TBW #34: The crypto industry's teenage crisis

TBW #34: The crypto industry's teenage crisis

Read all about The Big Whale's 34th newsletter.

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To devour this week

🖊️ Editorial

🔥 Our exclusive news

⚡ ️ The Solana "risk"

🤖 Ledger at the top


Grown-up ✊

For the past few days, we've seen many crypto players jump on the bandwagon to explain that FTX's bankruptcy is primarily a massive "fraud".

But it would be wrong not to draw any lessons from this event. Because this affair is also a reflection of a crypto industry that is still very young, unstructured, and where a little of everything and anything is still accepted.

How many times have we heard "Yes, but it's crypto" or "Crypto is a sector a bit apart" to justify the worst practices 😫.

If it wants, as many aspire, to become a major industry, the crypto industry is going to have to grow up, move from adolescence to adulthood with all that that implies in terms of responsibilities.

Let's be clear, the challenge is immense. Everyone is concerned: investors (individuals and companies) who need to be more vigilant and demanding, entrepreneurs who still too often propose projects that are not very well developed.

The regulator too needs to be more involved and tighten the screws on systemic players, while perhaps giving more latitude to fledgling projects.

Finally, and above all, there are the media and influencers. Many of them are still in untenable conflicts of interest, paid handsomely by companies and projects in the sector to do their publicity, without any hindsight. FTX was one of the most generous companies in the business 💸.

It was to have a truly independent media outlet and allow the industry to grow that we created The Big Whale.



👉 FTX: employees trapped

While it's still difficult to know the extent of the damage, we do know that FTX's customers will lose a lot. At least a few billion dollars 😬. What is less talked about are all the FTX employees - a few hundred - who were paid directly via the platform and who will also lose a lot. "Our salaries were paid in USDT stablecoins on the platform and we no longer have access to our money," one of them tells us, who has no information internally. "Sam Bankman-Fried presented FTX as a bank you could trust and many employees didn't hesitate to invest all their savings in it", explains another. Other employees have even invested in the company. This summer, SBF offered teams the chance to invest in FTX shares and FTX US (its US arm) for cumulative amounts of up to 500.000 dollars...


Solana and SBF: dangerous liaisons


Long-supported by Sam Bankman-Fried, the Solana ecosystem, whose token collapsed in a matter of days, is fighting for its survival.

As the days go by, the number of collateral victims of FTX's fall continues to climb.

Yesterday, it was lending company Genesis, despite being recapitalised a week ago, that got down on one knee and said it had frozen its operations. But until then, the problems had only affected companies and not... blockchains.

Or, the situation could perhaps tip over in the coming days or weeks, as the 30-year-old former billionaire (he lost everything) had also invested in several projects like Solana, which he actively supported. "Solana is one of the main victims" of FTX's fall, Stefan Rust, founder of Laguna Labs, which develops projects in DeFi, explained a few days ago.

Crazy growth

The Solana blockchain and its associated token (the SOL) have been among the big stars of recent years. By 2021, its price had risen from $1 to $259, an increase of 25,800% 🚀.

This surge has made Solana a credible alternative to Ethereum, a protocol that is also used to develop decentralised applications, such as NFTs or banks without intermediaries.

But since the fall of FTX, SOL has been going through a real storm. Its share price has collapsed by just over 60% to less than... $15. A huge drop that has not been seen for other cryptos such as Bitcoin (-20%) and Ethereum (-23%).

This loss of confidence in the markets can be explained by the particularly close links between Solana and Sam Bankman-Fried's empire ("SBF"). FTX and Alameda Research, SBF's investment fund, were among "Solana's main backers and financiers", recalls Stanislas Barthélémi, crypto expert for auditing firm KPMG.

"Everyone focused on FTX's cryptocurrency, FTT, because it was the number one position in Alameda's portfolio, but we mustn't forget that SOL was in second place", he insists.

According to the Solana Foundation, which manages the interests of this ecosystem, Alameda currently holds 50 million SOL tokens ($700 million), equivalent to 14% of Solana's capitalisation.

Inversely, the foundation was also very close to FTX as it holds the equivalent of one million dollars on FTX (which are blocked), 3.24 million FTX shares (which are now worth nothing 😯 ), as well as tokens whose value has plunged in recent days.

The real issue for Solana are the 50 million SOL tokens still held by Alameda Research, which should be sold fairly quickly as part of bankruptcy proceedings in the US. With such high volumes, the price of tokens could plummet even further. By how much? It's hard to know.

