Last Week Part 1: Bean Exploited, Private vs Public Market Valuations, MakerDAO & Uniswap Make Moves
Another week, another catastrophic exploit in DeFi. Public vs private market valuations become a hot topic. MakerDAO and Uniswap keep pushing forward.
This week was a little less insane compared to last week in terms of the competing narratives. It felt pretty clear cut what was being communicated and by who. Here’s my rating of Crypto Twitter’s narratives from my curation system:
DeFi. 10 mentions — mainly around the events from Bean
Fundraising. 10 mentions — mainly due to absurdly good deals available on public markets
Stablecoins: 3 mentions — a few interesting moves from Circle and MakerDAO
Narratives: 3 mentions — news around Uniswap becoming an investor, NFT madness recognition and the sideways nature of the market
Regulation: 1 mention — mainly tied around Andre’s blog post and calling for more trust/regulation.
To summarise a lot of what happened last week:
Bean Finance, an experimental stablecoin protocol, got governance attacked for about $70m ($180m in total). This spurred a lot of talk about risk, regulation and trust
Fundraising/valuations dominated a lot of the chatter due to the clear disparity in public vs private market valuations emerging
Stablecoins continue to stay interesting with Circle and MakerDAO working their magic in the background
Meta-narratives being commented on as a reflection of the state of the market with regards to NFTs, Uniswap launching their venture arm, and the crab market we’re in
Alright, let’s get into it.
This is probably the biggest piece of news to dominate the headlines recently. Bean Finance, a stablecoin protocol, got hacked through a “governance attack”. Basically what that means is that the hackers purchased enough governance tokens, then used them to push a malicious code upgrade which allowed them to exploit the protocol and take a large chunk of the funds. Easily the largest on-chain governance attack we’ve seen to date. It’s sad to see this happen since even a simple time lock would have reduced the chance significantly. This used to be common knowledge in DeFi 1.0 builders although it feels like we’re all learning these lessons again at a higher cost.
Sophisticated monitoring tools for on-chain activity are only going to become more dominant as time goes on. This thread from Forta shows how the attacker’s activity was pretty suspicious before the attack happened and how monitoring tools may have raised some alerts to the team before the attack happened. Being a hacker on-chain is going to get harder as monitoring infra becomes better.
After the governance attack on Bean, I think people are going to start paying more attention — starting at examples from the past. The other thing that will become apparent is that trustless governance isn’t a great idea. We do need more checks and balances with safeguards rather than trusting that anyone who holds the token can make any change to the protocol. This is a big reason why I’m quite bearish on on-chain governance for layer 1s because you can have quite catastrophic consequences if the wrong hands get enough power.
This tweet hits so hard that I couldn’t not share it. The saying “there’s no free lunch” has been told to us since we were children, but we never fully appreciate the saying. DeFi yields are the same concept. Everyone loves the yield but no one really wants to understand how it’s being generated and what the real probability of them losing their money is. Often the yields and the real risk are so wildly off but because the yield is good enough and there’s size behind it, people close their eyes. In my view, Compound/Aave lending rates are the risk free interest rates of this industry.
I love hearing about more intelligent ways to distribute tokens beyond the blanket approach that is done today. dYdX’s incentive program is one of my favourite ones in the space given the thouthfulness of it and the power of using off-chain calculations. This forum post on changing the incentive scheme was great to see because of the strong use of data and entities outside of the team proposing how they’d like to see the off-chain calculations changed. This is going to be the future of incentive design.
A key trend I’ve seen over the past few years and never fails to disappoint. Whenever we have some figure head that is over emphasised, we eventually get some sort of “top” event that marks the end of their hero worship... until we have the next hero come onto the scene. It feels like a joke but if you watch carefully you’ll see each season’s hero cycle in and out. The real players are those that keep playing the game...
This is definitely one of the more interesting pieces of news I found in the past week with MakerDAO ramping up their integrations. For those of you that aren’t aware, Maker can essentially print unbacked DAI into lending protocols in order to increase the supply of DAI without requiring more borrowers. They already have an integration with Aave but scaling this out to Maple which has undercollateralised borrowers is very cool to see. Excited for the future of Maker.
I’m not the only one who is seeing the subtle moves that Maker is making. A combination of the factors listed below makes me think that many might be underestimating Maker. Their dominance with DAI being used as a real stablecoin is one that no algo stable has even remotely achieved outside of being used as a ponzi farming game. If maker can get more D3 integrations then they can increase the supply rate of DAI at a faster and more sustainable pace. There’s probably a world in which Maker stops being a lender altogether and just becomes a wholesale reseller for DAI. This would threaten FRAX’s goals and has a real shot of doing so.
Another highly recommended read from this week. The following outlines the initiatives of the Etheruem Foundation, their spend, treasury and what they’re focusing in on. A report like this has never really been released by the foundation so it was great reading it as an outsider. One thing that caught my interest was that they have $300m of non-crypto assets. I was wondering what those assets are and in what legal entity they’re housed in and who controls that. Questions for another day I guess.
We’re at a stage in the market where the best returns are hidden in plain sight. You just need to put in the hard work to manually go through each and every token to better understand it. Many people believe that the way to “make it” in crypto is to get in an early deal and then wait for it to list. That may have worked in the past but the game has changed again. All the alpha now lives in public markets but very few are willing to put in the work and everyone is looking for a quick flip or someone to tell them what to research.
This recognition of quality is where the best fund managers are playing right now in my view.
