US Presidential Debate, Mainstream View of Crypto & Kucoin Hacked for ~$200 million #21
Market Meditations | September 30, 2020
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Today’s Meditations:
Think Tank Survey Reveals Mainstream View of Crypto
Messy U.S. Presidential Debate
UK GDP Collapsed Nearly 20%
The Epic-Apple Courtroom Battle Commences
Kucoin Hacked for ~$200 million: What Do We Know So Far?
Yfi Founder’s Incomplete Defi Protocol Eminence Exploited, Attacker Drained $15m and Then Returned $8m
Coinbase Offers Severance Package to Employees Unsatisfied With ‘Apolitical’ Mission
Blockchain-Based Storage Network Filecoin to Launch Mainnet in October
Black Box Thinking: A Lesson From the Aviation Industry
Think Tank Survey Reveals Mainstream View of Crypto
A new survey by RUSI and ACAMS reveals how banks, governments and the crypto industry are divided on cryptocurrency risk.
The key observations are that the cryptocurrency industry remains materially divided from other sectors over the perception of risk. Governments and financial institutions view cryptocurrency as a significant source of risk.
Cryptocurrency industry respondents also appear significantly more confident than other sectors about the business use and inherent vulnerability of cryptocurrency. The potential downside to this is that the cryptocurrency industry may materially underestimate the types of threats posed.
Respondents all expressed concern regarding the use of cryptocurrency by various illicit actors, ranging from terrorist groups to sanctioned actors and human traffickers. While cryptocurrency use by criminals only accounts for around 1% of all transactions, it remains an attractive venue for those avoiding the traditional financial system. It is interesting to see that perceptions of risk remain so high.
All respondents are expecting more guidance and best practices from both governmental bodies and non-governmental organisations. This is largely in line with the current and future efforts of international organisations, most importantly the Financial Action Task Force (FATF). There appears to be a consistent approach between the FATF and national regulators on the implementation of cryptocurrency regulation, with the expectation that the industry should look to both their national regulator and the international standard setter for guidance.
Respondents also indicate that despite current skepticism over the role of cryptocurrency in promoting financial inclusion, there might be more space for it in the future. Respondents predict both an increased role for cryptocurrency in day-to-day payments in the future as well as a decrease in cryptocurrency use for illicit activities, especially as compared to how it is viewed now.
Messy U.S. Presidential Debate. The U.S. presidential debate was a bit of a non-event. It involved more insults and pettiness than it did any indication of either candidate’s policy agenda. As such, there was limited market reaction. Mainly, the debate featured frequent interruptions by the president, insults traded back and forth, and crosstalk so severe it was difficult to make out what either man was saying at times. Reactions on social media and in cable networks’ instant polls were almost universally negative about the event overall, though most observers considered Biden to have come out on top. The video above shows some entertaining clashes between the two. That is about as much as you will get out of the debate though, entertainment. And also concern that this is who we have running for the presidency. Socrates did warn us about politicians and how they are really just rhetoricians; debates like those of last night do seem to validate this centuries old argument. Read more.
UK GDP Collapsed Nearly 20%. The UK suffered a record collapse in economic output in the second quarter of 2020 when C19 lockdown measures were in full force, though the decline was slightly smaller than first estimated. GDP shrank by 19.8% in the 3 months to June, the ONS said, slightly less than the initial estimate of a quarterly 20.4% crash but still more than for any other major advanced economy. Output has rebounded in recent months but the recovery looks to be fading with rising coronavirus cases and forecasts of a jump in unemployment as the government scales back job support. Households saved a record 29.1% of their income, up from 9.6% in the first quarter, as they were unable to spend in many shops and restaurants during the lockdown, while incomes were supported by a government job programme which ends next month. Read more.
The Epic-Apple Courtroom Battle Commences. On September 28th a court in California heard arguments, via video call, in a case that pits Apple against Epic Games, the maker of ‘Fortnite’, a hit video game. At issue is whether the tight control Apple exerts over the software can run on its smartphones amounts to a monopolistic abuse of power. The verdict, when it comes, may determine what other digital marketplaces can and cannot do. The case looks likely to go to a jury trial next year. Given the lack of clear precedent, potential ramifications for the tech industry and the likelihood that the losing party will appeal, the dispute may end up in the Supreme Court. In the meantime, Apple is facing the pressure and Epic is being cheered on by fellow members of the ‘Coalition for App Fairness’, which include Spotify and Match Group. Read more.
