Have You SEEN This Crypto Report?

So much has happened in the wonderful world of crypto over the last few months that it can be hard to keep up. And no, I’m not talking about all the beefs and blowups on crypto Twitter (as diverting and occasionally downright depressing as they so often are). No, I refer of course to all the important industry goings-on that will likely shape how the rest of the year in crypto unfolds.

Q2 of this year was an eventful period, what with Shapella and staking, SEC shenanigans, stablecoins struggling and spot ETF sensationalism - and that's just things beginning with ‘s’. In short, it was a busy three months that gave cause for cheer and concern.

If you’re already struggling to cast your mind back over what happened, then fear not, for help is at hand. The good folks at Coin Gecko, that first port of call for so many of us crypto folk of a morning, have put together a report covering all the comings and goings of Q2 in crypto and we have helpfully summarised it for you.

In today’s video, we present our summary of that report and its key findings. As Q3 nears its mid-point and the seasons begin to change, we’ll break down everything that’s been going on and give our take on where crypto is at right now as a result.

You can watch that video here.

📈 Crypto Market Forecast 📈

Looks like it’s shaping up to be another mixed week, at least as far as crypto factors go. On the bearish side, we have ongoing concerns about stablecoins, specifically DAI. On-chain analysis suggests that a16z (a long-time MakerDAO investor) sold the last of their MKR holdings last week. This has led to speculation that something big is about to go down.

Not only that, but it appears that Circle (or someone associated with it) has been derisking from MakerDAO. That’s because the amount of USDC backing the DAI in circulation has fallen sharply over the last few weeks. This could actually explain why USDC has been facing sell pressure. There’s also the Curve issue, which I’ll come back to in a moment.

Assuming MakerDAO concerns are the primary factors behind the wobbly prices of DAI and USDC, that leaves GUSD and USDT. GUSD is easy to explain. 83% of the GUSD in circulation is being used to back DAI (hence why it’s had the hardest time holding its peg). USDT is where things get interesting and also speculative, but here’s my best guess.

The concerns around MakerDAO seem to stem from the possibility that the real-world assets backing DAI could be seized or frozen by regulators. As it so happens, the SEC recently froze the assets of a Bitcoin miner. If the same happens to MakerDAO, there could be concerns about the same thing happening to Tether, hence the USDT weakness.*

Now on the bullish side, we have the upcoming public launch of Coinbase’s Ethereum layer 2, Base. If you’ve been using Base already, you’ll know that it’s currently a one-way trip - you can only bridge crypto in, not out. Well, this will change with the public launch, which is scheduled for this Wednesday. This could create secondary demand for ETH and ERC-20s.

It could also result in a resurgence of the memecoin mania that we’ve seen on Base so far. Not surprisingly, some of these memecoins turned out to be rug pulls, and it will be interesting to see how Coinbase will handle these bad actors. Barring any regulatory warnings or interventions though, Base could be like BNB was in its early days. DYOR though.

An even more bullish catalyst could be the recent approval to serve retail investors that two crypto exchanges received in Hong Kong. Hashkey and OSL (both previously registered with the city’s regulator) will reportedly offer BTC and ETH to start with. Hashkey will apparently offer USDT and USDC as well, which is surprising.

If you watched our video about Hong Kong’s retail crypto regulations, you’ll know it’s surprising because the regulator there had said that stablecoins would be off limits to retail. This is presumably because stablecoins could facilitate capital flight from the mainland, something that China’s new central bank governor wants to prevent.

In any case, BTC and ETH buys by retail investors in Hong Kong could be sufficient to keep crypto prices supported. The only question is when they will start buying. Based on Google Search Trends for Bitcoin and Ethereum in Hong Kong, the answer is not anytime soon. Searches for both are very low. But, all it will take for them to spike is another bullish catalyst.

For now, bearish catalysts seem to be front and centre, and most of them are in DeFi.

