5MF (WEEK 27): MAJOR IMPLICATIONS IN SOLANA’S LAWSUIT, VOYAGER’S BANKRUPTCY, POLY UP 28%+
The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.
Let’s see what’s going on this week:
- Celsius on the Road the Recovery?
- FOMC Minutes Conspicuously Avoid “Recession”
- Why Solana is Facing a Lawsuit
- Polygon Rises Above the Bear Market, Up 28%+
- Voyager Digital Ends Voyage in Bankruptcy
Celsius Completely Repays BTC Loan to Maker
- Celsius Repaid $183.6M to MakerDAO in July But Crypto Lender Still in Hot Water (link)
- Embattled Crypto Lender Celsius Accused of Fraud by Ex-Employee in Suit (link)
Loan Paid, BTC Selling Pressure Next?
Celsius Network is turning into a case study of irresponsible business practices. First, the fresh good news. The centralized lending platform paid off all of its loans to decentralized Maker, just a day after it repaid $183.6 million in DAI, the Maker’s native stablecoin.
This means that Celsius got back its 21,962 WBTC (≈$440M) that it used as collateral for the loan. In turn, its liquidation price is now at zero. Soon after, Celsius transferred 24,462 WBTC (510,853,104 USD) to FTX exchange, the same one that refused to bail out Celsius because of its “$2 billion budget hole”.
The tension is high. Will those bitcoins simply be converted from Wrapped to regular, or dumped into the market to pay off other liabilities, effectively erecting a sell pressure? The fact is, over a million Celsius accounts are still prohibited from withdrawing their money.
More worryingly is how Celsius ran its lending business. Former Celsius investment manager, Jason Stone, filed a legal complaint yesterday to NY state court. The lawsuit calls out Celsius for using customer funds to engage in risky trading strategies and manipulate the market with its CEL token.
This is more of a confirmation than a great revelation though. The writing was on the wall when Celsius picked double-digit APY yields for its growth. This inevitably attracted people who were miffed at anemic 0.08% interest rates on traditional banking savings accounts. But, to make those payouts, Celsius engaged in wide-ranging staking of its own.
The source of Celsius’ unusually high yields was multiple DeFi staking ventures, largely as staked Ethereum (stETH). Image credit: ApeBoard.Finance
In other words, Celsius was expanding its pyramid bottom as a business model. The Fed’s interest rate hike abruptly halted that expansion, collapsing markets across the board. Jason Stone now contends that Celsius used its CEL tokens as a tool to create the initial growth spark, by artificially inflating the price of CEL with $90 million in BTC.
And when something is artificially inflated, it can be used as a borrowing anchor. Illusion on top of leveraged illusion. Of course, those were customer funds as well. Stone also stated that Celsius borrowed $1 billion in USDT to cover for balance sheet holes.
It appears that crypto/DeFi became a victim of its own success. It attracted characters that picked the very low hanging fruit — low interest rates in banks. But instead of settling for realistic goals — up to 5% APY — they wanted bombastic 10% — 20% yields to attract customers.
The goal was to ensure Facebook-like entrenchment and dominance in that particular market. Looking back with all that we know now, the situation was like a ticking time bomb. Now, with the bomb having been detonated, it’s better that all shadiness is revealed and lessons are learned in this early stage of crypto adoption.
Is the Fed Hiking Us Into Recession?
- Fed Ponders 50–75 BPS Hike in July: Risk Assets May Be Set For Further Downside (link)
- Silver Falls Below $20 as the Fed Tightens Monetary Policy (link)
Suppressed Demand = Lower Inflation
In a central banking system, it is completely normal — and accepted — that a select committee decides the fate of billions of dollars worth of value. And, like reading omens from tea leaves, investors are quick to decipher the words from the Federal Open Market Committee (FOMC).
Wednesday’s FOMC minutes, discussed three weeks ago, revealed 90 mentions of the word “inflation”. Tellingly, “recession” was not mentioned once. This suggests that recession may be the final tool that delivers victory against rampant inflation.
