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:

• Celebrity memecoins

• Is MEV illegal?

• Former FTX executive sentenced

• NYSE BTC options

• Riot Platforms pursuing takeover

• Uniswap Foundation’s burn

The Latest

Celebrity memecoins

Mmm mmm MEV dept.

Is MEV illegal?

Recently the EU’s crypto regulatory body, MiCA, declared war on MEV. In a set of draft standards, they noted that “the well-known Maximum Extractable Value (MEV) whereby a miner/validator can take advantage of its ability to arbitrarily reorder transactions to front-run a specific transaction(s) and therefore make a profit clearly suggests the existence of market abuse.”

This would mean that all regulated crypto businesses in the EU, including exchanges and brokers, would be required to detect and report instances of MEV through comprehensive “suspicious transaction or order reports.” I can’t wait for a company to report that my WIF buy for $5 on Jupiter routed through Raydium was sandwiched for a searcher profit of $0.02. This is the future we all aspired to when we first thought of blockchains.

This comes on the back of two individuals getting charged with conspiracy to commit wire fraud, wire fraud, and conspiracy to commit money laundering on the back of an MEV exploit in mid-May. In this instance, the individuals created a series of “bait” transactions on Ethereum, luring searchers and their MEV bots to execute a series of buy transactions for illiquid tokens. This was executed through a vulnerability in the MEV-Boost relay, where the exploited relay revealed block bodies to the proposer as long as the proposed correctly signed a block header. As a result, the individuals could then sell these illiquid tokens using the MEV bots as exit liquidity.

This begs the question, is MEV illegal? As much as most of crypto hates MEV, and degens don’t like being sandwiched, it appears that we’ve widely socially accepted MEV as a way of life on Ethereum, and on other blockchains too. That’s not to say we are too pleased with the state of things, but we certainly don’t think it’s illegal. We always lean towards code being law, which means that if a system is designed in a certain way and an individual utilizes various features of the system to do something that may seem “malicious”, then the individual didn’t do anything wrong, he was using the system within the parameters it was designed in.

Any ordered transaction system will have MEV, in TradFi it’s called something high-frequency trading. This is why HFT firms spend billions of dollars running cables through mountains just so they can gain minuscule trading advantages. Ideally, that’s not the future we build towards in crypto, although we are already seeing signs of that playing out with validators strategically playing timing games so that they may build blocks with a higher value.

MEV is a feature, not a bug, of blockchain systems. It’s up to us to find mechanisms that minimize it, such that users get to interact with a fair, equitable, and friendly user experience. Whether that happens at the protocol layer or the app layer is an entirely different discussion that we can save for another time. But in the meantime, all is fair and all is game. — JC

Quick Bits

Former FTX executive sentenced

• Former FTX Co-CEO, Ryan Salame, was recently sentenced to 90 months in prison. He pleaded guilty in September last year to making tens of millions of dollars in unlawful campaign donations.
  

• Of course, those donations were made using customer funds and amounted to more than $24M to Republic candidates, which made him one of the top donors in 2022.

NYSE BTC options

• The New York Stock Exchange, one of the largest exchanges in the world, is planning to list index options tracking the price of BTC in its offerings. One by one, the TradFi dominos fall, and this trend will only accelerate.

• The cash-settled contract needs regulatory approval and plans to track the CoinDesk Bitcoin Price Index, which acts as the benchmark for $20B in ETF AUM. This adds to the list of traditional exchanges such as CME that offer BTC derivatives such as futures and options.

Riot Platforms pursuing takeover

• Riot Platforms, one of the largest Bitcoin miners, recently made an unsolicited $950M offer to buy Bitfarms Ltd. The firm offered $2.30 a share in cash and stock for Bitfarms, reflecting a 24% premium to the one-month volume weighted average price. 

• However, Bitfarms rejected the $950M acquisition proposal, stating that the proposal significantly undervalues the crypto miner. but not to fret, Riot Platforms still successfully acquired a 9.25% stake to become Bitfarm’s largest shareholder.

And last but not least

Uniswap Foundation Burn

Recently, the Uniswap Foundation revealed that it holds $41.4M in cash, with an estimated runway through the end of 2025. The headline was that the Foundation plans to disburse $25.8m through 2024 and 2025, which left much of CT wondering, what does Uniswap Foundation need that much money for? All these funds will be disbursed through grants, including for researchers, developers, governance, innovation, security, and protocol, which quickly add up. The remaining operating expenses will be funded by the leftover $12.7m. Starting from the operating expenses, the Foundation spent $1m in operating expenses in Q1 2024. This includes payroll, which accounted for 63.2% of that, and office expenses, event costs, and miscellaneous items like insurance. On the grant side of things, the Foundation recently provided a $1.2m grant to Auditless to launch the protocol grants program, which will identify opportunities to expand and strengthen the protocol tech stack. Or for example, a $480K grant allocated to Allium Labs to develop the DEX Analytics Portal. One can quickly see how these grants quickly add up to significant amounts.

The Foundation has to spend so much money because most foundations in crypto are simply entities tasked with helping to grow the protocol, and in most instances, the foundation is just a single director, meaning that quite literally, the foundation has to outsource every single business function, including marketing, research, BD, growth, sales, and more. Most of the time such a legal structure exists to limit the legal liability of the individuals working on developing the actual protocol. Developers fall under the Labs entity, while everything else falls under the Foundation entity. Thus, the Foundation is entrusted with onboarding and supporting core protocol stakeholders such as developers (the Labs entity), researchers, and contributes to protocol growth.

Like most things in crypto, the Foundation has realized that giving many small random grants isn’t as impactful as giving out larger grants for long-term oriented initiatives, which is why the average grant size has increased so dramatically in the past year. In addition, as the dominant DEX in DeFi today, many of the important decisions, such as the recent token fee switch, are left to the DAO to execute. This means that DAO governance has to be especially effective if the protocol itself wants to be successful, as it governs things such as incentives, new deployments, fee switches, and more, perhaps explaining why the Foundation spent more than $1m in Q1 2024 on governance grants. If they fail at that, the protocol could come to a standstill.

We are still in the early days of crypto, and all crypto protocols are still figuring out how to scale operations in a decentralized manner, which is no easy feat. It is akin to running a country as a President while outsourcing every single function, including your Department of Defense, Department of Transportation, Department of Energy, and the list goes on. Those who fail to navigate this dynamic, and fail to develop processes for distributing grants, and build up an ecosystem of involved stakeholders, will likely fail long term. Welcome to building a startup, decentralized version. — JC

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