The entire Solana ecosystem is shaking

Meanwhile, SOL is not the only crypto affected.

"SBF was involved in a lot of the Solana projects he was funding," confides a good connoisseur of the ecosystem. "This was the case for the decentralised exchange platform Serum, whose SRM token had been massively purchased by FTX. SBF had used this token, the value of which has continued to fall, to inflate FTX's balance sheet; the company explained that it held $2.2 billion worth of SRM, when in fact its total capitalisation was worth less than... $300 million. Today it is worth less than $100 million.

The SRM share price has fallen by 66% since the beginning of November, and FTX's 'hack' last weekend exacerbated this fall even further because the SBF company had access to Serum's infrastructure.

"Serum's update key was not controlled by Serum, but by a private key connected to FTX," worried Mango Max, a Solana developer, in a tweet.

"At present, no one can confirm who controls this key and its holder has the power to update Serum, possibly by deploying malicious code," he added.

To guard against this, Serum's designers were forced to "fork" its protocol, i.e. migrate it to another system. "Between Solana, Serum and the fall in prices, this produces an explosive cocktail for the entire ecosystem", insists Stanislas Barthélémi.

Another problem identified: the synthetic versions of bitcoin and ether circulating on the Solana blockchain have lost their anchorage with the underlying assets. The soBTC is now trading at just $1,300, while a bitcoin is currently worth $17,000.

The soETH, meanwhile, is trading at $200, while an ether is worth $1,200... The reason for this mismatch? These special tokens are issued by FTX. In bankruptcy, the exchange platform is naturally no longer able to guarantee that it actually holds the corresponding bitcoins and ethers.

"Virtually all the decentralised finance platforms in the Solana ecosystem have soBTC as loan collateral because they have long been accepted as the equivalent of bitcoin in the Solana space," analyses Meow, an (anonymous) founder of Jupiter, an application that belongs to the Solana universe. A cascade of liquidations is therefore to be feared, and these have already begun.

The total fixed value (TVL) in SOL in Solana's decentralised finance applications has fallen by 30% since the beginning of November. If we measure the fall in dollars, we are talking about a 70% drop and Solana is now only the 12th blockchain in this activity with $300 million in TVL, far behind Ethereum ($25 billion).

"The case of Solend, the equivalent of Aave on Solana, is significant because we can no longer do anything on it due to the dizzying fall in SOL," notes Stanislas Barthélémi.

FTX, Solana's "central bank"

The relationship between Solana and SBF went so far that most of the major projects developed on Solana received funding from FTX and Alameda. With one important detail: the projects were encouraged to store their cash on... FTX ☠️.

Although the situation is still unclear, it is likely that many projects will no longer have access to their funds.

Solana co-founder Anatoly Yakovenko tweeted that development company Solana Labs held no assets on FTX and had sufficient financial headroom for around 30 months. Another co-founder, Raj Gokal, meanwhile, said it was a "watershed moment" for the ecosystem, adding, "What doesn't kill us, makes us stronger".

"Nevertheless, we have to ask ourselves whether the projects in the ecosystem really have the funds they claim to have", asks one person familiar with the matter.

In the background, the collapse of the Solana ecosystem and its SOL token represent a threat to the very security of the protocol. As this is based on proof of stake (a technique that involves immobilising cryptos in software), its robustness is inextricably dependent on the price of the token. The cheaper SOL trades, the cheaper it is to mobilise a large number of them to take control of its blockchain.

"Solana is clearly caught in a negative spiral, but does that mean the project will disappear? No, because blockchains never die completely," stresses Stanislas Barthélémi. It remains to be seen in what state Solana will continue to live.


Pascal Gauthier (Ledger): "Platforms should be used to buy and sell cryptos, not to store them"

In an interview with The Big Whale, the boss of the maker of the Nano (S and X) looks back at the fall of FTX and all the questions it poses for the crypto industry.

The Big Whale: FTX has just gone bust in what looks like a massive scam. What's your take on the affair?

Pascal Gauthier: It's a very complicated situation because we don't yet have all the facts. What is certain is that there are many victims and that all this could have been avoided if cryptos were properly secured. That's what we've been saying for seven years at Ledger.

You have to realise that at FTX only a few people were able to access and manipulate the funds of more than a million customers. It's completely crazy. Fortunately, not all exchanges work like this. When you go to Kraken, they advise you to keep your cryptos yourself.

Does this case mark the end of centralised platforms?

There's been a debate between centralisation and decentralisation for years.

