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What the Hell Happened to FTX?

What the Hell Happened to FTX?

In response, CZ dropped a bombshell on Twitter: Binance would sell off its entire FTT holding. He claimed the intention was to sell “in a way that minimizes market impact,” but the announcement led to a steep drop in the price of FTT (the token has lost almost 90 percent of its value) and a surge in withdrawals at FTX as customers began to panic about the safety of their crypto.

Bankman-Fried initially denied rumors of insolvency on November 7, claiming that “a competitor is trying to go after us with false rumors” and that “FTX is fine.” (These tweets have since been deleted.) It later became clear the company was scrambling to secure a bailout.

CZ has denied that he deliberately created a liquidity crisis at FTX—“I spend my energy building, not fighting,” he tweeted on November 7—but Tim Mangnall, whose company Capital Block has consulted for both Binance and FTX, says this was a “shrewd” business maneuver by CZ, one that allowed him to “buy one of his biggest competitors for pennies on the dollar.”

All Hail CZ, King of Crypto

Binance has now rejected that deal. The crisis at FTX likely reinforces its rival’s position as the world’s largest cryptocurrency exchange. Binance is already larger, by trading volume, than a clutch of its nearest competitors (Coinbase, Kraken, OKX, Bitfinex, Huobi, and FTX) combined.

Binance will now likely hold greater control over the kinds of coins that are widely listed for purchase. By the same token, the influence of CZ, already one of the most prominent figures in the crypto world, will also be magnified in debates around policy and regulation.

For the portion of the community that believes crypto should stand for decentralization, the merging of two of the world’s largest exchanges will also be cause for concern. Decentralization is all about the even distribution of power and eliminating single points of failure, but the fall of FTX supports neither ambition.

After Binance’s rescue plan was first announced, the prices of bitcoin and ether fell by more than 10 percent, wiping out more than $60 billion from the market. They may now fall further.

The implosion of FTX will also raise questions about what should be done to protect crypto owners in the future. One proposal from CZ is that all exchanges should provide transparent “proof of reserves”—in other words, clearly demonstrate they have enough cash on hand to fund customer withdrawals. In a tweet, he promised that Binance will take up this policy “soon.”

Brian Armstrong, CEO of Coinbase, expressed sympathy for FTX but also pointed to “risky business practices” and “conflicts of interest” that left the company exposed—something that, presumably, transparency requirements would also remedy. Separately, Armstrong moved to dismiss concerns that Coinbase might find itself in a similar liquidity crunch: “We hold all assets dollar for dollar,” he wrote on Twitter.

But others say this latest dance with disaster is evidence that people should not store their wealth with exchanges. “What we’re seeing now is a reminder of the importance of crypto custody,” says Pascal Gauthier, CEO at Ledger, which makes wallets to allow people to manage their own crypto. “You don’t own your crypto unless you use self-custody.”

Updated 11-9-2022, 5:30 pm EST: This article has been updated to reflect Binance’s statement that it would not acquire FTX after all.

Ethereum’s ‘Merge’ Is a Big Deal for Crypto—and the Planet

Ethereum’s ‘Merge’ Is a Big Deal for Crypto—and the Planet

Cryptocurrencies are often criticized for being bad for the planet. Every year, bitcoin mining consumes more energy than Belgium, according to the University of Cambridge’s Bitcoin Electricity Consumption Index. Ethereum’s consumption is usually pegged at roughly a third of Bitcoin’s, even if estimates vary. Although some 39 percent of the energy going into bitcoin mining comes from renewable sources, according to a 2020 Cambridge report, the industry’s carbon footprint is generally regarded as unacceptable. According to a 2019 study, bitcoin mining belches out between 22 and 22.9 million metric tons of CO2 every year.

The problem is that specialized computers powered by eye-popping amounts of electricity are needed to process and verify transactions of cryptocurrencies like bitcoin or Ethereum’s ether on blockchains, via a process called proof-of-work mining. In this system, thousands of computers all over the world (but mostly in the US, China, Kazakhstan, and Russia) vie with each other to solve a mathematical puzzle and earn the privilege of appending a batch of transactions, or “block,” to the ledger. The miner who prevails wins a crypto reward.

Most Bitcoin advocates will tell you that proof-of-work mining is essential to keep the network secure, and would never dream of tampering with something first conceived by the currency’s pseudonymous creator, Satoshi Nakamoto. But Ethereum is on the verge of a monumental change that will substantially reduce its environmental impact.

Ethereum, launched in 2015 by a 21-year-old whiz kid named Vitalik Buterin, is about to swap proof-of-work mining for an alternative system known as proof of stake, which does not require energy-guzzling computers. The Ethereum Foundation, a research nonprofit that spearheads updates and ameliorations to the Ethereum blockchain, says the shift will reduce the network’s energy consumption by 99.5 percent. The big switcheroo is known as the Merge—and it is slated to take place on September 14. 

What Is the Merge?

The Merge hinges on the fusion of Ethereum’s current proof-of-work blockchain with the Beacon Chain, a proof-of-stake blockchain that was launched in December 2020 but so far has not processed any transactions.