Put simply, interest hikes raise the cost of capital. This decreases economic output, lowering consumer demand. In turn, lowered demand means fewer buyers, which means that supply is outpacing demand. This inevitably lowers prices.
We are already seeing this demand suppression. The consumer sentiment has hit a record low. Simultaneously, mortgage interest rates rapidly plunged to 2008 level, at 5.3%, suggesting collapsing demand.
Image credit: Twitter
Just like the Fed’s monetary policy injected trillions into the economy triggering inflation, the same dynamic happens with precious metals — gold and silver. Case in point, when the U.S. Gold Reserves dumps gold on the market, its price is suppressed. But, when there are no such disruptions, precious metals tend to rise.
Image credit: Twitter
Now that the Federal Reserve has shifted its monetary policy and is no longer injecting cash to lubricate the wheels of the economy, both gold and silver are halted in their appreciation growth. That’s because both act as hedges against inflation, similar to Bitcoin, due to their limited supply.
But, even with inflation, the dollar strength index (DXY) is soaring high against other currencies. With a particular spike after the energy-dependent EU is facing supply disruptions when it comes to importing energy from Russia.
The Dollar Strength Index has been having a good year. Image credit: Trading View
Yes, this global reserve currency privilege means that the dollar is simultaneously devalued and high in demand, making hedges against the dollar underperform.
We’ve seen the Fed hike rates by 1.5% so far this year. It’s safe to expect an additional 2% hike over the course of the following year.
Enjoy 5MF? Click to forward it to three friends.
Class Action Lawsuit Claims SOL is a Security, Solana Network “Highly Centralized”
- Solana is a Centralized Blockchain, Investors Claim in Class Action Lawsuit (link)
Decentralization Cloak on a Centralized Body
Money is the ultimate tool to gain power, and the concentration of power lies on a spectrum.
When it comes to the converging worlds of digital assets and currencies, on the one end is Bitcoin with a pseudonymous creator and a globally distributed, self-governing mining network across 15k nodes. Bitcoin’s monetary policy is enforced by code — and cannot be changed. On the other end is the Federal Reserve and other central banks, who can adjust monetary policy as they wish.
Modifying monetary policy isn’t necessarily a bad thing — it can help out a lot of situations. But it can also inadvertently facilitate very damaging situations as well.
Therefore, the spectrum is about trust. If an asset is more decentralized, less trust is required, as there’s less room for bad actors. And if it is more centralized, one is forced to trust the governing central body or individual(s). Somewhere in between this spectrum are the likes of Celsius Network or Solana.
They grew on the promise of trustless access to financial power. While you already know how Celsius operates, Solana is a venture capital baby, birthed by VC giant Multicoin Capital. It turns out, some investors are not happy with the bill of supposedly trustless sold goods.
Californian Mark Young filed a lawsuit against Solana Labs, claiming that Solana Network is nothing more than a company that avoided registering as a public company dealing with securities, by slipping into the blockchain space.
“They created the Solana blockchain network and all of the SOL securities in circulation, and likewise determined who would receive SOL securities and under what conditions.”
Indeed, after multiple network outages, and manual upgrades and restarts, many have become suspicious. How is it possible that a supposedly decentralized network acts as a regular computer network? Well, the answer is not far off once you see its power concentration, manifested through its SOL token allocation.
Solana’s initial token supply and allocation. Image credit: Messari.io
Beyond token concentration, it is telling that Solana Foundation is the only one in charge of developing the network’s core nodes. This is in stark contrast with Ethereum, which has a number of core node developers: Besu, Go Ethereum, OpenEthereum and Nevermind.
Now, Young’s claims are being brought as a class action lawsuit on behalf of other SOL investors. The suit claims SOL meets the three principles of the SEC’s Howey Test, effectively constituting a security. Young also says, despite claims from Solana Labs that the network is decentralized, that it is “highly centralized”.
The future of this case could very well set a precedent as to the securities status of multi-purpose smart contract blockchains in the US.