Kucoin Hacked for ~$200 million: What Do We Know So Far?
Friday last week, several reports on Twitter speculated that unexpected transfers were happening out of Kucoin’s balances. Kucoin’s initial response on Twitter was that everything was being taken care of and deposit and withdrawal issues would soon be solved. Later that night, an official announcement was released that a hacker had indeed successfully drained ‘bitcoin, ERC-20 and other tokens’ from Kucoin’s hot wallets. The Singapore based cryptocurrency exchange wrote that users could be rest assured that ‘if any user fund is affected by this incident, it will be covered completely by KuCoin and our insurance fund.’ Deposits and withdrawals were suspended and Kucoin started a race against the clock to try to recover some of the funds it had lost control over.
Race Against The Clock
At first, users speculated that a hacker managed to steal $15 million and there was not too much to worry about. However, during the weekend it became clear that the hack was way bigger as initially thought. While Kucoin claimed that around $150 million had been stolen, a researcher for The Block Larry Cermak indicated that by his estimate that number was closer to $280 million, indicating that he found it strange that Kucoin seemed so confident that they would be able to cover everything with their insurance fund.
With blockchain data being public, victims or users that were interested could follow the hacker’s course of action step by step. Traders being aware of the situation started shorting assets the hacker was dumping on the decentralized exchange Uniswap. In an industry wide attempt to prevent the hacker from cashing in his stolen funds, Kucoin encouraged liquidity providers to withdraw their liquidity from decentralized exchanges to prevent the hacker from selling and collaborated with different altcoin projects in an attempt to render the stolen tokens useless. Kucoin exchange remained open for trading and has been very transparently updating the situation so far. At the time of writing this article, more than $100 million of the stolen tokens have been invalidated by implementing token swaps, pausing the token’s smart contracts or even simply freezing the funds in the case of Tether (USDT), possible due to the centralized nature of the project.
What About Decentralization?
The attempt to recover most of the funds initiated an interesting debate around a blockchain’s decentralization aspect. Many projects froze their smart contracts or initiated a token swap based on a snapshot taken before the hack to control the damage and prevent the hacker from cashing in. This raised an important question in the community. If one person or even a group of people behind a project can pause the coin’s smart contract without going through a governance procedure, is the project really decentralized? One can’t claim blockchains to be uncensorable and unstoppable while simultaneously expecting projects to have their user’s back when things go wrong.
In an op-ed in The Defiant, co-founder of oracle provider DIA wrote: ‘At DIA we consciously decided against a fork. The entire vision of DIA is a reflection of the promise of decentralization: We want to move away from centralized decision making and concentration of power in the hands of a few. Prominent DeFi teams including Synthetix, Compound, and Chainlink made the same choice.’ Synthetix founder Kaiyne shared some of his thoughts on Twitter, claiming that he no longer had power to change the situation even if he wanted to, after Synthetix moved to a fully DAO governance platform a few months ago.
We think of decentralization as innate to a blockchain but the Kucoin hack proved otherwise once again. While established blockchains like Bitcoin and Ethereum would never roll back funds for an event like this, we also saw how early centralization has its benefits. Is this beneficial for a project that is still vulnerable to events like these? Should founders or people in charge be able to swiftly make a fundamental decision about the protocol without having to go through a vote? The Kucoin hack might be another catalyst to rethink token designs from the ground up. Centralization might have saved Kucoin’s funds, we can’t deny that it makes a project vulnerable to all sorts of regulatory actions.
