Stress in the system
What we are witnessing here is a typical liquidity stress in the system. It probably started off with Luna losses and then spiraled. We saw lending rates going up significantly over the past couple of weeks as liquidity dried up and we already got a first sign of the level of distress when BlockFi raised a painful down round last week. But that should have only been the beginning…Celsius had to halt all withdrawals last Sunday and that was probably what kicked off the major panic that we are seeing in the market now. This action has not only put them under state investigation but also led them to reportedly engaged a major wallstreet bank as advisor and a restructuring lawyer. Things are looking very grim and everyone’s eyes is on their MakerDAO DAI loan and at what price their wBTC will have to be force liquidated. They keep topping up so it’s now >14k so still have a bit of buffer but remember user funds can still not be withdrawn.
Another sign of fear in the system is MakerDAO has voted to cut off Aave from its direct deposit module in fear of a liquidity event and Celcius stETH unwind. Even protocols are now fearing for insolvency a true bank run. We also saw stress, unsurprisingly again including sizable stETH over at Three Arrows Capital. They reportedly have missed margin calls and got force liquidated — this is huge because they are one of the largest institutions in crypto and a default would be (is?) bringing the whole market nuke. We are also seeing more signs of stress over at large players that have announced sizable job cuts, -18% at Coinbase, 20% at BlockFI, and -5% at Crypto .com just the past week, i’m afraid we will hear more of that as this bear market continues.
Ethereum Difficulty Bomb Delayed
The Difficulty Bomb was supposed to encourage support for the proof of stake chain post-merge. The idea is that once detonated, the difficulty bomb would exponentially increase the difficulty level of puzzles required for proof of work mining, ultimately making that mining impossible to do. This can be seen as a sigh the merge is being pushed out as you don’t want the time lag between difficulty bomb and POS transition too long otherwise you end up with nobody committing hash power for the final blocks. Overall a bit of a disappointment after the successful merge or Ropsten test net last week. I don’t think however that this is the main reason for the stETH/ETH spread widening. I believe that divergence has more to do with liquidity stress at some of the major holders. Also regarding Ethereum we had another headline this week that might have gone under. Goldman has executed its first ETH non-deliverable forward a sign institutional adoption is still progressing.
Circle launching € stable coin
Circle is behind the second largest Dollar stable coin USDC and it was an open secret that they are aiming to enter the second largest currency EUR. They’ve gone the more regulated approach however said their Euro Coin (EUROC) will be fully backed by euro-denominated reserves held in the custody of financial institutions that fall “within the U.S. regulatory perimeter” It is therefore unclear how a euro-backed stablecoin issued under U.S. standards might be perceived by EU leaders, and how Circle is anticipating the EU’s pending legislation. The other obvious problem and why a EURO stable coin endeavor in the past has not been too fruitful is the -ve yield in Europe. That is changing however with rates rising globally and might explain the timing of this launch.
