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RelayNode NYC #44 - March 16 - Flattening the Exponential Covid Curve, Market Failure & Liquidity Crunch, Centralized vs. Decentralized Central Bank Responses

David Gogel

Welcome to RelayNode NYC Area edition! The NYC blockchain ecosystem is growing. Our goal is to harness its energy and innovation for the benefit of New Yorkers and provide a weekly curated list of interesting content, upcoming events, and local jobs.

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RelayNode NYC is curated by:  

David Gogel

Founder @GogelX/Definancier, Advisor @Paperchain.io, fmr Associate @Techstars' Blockchain Accelerator, Co-president @Wharton FinTech, Corp Dev @LinkedIn @AIG

Hsin-Ju Chuang

Founder @Dystopia Labs. Former-Head of Growth @Stellar / Lightyear, Solana. Ex-Director at Tezos (TQ)

Market Stats (as of Sunday, March 15, 10PM EST)

Despite the Fed’s announcement that it cut its target range for the federal funds rate by 100 bps to 0-0.25% and it is launching a $700B Quantitative Easing program to buy U.S. Treasuries and mortgage-backed securities, S&P futures dropped 5%, reaching a limit down. Investors want more visibility on virus containment and a fiscal stimulus package to put funds into consumers’ hands. The bearish trend continues as we enter a new phase of deleveraging.

The best explanation on the financial market comes from Caitlin Long:

https://twitter.com/CaitlinLong_/status/1238915150368792576

1 Big Thing: WFH & Social Distancing

The national and New York State public health crisis escalated this week:

  • New York State has 729 confirmed coronavirus cases.

  • NYC Mayor Bill de Blasio declared a state of emergency.

  • New York City has 329 confirmed coronavirus cases, up from a few dozen last week. 5 people have died in NYC. All of them had underlying health issues.

  • Gatherings of more than 500 people have been banned.

  • Schools, restaurants, and bars in NYC are closed.

  • Supermarkets are being raided, misinformation is spreading, and (false) rumors about an impending NYC quarantine are circulating. New Yorkers should text COVID to 692-692 to get regular official updates on the latest developments.

At this point, “Social Distancing” is a civic duty. Take care of yourself and your loved ones. Stay home. Facetime your friends and family. Decompress with a puzzle. This is the new normal.

Go Deeper:

What To Read

🌐 Macro

  • COVID-19, which first emerged in Wuhan in November, is now, according to the WHO, officially a pandemic. The US, like many other countries, is facing a catastrophic public health crisis. We have reached peak uncertainty.

  • Last week was one for the history books. I am feeling mixed emotions of disbelief, mild fear, and some opportunity. Stocks have plummeted >20% from Feb highs—officially entering a bear-market soon after the 11th anniversary of the bull run. The volatility triggered circuit breakers, first on March 9 and again on March 12, after the S&P 500 fell 7% and the Dow suffered its worst day since 1987 despite stimulus. Further, liquidity is drying up in the credit markets and the market depth for Treasuries plunged to levels last seen during the 2008 financial crisis. The sell-off reflects concerns about a recession as businesses close to adjust to the demand shock. Meanwhile, emotional and psychological contagion are amplifying the damage caused by COVID-19.

Policy Responses

  • On Wednesday, the Fed announced plans to inject $1.5T into short-term money markets, an intervention designed to ease the pressure on the financial system. By acting as an emergency backstop for the markets, the Fed wants to ensure that the market for Treasury bonds continues to function normally.

  • On Friday, President Trump declared a national state of emergency, freeing up as much as $50B in funds for municipalities and states to fight the outbreak.

  • On Sunday, The Fed cut its target range for the federal funds rate by 100 basis points to 0-0.25% and launched a $700B quantitative easing program. The Fed is running out of options in the event the situation gets worse. I expect to see more discussion around a Negative Interest Rate Policy (NIRP), but this would be unchartered territory for US policy.