Yfi Founder’s Incomplete Defi Protocol Eminence Exploited, Attacker Drained $15m and Then Returned $8m. Yfi Founder’s Incomplete Defi Protocol Eminence Exploited. Eminence.Finance, an unfinished decentralized finance (DeFi) protocol by Yearn.Finance (YFI) founder Andre Cronje, was victim of a flash loan exploit on Monday. The attacker managed to drain $15 million from the unaudited smart contract, where users had deposited funds to yield farm the new token. Although it is unclear why, the attacker returned $8 million to YFI after he successfully drained the Eminence contract. The hacker drained the funds just hours after users ‘aped’ (Twitter) into the unfinished Eminence protocol looking to catch the next YFI after Eminence’s Twitter page and Andre tweeted about it. Cronje said that Eminence was at least three weeks away from being fully finished, which he only disclosed after the hack had taken place. Read more
Coinbase Offers Severance Package to Employees Unsatisfied With ‘Apolitical’ Mission. After taking a strong stance on Coinbase being a mission focused company on Sunday, CEO Brian Armstrong sent a letter to the employees of the company to encourage them to follow the company’s stance and offering those unwilling to do so a ‘generous separation package’. Apparently, Coinbase sent the letter after discovering that certain employees were not comfortable with the new direction that the company was taking, writing that “life is too short to work at a company that you are not excited about.” Employees have until Oct 7 to submit a form to begin the process of severance. Beyond that date, it will be assumed that everyone in the company agrees with the new direction the company is taking. Read more.
Blockchain-Based Storage Network Filecoin to Launch Mainnet in October. Filecoin’s launch will be one of the most anticipated events in the crypto space this year, three years after the platform held an initial coin offering (ICO) where it raised $200 million in just 30 minutes. Filecoin is designed as a decentralized alternative to Amazon Web Services or Cloudflare and was the biggest ICO raise ever at the time. The mainnet was originally supposed to launch in March earlier this year but got delayed multiple times. In a blog post on Sunday, Filecoin announced that mainnet is expected to go live around Oct 15, with a week of events from October 19-23 celebrating Filecoin’s mainnet launch. Read more
#9 SalsaTekila: How Salsa Made 4000% in 3 Weeks
Today’s episode features SalsaTikila
SalsaTikila is a full-time bitcoin scalp trader from Canada who also works for a proprietary trading firm. He recently participated in the Bybit trading competition where he managed to finish in 2nd place, with a 4000% return on his buy-in in 3 weeks.
In this episode, we talk about the aftermath of the Bybit trading competition and what kind of risk management it required. We also discuss the journey becoming a full-time trader after leaving university and how his background prepared him to become a profitable trader at such a young age.
I hope you enjoy this episode!
Black Box Thinking: A Lesson From the Aviation Industry
Black Box Thinking is a book by Matthew Syed; it is a self help book that draws a powerful and compelling analogy using black boxes (the ones found in the aviation industry).
A black box, also known as a flight recorder is an electronic device placed in an aircraft for the purpose of facilitating the investigation of aviation accidents and incidents. Aviation has created an astonishingly good safety record because of the use of black boxes. Black boxes assist in the process of learning from mistakes rather than concealing them.
The powerful truth that the analogy reveals is that success can only happen when we confront our mistakes. In fact, the single greatest obstacle to progress is failing to learn from mistakes. Our failure to learn is often rooted in our attitude toward failure. As the aviation industry has, we need to redefine failure to unleash progress, creativity and resilience. This can be particularly difficult but most important when we are confronted with evidence that challenges our deeply held beliefs. More often than not, people will reframe the evidence rather than alter their beliefs.
By way of a more relatable example, you may have a preferred trading strategy. You have spent countless hours developing said strategy and in fact, you have even told your friends and colleagues how fantastic it is. Recently, you are continuously taking losses from the strategy. Rather than admit to yourself and peers that your strategy is flawed, you may be inclined to say these events were anomalies (to do with the underlying asset, an external event or anything rather than your strategy). Needless to say, your strategy will remain suboptimal unless you admit failure, spend ample time investigating the cause of failure and come out with a new and improved strategy.
The depth of analysis is also essential. Marginal gains are not about making small changes and hoping they fly. Rather, it is about breaking down a big problem into small parts in order to rigorously establish what works and what doesn’t.
Ultimately, it comes down to two scenarios. One is a closed loop where failure doesn’t lead to progress because information on errors and weakness is misinterpreted or ignored; another is an open loop that does lead to progress because the feedback is rationally acted upon. I recommend the latter, which may require you to take the concept of black box thinking as an example and re-frame how you identify and respond to failure.
Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.
