September 20, 2022

The biggest crypto news and ideas of the day

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Hello and welcome to The Node. I'm Daniel Kuhn, here to take you through the latest in crypto news and why it matters. In today's newsletter: Nasdaq launched a crypto custody service for institutional clients, crypto market maker Wintermute was hit with $160 million attack and China will extend its CBDC trial to four more provinces.

And I covered the recent vote to dissolve Tribe DAO, an early experiment between Rari Capital and Fei Protocol to share economic resources, which unravelled in governance disputes after an $80 million exploit.

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– D.K.

Today's must-reads

Top Shelf

Nasdaq Starts Crypto Custody Service for Institutional Clients: Nasdaq, the second-largest U.S. stock market operator, is starting a cryptocurrency custody service as it aims to cash in on the demand from institutional crypto investors. The exchange said it is open to working with crypto-native firms, although it doesn't have any plans for acquisitions in the short term.

Nasdaq's move into crypto follows a wider trend across Wall Street. Last month, BlackRock, the world's largest asset manager, said it will offer cryptocurrencies to its institutional clients.
Separately, Digital Transformation Capital Partners, which started as the venture capital arm of German telecommunications company Deutsche Telekom, raised $300 million for its latest fund focused on tech-based industries including Web3. Japanese conglomerate SoftBank was a primary backer.

Crypto Market Maker Wintermute Hacked for $160 Million: Cryptocurrency market maker Wintermute has lost $160 million in an attack, which has not affected its over-the-counter services. CEO Evgeny Gaevoy said that the company is approaching the exploit as a "white hat" event (meaning it was "pen-tested" to improve the platform, not for the attacker's financial gain) and asked the hacker to get in touch.

Wintermute is the latest in a long list of crypto projects to be stung by hacks over the past few months. Crypto bridge Nomad had nearly $200 million drained in August shortly before DeFi protocol Curve Finance had $570,000 stolen.

China Will Extend CBDC Trial to Most Populous Province, Guangdong, Three Others: The People's Bank of China plans to extend the trial of its e-CNY digital currency to Jiangsu, Hebei, Sichuan and Guangdong. No timetable was offered for the expansion of what is widely considered to be the world's most advanced central bank digital currency pilot.

Over the past two years, around 140 million people have opened e-CNY (aka digital yuan) wallets, and transactions worth 62 billion yuan ($9 billion) have been carried out as of last October.
Meanwhile, the Hong Kong Monetary Authority plans to start trials of its CBDC in the fourth quarter. The city's de facto central bank will look at use cases and design issues that could benefit the regional trading hub.

ICO Promoter Ian Balina Charged With Violating Federal Securities Laws: Crypto influencer Ian Balina – host of the "Ian Balina Crypto World Tour" and YouTube channel "Diary of a Made Man" – is facing charges related to his alleged promotion of the SPRK initial coin offering (ICO) in 2018. In a curious legal maneuver discussed in the Ballina filing, the U.S. Securities and Exchange Commission (SEC) has claimed oversight over the entire Ethereum network due to the consolation of network validators in the U.S.

Commentators have noted that the SEC's language in the Ballina lawsuit represents a first (giving it increased justification for policing any and all Ethereum-based projects), though it may not have legal standing.
"No code" software company Sparkster and its CEO, Sajjad Daya, have settled with the SEC. Earlier this year the project converted $22 million in ETH raised from its $30 million ICO to USDC, without releasing a product.

U.S. Treasury Wants Public to Comment on Crypto's Role in Illicit Finance: The Treasury Department listed over 20 questions, asking the general public to weigh in on how it's approaching cryptocurrencies and their possible role in illegal activities. The regulator also noted that various federal officials would create a "coordinated action plan" to address the possible national security risks posed by digital assets.

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Putting the news into perspective

The Takeaway

Lessons From the Tribe DAO Divorce

It's a bit of deja vu for victims of the $80 million Rari/Fei attack last April who today voted to disburse funds "making them whole." The marriage between the two decentralized finance (DeFi) protocols, Rari Capital and Fei Protocol, will also be dissolved, marking the beginning of the end to what was once one of DeFi's most celebrated unions.

Last year, TribeDAO, the parent organization of the algorithmic stablecoin issuer Fei, merged with decentralized lending protocol Rari Capital. It was a massive moment for DeFi, involving two rising star developer teams, billions of dollars in capital and a proof-of-concept for on-chain M&A through protocol politicking.

Rari gained a fast-growing stablecoin, FEI, while the Fei Protocol gained access to Rari's borrowing and lending pools. And neither project had to dissolve their distinct dev teams. (It's worth stating that FEI suffered stability issues at launch and, as one of the few fully crypto-backed (or algorithmic) stablecoins, was always on the more "experimental" end of the spectrum.)

A16z's Jeff Amico at the time called the merger "a new primitive to align incentives between Web3 communities going forward." RARI token holders were given the opportunity to swap their holdings for TRIBE, earning staking in the powerhouse project – and allowing both protocols to operate under a shared vision and shared economic interest.

(Kelly Sikkema/Unsplash, modified by CoinDesk)

Divided tribes

All was going according to plan until Rari's core product, an "open money market" called Fuse, was attacked. Fuse enabled anyone to create liquidity pools to trade any number of Ethereum-based tokens, often against the FEI stablecoin. On Apr. 30, it was hit with an $80 million re-entrancy attack, all but draining the project's liquidity.

A vote was called to reimburse victims of the attack using Tribe's treasury. It passed with high participation and about 75% of voters in favor. But details of the payout scheme were scant in the initial vote, and once there was a better sense of who would be paying for whom, Fei's leadership reneged on the vote.

Fei leadership called for another vote a few days later, after declaring the initial "snapshot" process non-binding because it wasn't "on-chain." Rari's victims would still be reimbursed under a new plan, but only partially. This, of course, led to months of bickering, personnel changes and calls to dissolve the Fei-Rari union.

Sam Kazemian, the founder of Frax Finance (which lost about $12 million in the Fuse attack), called it "a new low for DeFi." Fei, which had earlier raised $1.3 billion in ETH, had the reserves to make all of the attack's victims square, but began to question whether it'd be the right move considering a worsening "macro-economic" environment and industry-wide market rout.

Today, the decentralized autonomous organizations (DAO) are more or less back where they started, after a series of four governance votes over the past months. It's a story of partisan politics, self-interested voting and the challenges of community governance in an age where decisions are supposed to follow pre-programmed code.

The final vote passed with 99% in favor of the plan, with no ability to veto the decision. FEI holders will be given an escape hatch to cash out for another stablecoin, DAI, while TRIBE holders will receive pro-rata shares of the DAO's assets. Shared governance is being dissolved.

If there is a wider lesson to the Rari-Fei breakup, it's one of disaster preparedness. Governance will always be a messy issue, especially in times of crisis. DAO mergers are not impossible going forward, but it's becoming clearer that supposedly unified communities can fracture whenever there are multiple economically incentivized groups. There's no shared understanding of what's fair when money is on the line. So maybe there's a market for DAO prenups.

– D.K.

The Tron Grand Hackathon 2022 Is Back for Season 3*

Hosted by Tron DAO and BitTorrent Chain, the Tron Grand Hackathon 2022 is back again, this time with a prize pool of $1.2 million. The competition brings another exciting opportunity for yet-to-be-discovered talents to show their skills and help accelerate the future of Web3 through unique crypto project proposals.

Whether you're a developer, entrepreneur, designer or blockchain enthusiast, the Tron Grand Hackathon is the perfect opportunity for you to grow the ecosystem and get your ideas seen by crypto experts, KOLs and the community.

Continue reading here

*This is sponsored content from Tron.

What others are writing

Off-Chain Signals

SEC Claims All of Ethereum Falls Under US Jurisdiction (Decrypt)
Don't Let the Crypto Winter Go to Waste (Bloomberg)
Why is Iran turning to a new 'digital rial'? (Aljazeera)
How fashion should navigate the world of crypto wallets (Vogue Business)

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