With the help of Derek Robertson
Programming Note: On June 16th we are off Mondays but will be back in your inboxes on Tuesday.
Crypto crisis is just off the chain.
It’s also very much down to the chain. This differs from other financial crises as an across-the-board drop in crypto prices worries more cryptofinance businesses will fail and push markets even lower.
Much of the crisis is playing out before our eyes, visible to anyone who knows where to look.
That’s a big change from, say, the 2008 financial crisis, when huge icebergs of risk were essentially hidden by big banks and trading houses.
This is all part of the design of decentralized finance, where transactions are publicly recorded in real-time on blockchains, with copies stored independently on many, many computers at once.
That doesn’t mean investors, citizens, or even regulators can understand everything that’s going on. The computer programs that run blockchains record transactions in blocks of data that look like gibberish to most people, who need tools to translate them into a recognizable form.
And just because you can see a transaction taking place doesn’t mean you know who’s on either end of it. Even if you do, a participant’s full financial health is unlikely to be captured in the on-chain information. Much of the action is still happening off-chain. For example, when a crypto hedge fund is in danger of going bust, its fate may depend on frantic behind-the-scenes efforts to secure an old-fashioned dollar loan sent through the banking system.
But much can be gleaned from what is going on in the chain. It’s a dynamic that drives market behavior in real time, as well as the way and speed with which regulators – or anyone else – can analyze what happened in a crisis.
In traditional finance, regulators and the public learn about the state of the industry in different ways. After the 2007-08 global financial crisis, the Fed began conducting annual stress tests on major banks, examining their balance sheets to determine whether the banks were able to weather a crisis. Publicly traded companies issue SEC filings quarterly or within a few days of certain significant events. If something goes wrong, regulators can intervene after the fact with subpoenas.
In both traditional and crypto finance, industry rumors and news reports can complete the picture of where the risks lie during a crisis.
However, crypto also has on-chain analytics, which has spawned a sub-industry of companies reading the blockchain and reporting what they see there. Some of these firms have already produced after-action reports that shed some light on last month’s implosion of algorithmic stablecoin Terra. A report by Chainalysis has measured the impact of Terra’s collapse on confidence in stablecoins in general, by tracking a spike in redemptions of other stablecoins – users getting rid of them – around the time of the collapse.
A separate report by Nansen, another blockchain analytics firm, argues that on-chain evidence undermines the theory that Terra’s collapse was the result of a financial attack by a single sophisticated player.
On-chain analysis is also taking place in real-time during this week’s market tremors, which began when crypto lender Celsius suspended payouts.
This kind of transparency is notionally good for a market. But it doesn’t necessarily improve the functioning of the market. That’s partly because not every user is known: they’re all identified, with strings of numbers and letters, but only some of those strings have been linked to real-world entities.
In the case of Celsius, the market can see that it has deposited collateral in the form of Ethereum and synthetic Bitcoin on DeFi platform MakerDAO. If the price of Ethereum and Bitcoin falls, the risk that the loan will enter the liquidation zone without further collateral increases. The market is now watching in real time as the collateral cushion on the loan fluctuates.
Alex Thorn, head of research at Galaxy Digital, a digital asset financial services company, said these dynamics represent a marked departure from traditional finance, where less information about the health of the system is available.
“In a stress test situation, the Fed may have direct access to data,” said Thorn, who previously worked at Fidelity. But in the case of the crypto crisis, he said, “The whole world can see Celsius’s MakerDAO vault.”
In some cases, this replaces the general uncertainty that prevails during financial crises with a more acute form of uncertainty. When market participants see a large loan moving near liquidation territory, they tend to wait and see what happens with it, Thorn said. “That freezes the market a bit.”
As of Friday afternoon, the market is facing a growing number of places to look for on-chain risk. Hong Kong-based lender Babel Finance temporarily suspended withdrawals today and hedge fund Three Arrows Capital is reportedly struggling to stay afloat as the market closely watches addresses being attributed to the company.
At least those investors who are being hosed can take comfort in knowing that their pain is producing a rich dataset that will support public understanding of blockchain finance for years to come.
Yesterday afternoon, the FTC voted to release it to Report on the use of AI to mitigate online harms such as fraud and illegal content – here are some key takeaways as the Commission, now in its second year as Chair and tech watchdog, adopts a more aggressive stance to monitor technology-related policy issues Lina Khan:
- The report is overall deeply skeptical of the use of AI tools to moderate the internet, and ultimately more concerned about their unaccountable use by private actors: “The main conclusion of this report is therefore that governments, platforms and others must exercise great caution when using either , or relying too heavily on these tools, even for the important purpose of reducing damage. “
- Additionally, regulators are concerned that the tools themselves could be too rudimentary to achieve their stated goals at all, writing that “the datasets supporting them are often not robust enough or accurate enough to avoid false positives or false negatives”.
- The report calls for more transparency of the companies that develop these tools, saying that “seeing and enabling research behind the opaque screens of the platforms (in a way that respects users’ privacy)” is necessary to put them into a general policy framework integrate.
And when it comes to legislation, the FTC is straightforward: “Congress should generally stay away from laws that require, require, or pressure companies to use AI tools to detect malicious content,” and that ” any initial legislative focus should prioritize transparency and accountability. “- Derek Robertson
Prada and the jewelry house Bulgari both recently announced Metaverse projects, the latest developments in the budding cozy relationship between fashion and VR world.
Prada launches an NFT collection that will be tied to gender-neutral real-world clothing and various perks for shoppers, and a Discord server “where Prada fans can discuss fashion, art, film, music and Web3.” Bulgari’s offering includes NFTs paired with outrageously expensive Ruby and emerald necklaces, as well as a digital-only jewel that the company is touting as the “first NFT jewel, an intangible creation that pushes the boundaries of materiality.”
The concept of the “digital twin” is a key selling point for NFT advocates, who see it as an element of the online “Permanent Identity” They say the blockchain technology makes it possible. As for why high-end companies like Prada and Bulgari are so interested in the space, there’s a much less shaky explanation. The Metaverse is largely fictional for now, there’s not much they actually need to do do Aside from raising their flag and targeting their brand to the forward-thinking rich – something both companies have been doing for a long time. – Derek Robertson
Keep in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Konstantin Kakaes ([email protected]); and Heidi Vogt ([email protected]). Follow us on Twitter @DigitalFuture.
Ben Schreckinger reports on technology, finance and politics for POLITICO; he is a cryptocurrency investor.
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