Why is Polygon (MATIC) Up +28% This Week?
- Using Polygon, Meta Begins Testing NFT Integration on Facebook (link)
- Reddit Partners with Polygon to Launch Avatar NFT Marketplace (link)
Low Gas Fees Continue to Be High in Demand
No computer network can escape the boundaries of physics. There is only so much computing power and memory to be distributed. And if the user uptick is too high, the network’s highway system gets clogged up.
In the decentralized blockchain world, this means that users have to pay an arm and a leg for transfer fees. Ethereum is notorious for this problem, as the most popular smart contract network.
Suffice to say, it doesn’t matter if something is decentralized if it is prohibitively expensive to use. Until Ethereum implements sharding some time in 2023, the obvious solution is to tie extra roads to Ethereum’s main highway. Polygon is one of such roads, as a layer 2 scalability sidechain.
Image credit: CoinTool.app
As a designated gas fee suppressor, recent partnerships have made Polygon’s MATIC token outperform both Ethereum and Bitcoin.
MATIC’s price move over the last 5 days. Image credit: Trading View.
The world’s biggest social media platforms are building up that momentum, even amid a dire bear market. Reddit caters to 48 million monthly active users, while Meta (Facebook) dips into 2.93 billion.
Specifically, Meta is testing out NFTs via Ethereum/Polygon for Instagram integration. Likewise, Reddit is aiming to tokenize users’ avatars on its own NFT marketplace, minted on Polygon.
Given how ripe with creativity and talent Reddit can be, this just may be the boost the NFT market needs to reach its next stage of development.
Voyager Digital’s Bankruptcy Closing the Exposure Plague
- Voyager Digital Files for Bankruptcy as Terra Luna’s Contagion Looms (link)
Everyone Owes Each Other
Despite Sam Bankman-Fried’s efforts, Voyager Digital crypto broker is flushed into the financial toilet. After Voyager suspended account withdrawals a week ago, SBF provided a credit lifeline worth $500 million, via his quantitative trading firm Alameda Research.
SBF is the co-founder of Alameda Research. The rescue was a combo of $200 million in USDC and $309 million via 15k BTC. However, that was still lower than what defunct Three Arrows Capital (3AC) hedge fund owed Voyager, to the tune of $654 million.
Surprisingly, the bankruptcy filing revealed that Alameda Research itself owes Voyager $376.7 million. Does this mean that all debt mutually owed is now wiped clean? Not exactly, as Chapter 11 bankruptcy means that at least a part of the debt has to be paid.
Once the court approves of the liquidation plan, it can take up to two years for restructuring to complete. Of course, those creditors that are secured, such as banks, get paid first. Unfortunately for end users of Voyager Digital, they are last in the line, as equivalent to shareholders.
On the upside, this seems to be the beginning of the end for the recent crypto contagion. It started with Terra’s depegging of UST, and will likely end with Celsius, which is still in hot water despite paying off its debt.
In the end, it seems that the mantra “Not your keys, not your coins” continues to ring true.
Tweets of the Week
A few things reading the 141 pg Voyager Digital bankruptcy filing (thread)
This is not the first time crude oil is $100 per barrel. In fact most of 2008–2014 oil was ~$100. However consumers did not pay as much for fuel then as they do today. And why did inflation not spiral out of control back then? We are being played.
The real signal regarding Bitcoin adoption:
Every price drawdown some new market participants leave (that were only here for price going up), but there’s a higher base of people who gain conviction in Bitcoin and stay.
Yikes: @ChallengerGray job cuts spiked 58.8% y/y in June vs. -15.8% in prior month; largest jump since December 2020 … auto sector announced most cuts at 10,198 (+155% y/y)
The Euro is at its lowest level since 2002, down 26% from its peak in 2008. $EURUSD
Charting via @ycharts
Join Five Minute Finance Newsletter.
Contents distributed by Learn.Block6.tech
👉 Discord — Live Talks
👉 Twitter — Latest articles