* It’s not likely that it’s related to Curve because USDT doesn’t have that much DeFi exposure. USDC does, hence why it’s probably being affected by Curve and DeFi fears

🔪 Curve’s Demons 🔪

This week, we saw Curve Finance - one of DeFi’s blue-chip protocols - get hit with full force by a cascading wave of panic selling and withdrawals.

Within 48 hours, Curve’s $3.2B TVL dropped by 50% to $1.6B, and the price of its CRV token fell by more than 30%, from $0.73 to $0.50. Ouch.

So, how did we get here?

Well, it all started on 30th July, when hackers stole approximately $70 million from several pools by exploiting a dormant zero-day vulnerability present in older versions of Vyper - a third-party EVM contract-oriented, pythonic programming language used by Curve and other decentralised protocols.

This attack happened in two tranches, with the initial attack hitting the Alchemix (alETH), Pendle (pETH), CurveDAO (CRV) and Metronome (mSETH) pools on Curve and the second attack hitting the CRV/ETH pool again a few hours after the first attack.

The second attack happened due to the CRV/ETH pool having broken balances as a result of the first exploit. This allowed the hacker to exchange a few CRV for most of the ETH left in the pool after syncing balances.

Fortunately, a portion of the losses in the second attack was quickly contained due to the efforts of white hat hacker c0ffeebabe.eth, who returned roughly $5.4 million to Curve after her MEV bot successfully front-run one of the attacker’s transactions.

In terms of losses, almost half of the roughly $70 million in stolen assets came from the exploit on the CRV/ETH pool.

Interestingly, the vulnerability in the CRV/ETH pool was identified and tweeted by security firm BlockSec almost two hours before the attackers exploited the pool.

This has led to several people, including Curve founder Michael Egorov, accusing the security firm of aiding attackers by “publicly broadcasting a live exploit.” BlockSec has fought back against these accusations by stating that it had only meant to alert users of the new issue in order for them to take action and save funds.

While the supposed intention behind BlockSec’s actions may have been good, whether it was really the best course of action remains debatable.

Having said that, the exploits themselves are not the sole reason behind Curve’s rapid loss of confidence. To put things in perspective, the $70 million exploit affected less than 4% of Curve’s TVL at the time of the incident.

The real threat came when users realised the ensuing chaos could have a cascading effect on the price of CRV, which in turn threatened to wake up Curve founder Michael Egorov’s sleeping dragon - a $100 million loan backed by $427.5 million of CRV.

If you aren’t aware, Egorov’s CRV collateral accounts for roughly 47% of the entire circulating supply of CRV. As highlighted by research platform Delphi Digital, the token’s price dropping would mean that Egorov’s loans across lending platforms such as Aave, Fraxlend, Inverse Finance and Abracadabra would be liquidated. This would create even more volatility in the broader DeFi ecosystem, as a lot of these lending platforms would be left with bad debt due to the illiquid CRV tokens.

Thankfully, Egorov quickly began working on measures to prevent the liquidation by executing a series of OTC trades which were used to repay a portion of these loans. Egorov also created a new liquidity pool on Curve for FraxLend's CRV/FRAX market. He incentivized people to lend FRAX to lower the CRV/FRAX utilisation rate by rewarding CRV to those who LP’d crvUSD with fFRAX for CRV/FRAX.

At the moment, these measures have kept the liquidation at bay, preventing further volatility. However, this solution points to the ironic reality of Egorov being bailed out by other big whales. A situation that seems all too familiar with TradFi.

📊 Personal Portfolio 📊

BTC 37.37% | ETH 31.06% | USDC 17.34% | USDT 6.93% | USD 3.51% | ATOM 2.61% | DOT 1.18%

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🔮 Video Pipeline 🔮

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• G20 Crypto Roadmap: What are they planning?

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📖 Quote of the Week 📖

Some of the most successful investors in the crypto market are those who have the necessary staying power. You have to see an investment through and be willing to expand your time horizon.

“Time in the market beats timing the market” - Ken Fisher

Team Coin Bureau

Disclosure: Authors may own cryptoassets named in this newsletter. These are unqualified opinions, and a Coin Bureau newsletter, is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor.