31 Dec 2022 Year In Review – Part 3
In A Sea Of Bearish News, The Ethereum Merge Shines Bright
September
Solana’s DeFi woes continued as OptiFi, a decentralised options exchange, accidentally shut down its mainnet through a programming error and irrecoverably locked up $661,000 in USDC tokens.
After so many DeFi hacks and mishaps, the FBI issued a warning about DeFi vulnerabilities to cryptocurrency investors and urged a list of precautions to DeFi platforms, as well as suggesting to them that they create incident response plans. The statements came after $1.3 billion in funds were hacked in 3 months.
The much anticipated Ethereum Merge also took place in September, amidst wild speculation on whether it would succeed or fail. In the event, it went so smoothly that it almost felt like a nothingburger. The Merge was a change of Ethereum’s consensus mechanism from Proof of Work (PoW) to a Proof of Stake (PoS) consensus, which changed the way transactions are validated and new blocks are produced.
The Merge also saw the Ethereum chain split into several PoW spinoff coins post-merge, and other existing PoW coins like Ethereum Classic and Ravencoin experienced a tremendous rise in hash power as former Ethereum PoW miners began to mine alternative chains, as Ethereum’s mainnet converted to PoS.
October
In October, the Celsius drama continued as disgraced Celsius CEO Alex Mashinsky resigned amidst allegations that Celsius executives cashed out $17 million shortly before Celsius declared bankruptcy.
Terra founder Do Kwon became the focus of an international manhunt after absconding from Singapore. When South Korea issued an arrest warrant and Interpol issued a Red Notice for Kwon, he insisted he was not on the run, while tweeting from an unknown location.
In October, DeFi hacks continued at a frantic pace, Transit Swap was exploited for $21 million, although the hacker did return $16.5 million to the project and kept the remaining funds as a bug bounty.
Solana-based Mango Markets was also hit with an exploit for $114 million. The attacker was allowed to keep $47 million, and returned $67 million in a deal that Mango Markets would not press criminal charges. In just October alone, $650 million was lost in 44 hacks affecting 53 DeFi projects.
FTX won its $1.4 billion bid to purchase Voyager’s assets, after paying $51 million in cash and agreeing to pay an additional $60 million. FTX also partnered with Visa in a deal to issue crypto debit cards in 40 countries.
Tether announced that it had reduced its commercial paper holdings to zero, and replaced them with US treasury bills.
In related news, Keet added Lightning Network support for in-app payments, and Pear Credit, a P2P credit system, was also launched.
Icing On The Crypto Winter Cake: The FTX Saga
November
November started out with yet another hack, this time crypto derivatives exchange Deribit was exploited for $28 million on November 2nd, and halted withdrawals when an attacker gained control of its wallet server and drained the company’s hot wallets.
The same day, trouble began with Sam Bankman Fried’s (SBF) exchange FTX and sister company Alameda Research, as rumours began circulating about the value of FTX’s own FTT token, following a Coindesk article on the amount of FTT being held on the balance sheet of Alameda. FTX made statements to try and quell the rumours, but only days later, halted all withdrawals.
A couple days later, Changpeng Zhao (CZ), CEO of Binance, tweeted that due to Coindesk’s article, Binance would liquidate the remaining FTT tokens on their balance sheet which totalled around $500 million. Following CZ’s lead, an onslaught of FTX customer’s rushed to get $5 billion of funds off the exchange, which immediately caused liquidity issues.
The following day (November 7th), SBF issued a statement reassuring FTX customers that their funds were safe, despite withdrawals being halted and barring new customers. The day after that (November 8th), in an unexpected turn of events, SBF and CZ went on social media and announced that Binance would be acquiring FTX, in a conditional deal.
On the following day (November 9th) however, CZ announced that Binance would not be acquiring FTX, after performing due diligence and discovering the extent of the malfeasance that occurred behind the scenes. On November 10th, Bahamian financial authorities ruled to freeze FTX’s assets. On November 11th, FTX filed for bankruptcy.
Shortly after, BlockFi, which was bailed out by FTX over the summer, halted withdrawals citing the financial fallout from FTX’s bankruptcy, and a few days after that, Genesis, an OTC exchange, stopped withdrawals, impacting Gemini, a centralised exchange, which was founded by the Winklevoss twins.