  • In China, the PBOC launched a $79B stimulus package by cutting reserve requirements to leave banks more money to lend. Other central banks and governments around the world are beginning to provide fiscal and monetary stimulus. The global coordination appears disjointed. Will this be enough?

🌐 Bitcoin Spot & Derivatives Trading

  • On Thursday, Bitcoin dropped 46% in a day, suffering its biggest drop in 7 years, as fears over the coronavirus triggered a wave of selling across asset classes. This has undermined the narrative that BTC is a non-correlated store of value and safe-haven asset usable as a hedge to macro risk. Nevertheless, many feel like Alec Harris who explains “Satoshi didn’t write a white paper on how to generate non-correlated alpha in your retirement portfolio. Bitcoin is a higher calling. It’s a fundamental change in money & accounting. It’s a manifestation of mistrust in institutions. It’s a hedge against centrality. It’s sovereignty for the individual.”

  • BTC’s move lower was precipitated by the liquidation of both BTC-collateralized USD loans and levered longs in the BTC options & futures markets. BTC’s price crash triggered $702M in long-short liquidations on BitMEX. BitMEX also came under two attacks on March 13 from a botnet that froze up the exchange. Meanwhile, according to CoinDesk, investors that borrowed against crypto faced margin calls. Genesis Capital called an additional $100M of collateral from its selective pool of about 40 clients. Celsius Network, which lends to 225 institutions, making up up a loan book of $400M-$600M, has seen margin calls in the “hundreds of millions.”

  • According to Skew, one-month ATM implied volatility for BTC, which gauges a market's expectation for volatility, has nearly tripled from 55% to 144%. Arthur Hayes, Co-Founder of BitMEX, in his latest Tradin’ In My Jammies post, provides an overview of global macro developments and a potential bull case for bitcoin.

💰 Funding, M&A, & Exits

  • Argent, a crypto wallet provider, raised a $12M Series A led by Paradigm, with participation from Index Ventures, Compound founder Robert Leshner and other investors. Funds will be used to scale from beta (with 3000+ users) to a full public launch.

  • Futureswap, a decentralized futures exchange providing automated market-making futures without price slippage, raised a $400K Seed round led by Framework Ventures.

  • Common Labs, the developer of proof-of-stake blockchain Edgeware, raised $500K from Framework Ventures. In addition, the firm has locked 20,000 ETH in Edgeware’s lockdrop to help advance the network’s distribution. 

  • Phemex, a Singapore-based crypto derivatives exchange, raised a $3.5M Series A, led by NGC Ventures. The exchange looks to expand into Russia, South Korea and Japan.

🔓 DeFi / OpFi

  • Black Thursday for DeFi: On March 12, ETH saw a dramatic drop in price, losing 30% value in 24 hours triggering large liquidations across Compound, dYdX, and Maker. According to Maker, the ETH price collapse combined with a rapid increase in gas prices put stress on the Maker Protocol, the community, the Maker Foundation, and the Ethereum DeFi ecosystem as a whole. While DeFi survived the recent shock, it highlighted multiple vulnerabilities including:

    1. Scalability challenges: The Ethereum network became congested and transactions took too long to complete. Thursday saw a big spike in gas fees to >100 gwei, resulting in traders only executing trades by paying high fees to record transactions on Ethereum.

    2. Oracle Failures: A Maker oracle was slow to provide the most current price. The specifics regarding the issue of the price feed delay itself are still under investigation. 

