least you didn’t lose $8B of customer funds taken illegally and instead only lost whatever she gave you. If there was ever a case of infinite money hacks, this was it.

Next on the chopping block is Caroline Ellison, former CEO of Alameda Research, who took over for Sam Trabucco after he left. As a side note, in my opinion, Sam Trabucco remains one of the largest winners of the previous bull market shenanigans. You don’t even see his name mentioned anywhere. But for Caroline, all eyes have been on her for the ongoing trial, especially considering her close, at times romantic relationship with SBF. Similar to ex-FTX CTO Gary Wang, Caroline has also chosen to admit to all of the crimes and testify to the jury that it was SBF who directed her to do so.

I quote, “he was the one who directed us to take customer money to repay our loans." Given that Caroline joined Alameda in March 2018 and already knew about the rough shape the company was in on day one, I don’t buy it. You don’t stay at a company stealing customer funds for four years if you weren’t in on it. You could’ve just left you know. Considering her outsized role within the company throughout the implosion, it’s surprising how little Caroline got paid for her troubles. In 2021, her compensation was a $200K salary, a $20M bonus, $10M for startup investments, and 0.5% equity in FTX.

I’m sure we’ll get more fascinating stories from witnesses and testimonies, and I for one, eagerly await all the spicy details of what went down and watch as the entire FTX gang try to rat each other out. — Joseph Cooper, Decential Media

Quick Bits

Binance recovery fund not doing much recovering

• Following the collapse of FTX, Binance led the initiative on a recovery fund, raising $1B with other crypto heavyweights like Jump and Animoca to give a lifeline to quality projects running on fumes. (Jump Crypto is an investor in Decential Media.)

• So far, less than $30M has been deployed, with most of the funds being returned to Binance’s corporate treasury. Post this update in February, efforts have likely ground to a halt.

Crypto funding down bad

• We are deep into the bear market. I think we can all feel that, both in daily life and also in our bank accounts. Startups are probably feeling it too, with crypto startup funding being down 63% year on year.

• Venture capital cash reached an all-time low since the start of the previous bull run. Nobody wants to invest, nobody wants to be a LP, and to be frank, there aren’t a lot of exciting projects these days. You can hardly blame the VCs who don’t want to fund the 97th perp DEX on Ethereum.

ThorSwap screens addresses

• In a never-ending bid to make funding North Korea’s nuclear program slightly harder, ThorSwap, mixer of choice these days for illicit funds laundering, has chosen to deprecate its front-end into maintenance mode., making it harder for people to access who don’t know how to directly interact with the blockchain.

• That’s not all. They’ll now be working with industry providers to perform address screening. I wonder who could be providing those wallet address data? E.g. who’s been harvesting your wallet address and linking it to personal info and selling that.

And last but not least

On-chain lending. How do we fix it?

I’m sure the multiple market makers blowing up post Luna and FTX are still fresh in our minds. These memories are definitely fresh for those who lent millions into on-chain credit protocols, which then lent those funds out to market makers without sufficient collateral, more often than not at a ridiculously low interest rate considering where global interest rates are today. Well, deep into the bear market, we are still receiving reports of borrowers defaulting on loans. This time it’s Goldfinch, an on-chain credit protocol with $100M in active loan value. The protocol made a $20M loan to Stratos, a US based credit fund with a five year track record and $250M in investments and 18%+ in annualized returns. For those who don’t live in the world of hedge funds, that’s pretty darn impressive. What’s not so impressive is that they took $2M and aped it into a shit-coin. POKT isn’t exactly a shit coin, it’s a crypto protocol promising decentralized RPCs with a very valid use case, but the token is down 99.16% from all-time highs. I don’t think any of the lenders on Goldfinch were expecting their loans to be used to ape into crypto. They were probably thinking more about financing fintech companies with high cash flow needs and a sound business model.

Is this a problem we can solve? And if so, how do we go about it? For starters, don’t lend money to someone who was an early advisor to your protocol and also an equity investor. That’s probably the clearest case of a conflict of interest I’ve ever seen, perhaps even more so than FTX and Alameda Research. Next, conduct constant extensive audits of borrowers’ financial stability and identify potential breaches of their loan agreements, preferably before it becomes a major problem. Perhaps we can take something from the proof of reserves model that a few CEXs currently utilize. I’d also like to make a point that borrowing in TradFi is tricky too, and it blows up in spectacular ways pretty often. The ‘08 housing crash was a spectacular failure on a slightly more retail front. On the slightly more sophisticated front, Bill Hwang borrowed billions from large banks, only to take on speculative stock positions and eventually lose it all. What happened with Goldfinch has happened in TradFi multiple times and multiple orders of magnitude larger. The goal of building credit systems on blockchain rails should, at the very least, be to provide radically more transparency, leading to better risk controls and a better lending/borrowing experience. There’s also a point to be made that retail users shouldn’t be depositing funds into a credit protocol. Perhaps they’re better off buying treasury bonds for risk-free returns. However, we want to equalize the playing field and give retail access to such investment opportunities. So, proceed at your own risk. — JC

Have you read the definitive history of Ethereum? No? Well then get your copy of Out of the Ether while you can.