A couple of upgrades, scheduled to launch over the next few weeks, will lay the groundwork for a segue from one chain to the other. Justin Drake, a researcher at the Ethereum Foundation, says the way the process has been structured can be compared to a car switching from an internal combustion engine to an electric one. “How do we do that? Step one: We install an electric engine in parallel to the gasoline engine. And then—step two—we connect the wheels to the electric engine and turn off the gasoline engine. That’s exactly what’s going to be happening at the Merge,” Drake says. “We’ve had this parallel engine of the Beacon Chain for a year and a half—and now the old ‘gasoline’ proof-of-work engine is going to be shut off.”

After years of delays, the Ethereum community is positive that the long-awaited shift will finally happen, following a successful dry run carried out on a test blockchain, called the Goerli chain, on August 10. The fact that Buterin has a book titled Proof of Stake coming out in September is probably a coincidence.

How Will Ethereum’s Proof of Stake Work?

Talking about proof of stake is a bit like talking about French cheese: There are myriad varieties—with hundreds of cryptocurrencies claiming to use some version of the process. At its most basic, however, proof of stake is predicated on the idea of securing a network through incentives rather than hardware.

In this scenario, you don’t need an expensive mining computer to partake in the network: You can use your laptop to put down a “stake”—a certain amount of cryptocurrency locked in the network. That gives you the chance of being selected, usually via a random process, to validate a certain block and earn crypto rewards and fees. If you try to game the system, for instance by doctoring a block, the network will punish you and destroy, or “slash,” some or all of your stake.

After Layoffs, Crypto Startups Face a ‘Crucible Moment’

After Layoffs, Crypto Startups Face a ‘Crucible Moment’

In May, the venture capital firm Sequoia circulated a memo among its startup founders. The 52-page presentation warned of a challenging road ahead, paved by inflation, rising interest rates, a Nasdaq drawdown, supply chain issues, war, and a general weariness about the economy. Things were about to get tough, and this time, venture capital would not be coming to the rescue. “We believe this is a Crucible Moment,” the firm’s partners wrote. “Companies who move the quickest and have the most runway are most likely to avoid the death spiral.”

Plenty of startups seem to be taking Sequoia’s advice. The mood has become downright funereal as founders and CEOs cut the excesses of 2021 from their budgets. Most crucially, these reductions have affected head count. More than 10,000 startup employees have been laid off since the start of June, according to Layoffstracker.com, which catalogs job cuts. Since the start of the year, the tally is closer to 40,000.

The latest victims have been crypto companies, and the carnage is not small. On Tuesday, Coinbase laid off 1,100 employees, abruptly cutting their access to corporate email accounts and locking them out of the company’s Slack. Those layoffs came just days after Coinbase rescinded job offers from more than 300 people who planned to start working there in the coming weeks. Two other crypto startups—BlockFi and Crypto.com—each cut hundreds of jobs on Monday; the crypto exchange Gemini also laid off about 10 percent of its staff earlier this month. Collectively, more than 2,000 employees of crypto startups have lost their jobs since the start of June—about one-fifth of all startup layoffs this month.

The conversation around crypto companies has changed abruptly in the past year. In 2021, they were the darling of venture capitalists, who showered them with billions of dollars to fund aggressive growth. Coinbase, which went public in April 2021 at $328 a share, seemed to suggest an emerging gold mine in the sector. Other companies, like BlockFi, started hiring aggressively with ambitions to go public. Four crypto startups took out expensive prime-time ads in the most recent Super Bowl.

Coinbase was also focused on hypergrowth, scaling its staff from 1,250 at the beginning of 2021 to about 5,000 in 2022. “It is now clear to me that we over-hired,” Brian Armstrong, Coinbase’s CEO, wrote in a blog post on Tuesday, where he announced the layoffs. “We grew too quickly.”

“It could be that crypto is the canary in the coal mine,” says David A. Kirsch, associate professor of strategy and entrepreneurship at the University of Maryland’s Robert H. Smith School of Business. He describes the contractions in crypto startups as one potential signal of “a great unraveling,” where more startups are evaluated for how well they can deliver on their promises. If history is any indication, those that can’t are fated for “the death spiral.”

Kirsch has spent years studying the lessons of past crashes; he is also the author of Bubbles and Crashes, a book about boom-bust cycles in tech. Kirsch says that the bubble tends to pop first in high-leverage, high-growth sectors. When the Nasdaq fell in 2000, for example, the value of most ecommerce companies vanished “well in advance of the broader market decline.” Companies like Pets.com and eToys.com—which had made big, splashy public debuts—eventually went bankrupt.

Welcome to the Zombie Cryptocalypse

Welcome to the Zombie Cryptocalypse

In 2008, the backing reserve was basically houses. In cryptocurrency, I’m quite serious about this, the backing reserve is gullibility.

It sounds like you’re saying, one, crypto is all nonsense, but, two, the nonsense will continue indefinitely, because as long as you can invent money out of thin air, you can find a sucker to buy it. Unless governments step in to say you can’t do certain things anymore.

