Weekly Recap
August 4, 2023

Crypto Fundamental #039

Curve Finance faces $62mm exploit, SEC sees a wave of Ethereum ETF filings

Jimmy Zheng
COO

This week, Tether becomes 11th largest holder of Bitcoin, crypto options volume on CME rises to nearly $1bn in July, and Michael Saylor may sell stock to purchase more Bitcoin.

let’s jump right in 👇

🌞 Curve Finance, one of the largest Decentralized Exchanges, faces $62mm exploit

💫 SEC sees a wave of Ethereum futures ETF filings

🤝 Trends to Look out for on Artemis: Synthetix

The market continued its fall across the L1 / L2 tokens with average and median WoW price declines of ~2.3% and ~4.5%, which coincided with a similar movement in equity markets (S&P 500 and NASDAQ index down ~2.3% and ~3% over past 5 days, respectively). While the broader layer 1 / 2 ecosystem declined, OP saw a huge week with the launch of Coinbase layer-2 scaling solution BASE and the ongoing deployment of Worldcoin.

🌞 Curve Finance, one of the largest Decentralized Exchanges, faces $62mm exploit

This past Sunday, hackers stole ~$62mm from Curve, one of the largest decentralized exchanges on Ethereum holding ~$2.3bn in total value locked (TVL) as of August 4, 2023 according to data on DeFi TVL aggregator DeFiLlama.

While the hack itself was sizeable in nature, the systemic risk the hack posed to the DeFi ecosystem called into question the integrity of the DeFi economy and caused a number well-capitalized players to spring into action to defend critical pieces of on-chain financial infrastructure. The root of the issue was that Curve founder Michael Egorosv had previously secured numerous loans across several DeFi protocols using the CRV token. His personal CRV holdings of ~$170mm+ equaled almost ~34% of the CRV token’s circulating market capitalization, which saw ~20%+ of its value wiped after the weekend exploit of Curve.

The substantial price decline put Egorov’s on-chain positions close to a point where he would have been liquidated, which would have caused a cascade of liquidation events on other decentralized lending protocols, in addition to further downwards pressure on the CRV token. Egorov’s positions included locking up ~$168mm in CRV tokens on Aave to take out ~$63mm loan in USDT and locking up ~$32mm of CRV on Fraxlend to borrow ~$17mm of the FRAX stablecoin.

As a response to the potential liquidation of his on-chain positions, Egorov sold ~39mm CRV tokens for ~$15.8mm in OTC trades to well-known DeFi players including Justin Sun, Machi Big Brother and DWF labs. The buyers purchased CRV at ~$0.40 per token, a ~25% discount to market price but above Egorov’s liquidation price on Aave of $0.37.

While the hacker ultimately came forward to take a ~10% bug bounty offered by affected protocols Curve, Metronome and Alchemix (and issued a snarky, holier than thou message to the Alchemic and Curve teams) the situation calls into question whether such a large portion of a “blue-chip” DeFi token’s supply should have been lent out on other platforms and whether the allowance for such leverage introduces systemic risk into a largely self-referential financial ecosystem.

Today, it appears that the avengers of DeFi have come in support of Egorov to allow for the continued existence of the DeFi ecosystem that has been built to date, and it remains to be seen if there will be any reverberating effects from Egorov’s and Curve’s narrow escape.

💫 SEC sees a wave of Ethereum futures ETF filings

This past week the US SEC was inundated with Ethereum futures ETF filings, with a grand total of 11 Ethereum-based filings submitted in less than a week. This flurry of activity appears to be a follow-on after the wave of spot-Bitcoin ETFs by large-cap financial institutions such as BlackRock hit the market earlier in the summer. While pundits quickly jumped on the narrative that the filings were evidence that the crypto regulatory environment continues to move in a positive direction in the U.S., a muted response from the SEC along with the fact that ETH futures applications have been filed and withdrawn earlier this year leaves the outcome of the current set of applications in an uncertain place.

This week’s frenzy started with Volatility Shares launching its filing for the “Volatility Shares Ether Strategy ETF” on July 28th, which was followed by Bitwise Asset Management, Roundhill Financial, VanEck, ProShares and Grayscale Investments which all filed new Ether futures applications on August 1st.

Important to note - while Bitcoin futures ETFs have been around since October 2021, the SEC has never approved an ETF that tracks Ethereum futures contract. With regards to the current set of filings, the SEC now has 75 days to review / deny the applications from their respective filing dates before the Ethereum futures ETFs launch on the market. Assuming that the applications are not denied, the first Ethereum ETF product to launch would be the Volatility Shares ETF on October 12, 2023.

Ultimately, while the whirlwind of futures filings is encouraging for institutional crypto adoption, the reality is that capital demand for futures ETFs are relatively limited in scope vs. spot ETFs, and that meaningful capital inflow will likely only enter the space once there is approval of a spot ETF product. Nate Geraci, Co-Founder of the ETF Institute notes that the total assets in bitcoin futures ETFs total ~$1.3bn, with a single product (ProShares Bitcoin Strategy ETF) making up ~$1.1bn of total AUM.

Another event that is potentially more relevant to the inflow of institutional capital into crypto assets is the ongoing legal battle between Grayscale and the SEC over the conversion of its Bitcoin Trust into a Bitcoin ETF.

🤝 Trends to Look out for on Artemis: Synthetix

Synthetix is a derivatives liquidity protocol that allows users to interact with products such as perpetual futures, options and more across EVM chains. The platform has seen steady growth over the past 6 months across core operating metrics such as perpetual trading volumes and unique traders.

Synthetix has seen unique traders grow from ~225 at the end of January 2023 to ~565 in August 2023, while daily perpetual trading volume was de minimis at the end of January 2023 and has since grown to ~$215mm.

Synthetix unique traders, perpetual trading volumes and TVL

Synthetix is now the 2nd largest perpetual trading protocol by trading volume, only trailing dYdX, but continues to be the largest platform by market cap. Synthetix’s market cap of ~$773mm is roughly the size of its next two largest competitors, GMX (~$457mm circulating market cap) and dYdX (circulating ~$328mm market cap) combined.

Synthetix product allows other front-ends / decentralized exchanges to plug into the liquidity that exists on the Synthetix platform. Today, front ends such as Kwenta, Polynomial and dHedge are utilizing the Synthetix smart contracts to provide liquidity to their end users.

EDIT: Part of Synthetix’s increased trading volumes over the past few months appears to be related to trading incentives issued in the form of Optimism tokens.

Starting April 19, 2023 Synthetix launched a program that would issue up to ~300k OP tokens to traders of Synthetix Perps across all integration partners. The program is currently scheduled to run until around ~September 6, 2023.

Thank you to Waleed @whiteblockventures for the detail.

Detailed L1 dashboard for people who love more numbers in smaller font:

Note: Revenue represents fees that go to the protocol’s treasury or are returned to tokenholders via a burn mechanism (source: Token Terminal). Weekly commits and weekly dev activity as of 7/21/23.

The content is for informational purposes. None of the content is meant to be investment advice. Use your own discretion and independent decision regarding investments.

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