    3. Undercollateralization & Keeper Arbitrage: Maker liquidations on March 12 and 13 resulted in protocol losses of 5.67M DAI. Many vaults (containing ETH as collateral to mint DAI) became undercollateralized (<150% collateral), thus becoming available for liquidation. Liquidations are triggered by users calling the contract, which starts an auction for the ETH to raise DAI to reimburse the liquidated Vault’s debt. In normal operation, keepers compete for this auction, and the winning bid is paid in DAI in exchange for the ETH in the vault. The DAI is then burned, the debt erased, and if some ETH is left, it is returned to the vault’s owner. This confluence of circumstances led to keepers either stoping their activity for fear of slippage (price dropping fast + transactions taking a long time to validate) and for lack of liquidity to absorb all those liquidations. This led to a situation where only one keeper triggered liquidations and bid 0 DAI for the ETH. As a consequence, some vaults were liquidated with 0 DAI coming back in the system, resulting in the accumulation of protocol debt in the MakerDAO system. Here is an excellent analysis by the whiterabbit team on Maker liquidations.

  • Decentralized recapitalization: DAI is facing a severe liquidity crunch. The DAI peg has been trading as high as $1.10 while DAI generation from Vaults is low. A MKR token auction for ~$4.5M of MKR to cover the protocol deficit will occur on March 19th to recapitalize the system, as explained in the whitepaper. Maker governance also proposed changes to system parameters, including changing the DSR to 0%, the Stability Fee to 0.5%, GSM to 4 hours, and a decentralized circuit breaker for auctions.

  • bZx fix: bZx co-founder Kyle Kistner looks back on the recent exploit and outlines measures that the platform is taking to mitigate security risks in the future. The company also announced its integration with Chainlink to prevent future price oracle exploits.

  • Peak DEX Activity: The ETH price crash caused major spikes in volume for DAI on DEXs as users sought to pay off DAI loans. According to a tweet by Hayden Adams, Uniswap saw its all-time trade volume double to over $53M. Kyber Network also set an all-time high with some $30M in 24-hour trade volume.

💸 STOs / Stablecoins / Tokens / DAOs

  • Figure Technologies completed a $150M securitization of a bundle of home equity lines of credit (HELOCs) via an unrated private placement, billed as the first such transaction in which all aspects of the process were managed on a blockchain. Everything from the origination of the loans to the issuance of the bonds to the collection of borrowers' monthly payments is run on Provenance, Figure’s blockchain. By automating all these steps on Provenance, Figure generated 100+ basis points of savings.

  • For the first time, DBRS Morningstar, the rating agency, rated a securitization with a digital asset component. Fat Brands issued a $40M debt security backed by franchise royalties and upfront fees from Fat Brands companies. The security was structured by Cadence to include several ERC-20 tokens representing the debt security issued on the Ethereum blockchain. Morningstar reportedly said in its rating that using Ethereum would speed up access to data on the securities, as well as boost transparency.

  • Chris Burniske, GP at Placeholder VC, deep dives into Aragon which has built a suite of governance tools that allow any organization to legitimately and transparently manage activities like community voting, treasury management, organization ownership, and contributor payroll.

🌉 Infrastructure

  • Circle, the crypto exchange behind the USDC stablecoin, announced a Payments API, combining the stablecoin, banking connectivity and wallet infrastructure into powerful APIs. One step closer to Banking-as-a-Service via npm commands.

  • Coinbase launched Bitcoin transaction batching, a feature that significantly reduces the load that Coinbase puts on the Bitcoin blockchain and may save users more than 50% on network fees.

  • Kraken, a leading crypto exchange, OTC trading desk, and futures trading platform, announced the launch of a forex trading business. Will other crypto exchanges follow suit?

  • The Celo Foundation announced the formation of the Alliance for Prosperity, a network of mission-driven firms to leverage the benefits of blockchain technology to furth the mission of financial inclusion and prosperity, and adoption of Celo’s technology. The Alliance has 50 initial members, including Andreessen Horowitz, the Grameen Foundation, and Coinbase.

🎧 Podcast of the Week

Upcoming Virtual Events / Conferences

Virtual

Conferences (Status TBU)

Postponed Conferences

🎓Highlighted Industry Jobs (non-exhaustive list for NY)

If you would like to highlight jobs or internships in future editions, please email links here.

Nothing written in RelayNode NYC is legal or investment advice and should not be taken as such. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.