Yes. The good news is, there’s regulation coming. Treasury is looking at this stuff very closely because they basically have to make sure that these crypto bozos cannot screw up the actual economy where people live. And they would absolutely screw it up, because they’re idiots. And they got a taste of that in 2019 when Facebook did its Libra cryptocurrency, or tried to, and every regulator, central bank, and finance ministry in the world said, “No, you are bloody not.” Because Facebook didn’t know what they were doing and they were really arrogant about not caring that they didn’t know what they were doing. So basically, about a month later, the entire US government, Democrats and Republicans were united in this, squashed it like a bug.

So on the regulation question, are we talking about something like, if you have a stablecoin, you actually have to be audited and prove that you really have a dollar for every one of these stablecoins that you say is backed by a dollar?

That sort of proposal, yeah. There’s various versions of this, like requiring that stablecoins be issued by actual banks that are highly regulated and so forth. There have been proposed laws to this effect. None have passed, but these ideas are very much in the air.

The thing is that the regulators are reluctant to move too fast, and also they have restricted enforcement budgets. But I’ll tell you who really wants to regulate crypto: the money laundering cops. FinCEN are absolutely humorless cops who don’t care if they crush your business. And internationally, the FATF, who set rules that regulators are advised to follow if they want their country to be allowed to do business with anyone else. Those guys have put in a bunch of rules that came in 2021 about making crypto transactions more traceable. I think we’re going to end up with some sort of two-speed crypto market. You’ll have the entities that are known exchangers where people are traceable, and changing it back and forth to actual money is relatively easy, and then there will be another market which runs high on crack and is just incredibly unregulated and has a much harder time getting to the precious US dollars.

Most people don’t own any crypto, and yet you have Fidelity offering Bitcoin in 401(k)s, you have Wall Street institutions investing increasingly in crypto. How much could a crypto collapse affect the broader economy?

The main thing you have to worry about is that these bozos really want to get their tendrils into the world of real money. I think for a lot of them, that’s the endgame: get it into people’s retirement accounts. Now, the Department of Labor actually issued a notification in March warning financial advisers not to tell retirees to put their 401(k) into crypto. And Fidelity went and offered this product anyway. They really, really want to get into important products, because that way, when it collapses, they’re looking to the government becoming the bag-holder of last resort. And this is something to be fought against strenuously. It hasn’t happened yet, but we need to fear it.


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Terra’s Crypto Meltdown Was Inevitable

Terra’s Crypto Meltdown Was Inevitable

At a Mexican restaurant in North London a few weeks ago, a handful of small-time but remarkably discerning retail cryptocurrency investors predicted that terra and luna would crash. Several of them were scoffing at terra, or UST, a stablecoin whose price equivalence to the dollar is underpinned by algorithms and game theory rather than cash or collateral, and at the notion that it would maintain its peg in the long run.

The “Ponzinomics” of the project, they informed me, were just too risky. Only one of the investors seemed optimistic, out of nihilism rather than trust in terra’s solidity. He said that at some point UST’s price would grow well above one dollar per unit, and the coin’s promoters would decide to just keep it there and rebrand the stablecoin as an “inflation-resistant cryptocurrency dollar.” Another shrugged but conceded that all bets were off. “So far,” he said, “this story has always followed the most humorous timeline.”

You can bet a lot of people do not feel like laughing today. UST has lost its peg to the dollar (at the time of writing, you can buy it on cryptocurrency exchanges for $0.58), and its sister asset luna has plummeted from $82 last week to $0.02. A big chunk of the investment of around $60 billion in these cryptocurrencies was pulverized overnight, and more of it will follow as people scramble to get rid of their diminished coins.

Meanwhile this week, the wider crypto market is in turmoil as bitcoin fell to $27,000 after bleeding 8 percent of its value in 24 hours, and many other cryptocurrencies are trailing its descent. Tether, the world’s largest stablecoin, dropped under $1 on Thursday.

With terra, we are witnessing the crumbling of a project predicated on the notion that you can create money—and assign it a specific value—if people are willing to go along with the pretense that money has the value that crypto companies assign it, akin to role-playing in a video game.

A small subsection of hardline crypto believers would retort that in the age of post-gold-standard fiat money, most currencies are indeed just a collective delusion. But the fact that there is no government, central bank, economy, or actual usage underpinning terra matters. As Frank Muci, a policy fellow at the London School of Economics’ Growth Lab Research Collaboration, puts it, “It is similar to a bank run, except it’s a run on nothing.”

UST was marketed to the public as a stablecoin, a type of cryptocurrency whose value supposedly remains steady over time, creating a convenient edge against the wild price fluctuations of other cryptocurrencies like bitcoin or ether. With most stablecoins, that stability is guaranteed by currency reserves—whoever creates a stablecoin pegged against the dollar should theoretically keep an equivalent amount of dollars in a vault somewhere—or other collateral, including crypto. Except UST is an “algorithmic stablecoin” and has none of that. It is fully shielded from the real world, and takes pride in it.

On Terra’s own blockchain, UST has a symbiotic relationship with its satellite asset luna, which can be used to earn cryptocurrency rewards. It was always possible to exchange UST for luna and vice versa, and the blockchain’s own code always made sure that terra traded at a dollar a unit, while luna’s varying price was determined by algorithms keeping an eye on the market.