Overall, the contagion from FTX had a negative impact on a wide range of exchanges, funds, and lending companies which reporting suggests may have all been connected or interdependent on each other, and in some cases, potentially even structurally integrated. The companies named in that reporting include: Genesis, Gemini, Sequoia Capital, Galaxy Digital, Gallois Capital, BlockFi, Crypto.com, Wintermute, Multicoin Capital, Coinshares, Amber Group, Pantera Capital, Nexo, Coinbase, Binance, and Celsius Network.
Also in November, Bitfinex was the whale sponsor for El Salvador’s Adopting Bitcoin 2022 conference, in collaboration with Galoy. Bitfinex CTO Paolo Ardoino took to the main stage during the conference, and presented the Bitfinex Freedom Manifesto, Bitfinex’s commitment to personal and financial freedom and freedom of speech.
In the manifesto, Bitfinex outlined its vision for personal and financial freedom and invited other actors in the industry to join in offering products and services which encourage, protect, and preserve personal and financial freedom and self-sovereignty.
December
As the FTX collapse continued to snowball, BlockFi filed for bankruptcy.
SBF spent much of the early part of December giving interviews and trying to claim he was unaware of what his subsidiary company Alameda research was really up to, while millions of FTX users demanded his prosecution. Alameda was headed up by SBF’s ex-girlfriend, Caroline Ellison, whose father Glenn Ellison was SEC Chair Gary Gensler’s boss at MIT.
SBF tried to shift blame to Caroline and plead ignorance, until December 12th when he was arrested in the Bahamas after US officials filed charges for wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy and money laundering, just a day before he was supposed to testify before Congress, about the FTX collapse. SBF is currently in custody in the US, having not contested an extradition order to return him back to the US to face charges in the Bahamas.
In other news, Terra founder Do Kwon, who is currently being sought for questioning by Interpol and faces an arrest warrant in South Korea for his role in Terra’s collapse, has been said to have been found hiding out in Serbia. South Korea has asked for Serbia’s cooperation in the investigation in an effort to make Kwon return to South Korea and face charges.
Like many in the space, we are watching both of these stories continue to play out, with great interest. There still may be further fallout stemming from the FTX collapse, which was initially sparked by the Terra implosion. Only time will tell.
What Can We Expect For 2023?
As anyone who has been around the crypto markets long enough already knows, they are anything but predictable. With the current macroeconomic outlook, it is possible that Bitcoin and crypto as risk on assets have some degree of volatility in the year to come, as the situation in traditional markets worsens and the economies of the west struggle to contain inflation and stave off recession.
It remains to be seen if the Fed will continue its policy of raising rates to combat inflation. The Bitcoin halving will not occur until its forecasted date of May 2024, so we may still have some unpleasant times ahead in 2023. At Bitfinex, we are no strangers to the cyclical nature of the Bitcoin and crypto asset markets which are heavily influenced by Bitcoin’s 4 year halving market cycle. As crypto veterans we tend to focus on signal more than noise and build during the bear market. In this regard, we have several exciting projects planned for 2023.
To kick things off, we’re finalising the documentation for Keet, and plan on making its code fully open source. We’re excited to see what the community will build with the tools we’ve designed. Also, be sure to stay tuned to Keet Mobile, an app for Android and iOS.
Synonym has also launched Bitkit, a wallet which leverages Hypercore, Slash tags, and Public/Private cryptographic key pairs and expects to offer a wide range of powerful new features, like accounts, decentralised social media, data feeds, in app widgets, and the much anticipated Pear Credit. The P2P revolution is already in full swing.
In 2023, Bitfinex Securities also expect to be moving forward as the technology platform supporting the government of El Salvador’s much publicised Volcano Token, as well as opening offices in Kazakhstan.
We’re building a P2P parallel financial system focused on providing our users with a more free, fair, and equitable alternative to the legacy system. Many of our most exciting offerings will be coming in 2023, so stay tuned, and join Bitfinex today.
Important Notes
Not Advice; No Reliance
Nothing in this article is financial, investment or other advice. Nothing in this article is an offer or the solicitation, recommendation or endorsement of any course of dealing. Any references in this post to returns are only hypothetical and not guaranteed. You may not rely on any information set out in this article and must conduct your own research if you wish to rely on anything in this article.
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