Lately we've been getting the feeling that centralisation was the way to go, with big players like FTX becoming really big, with crazy valuations ($32 billion for FTX before the scandal, editor's note), and considerable influence.

In the United States, Sam Bankman-Fried had become one of the favoured contacts of regulators and authorities, particularly on the subject of regulation. SBFs and other players in the ecosystem have been using crypto jargon for months to give themselves credibility, to make themselves unavoidable, when in reality they have very little to do with 'real' crypto.

FTX is just a very traditional, centralised marketplace... We had the same example with Celsius in the spring. For months, they talked about "DeFi", "decentralisation" to promote an ultra centralised product, exactly like FTX.

How do you explain the success of these players with regulators?

They speak the same language. It's very comfortable for a regulator to have a crypto player come in with a centralised solution. SBF was the wunderkind in the US because he was exactly what the regulators wanted to see and hear.

The best example is probably what he said about Bitcoin this summer (he said Bitcoin was not a good payment solution, ed. note). When we heard him, we thought he didn't believe at all in the value proposition of cryptocurrencies and decentralisation. SBF was just in it to make money.

Since the fall of FTX, there's been almost nothing but talk about Ledger. The best way to learn that fire burns is to get burned. You burn yourself once, and then you'll see that you won't do it again. That's exactly what just happened with FTX.

Many investors knew there was a risk and they've just experienced it. Some have lost a lot of money, and they won't want that to happen again, so they're taking a Ledger. The number of people who have turned to us since the crash is insane.

We've had one record-breaking day after another for over a week now, with daily sales of several tens of thousands of Nano (usually a few thousand). And it's not just hardware sales that are soaring: the Ledger Live app, which lets you manage the cryptos stored in a Ledger, has been downloaded more than a million times in recent weeks.

You don't have any supply problems?

We've anticipated everything with production lines, stocks, suppliers... Everything has been thought out for this kind of situation. The pace increased and we were able to manage it.

And what about the other exchanges? We saw that several of themlike Binance wanted to implement more transparent solutions...

It's all very well to want to improve things, to talk about "Proof of Reserves", but we need to bear one thing in mind: platforms should be used to buy and sell cryptos, not to hold them.

We have set up a custody solution for companies (exchanges in particular) with Nomura and CoinShares called Komainu. This system, which works with Ledger security, ensures key safekeeping as well as good governance to avoid cases like FTX.

Users are right to want more security, but we need to know what security we're talking about. An exchange has two solutions: either it takes a Ledger-style system, or it entrusts its corners to Komainu, which is an independent structure secured by technology like ours. The rest is not up to scratch.

Do you think the FTX affair will change everything?

We are living through an important moment for the industry. It would be a serious mistake to think that exchanges can be satisfied with "trust me" with a few changes like the introduction of the "Proof of Reserve" which, I would remind you, makes it possible to show that there are funds at a given moment, but does not prevent these funds from being transferred immediately afterwards...

The real solution would be for custody and exchange activities to be clearly separated. After that, if people want to go into DeFi, that's another story. With Uniswap and Paraswap you can do your crypto swaps and then you get them back into your Ledger.

Mastering DeFi and holding your cryptos yourself isn't necessarily easy. There are risks that go with owning your cryptos. Don't intermediaries have a bit of a positive?

Yes, of course, but it all depends on what the intermediaries bring to the table, and when it comes to custody, it's really very debatable, to put it mildly...

What's very interesting is that a lot of people refuse to unlearn what they learned with Web2. But once they've taken the plunge, once they've understood how it works, it seems obvious to them. It's just a matter of education. Web3 was lagging behind in terms of user experience and ease of use. We're working on it.

What's the goal?

We've always said that we wanted to do with the wallet what Apple did with the smartphone. Apple sells 250 million devices a year. That's a good target for us, I think (laughs). But to reach that target, we're already going to be selling a few tens of millions of devices a year.

We're currently at 5.5 million Nano units sold, and fairly soon we hope to exceed 15 or 20 million with the aim of selling 10 million Nano units every year. After that, to reach Apple's level, we're going to have to integrate into phones and computers, and we're working on that.

Will the crypto sector be permanently impacted by the affair?

The FTX affair is a vast fraud and has nothing to do with crypto. It's also interesting to see that the market hasn't reacted that much. It fell, but compared with the scale of the scandal, that's not significant. The fundamentals are still there, and we can even expect much better practices in the months and years to come.

This edition was prepared with ❤️ by Raphaël Bloch and Grégory Raymond. The Big Whale is a free and independent media. By supporting us, you are contributing to its development.

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