TBW #37: Binance's Proof-of-Reserve bluff

TBW #37: Binance's Proof-of-Reserve bluff

Read all about The Big Whale's 37th Premium newsletter.

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🤖 The Big Focus


New continent 🌍

The fall of FTX is a major topic and it's only right that we talk about it. But we shouldn't let this scandal, certainly off the charts, prevent us from seeing everything that continues to develop in Web3, particularly in... Africa 🧐.

In just a few years, Africa and its 1.2 billion inhabitants have become one of the hottest areas in terms of projects and adoption. Figures vary, but there are said to be between 40 and 60 million crypto holders on the continent, according to Chainalysis (roughly 250 million in total).

The reasons for this dynamic are well known: because of the lack of financial infrastructure, Nigerians, Togolese and Kenyans are turning to cryptos to be able to pay, send each other money, keep their savings and develop their business 🚀.

And the trend is not about to stop. The American company Strike has just announced the roll-out of its services in several African countries (Nigeria, Ghana and Kenya).

It will enable transactions to be made using the Bitcoin network and funds to be received in local currency, all almost instantaneously and at almost no cost.

Other projects are in the pipeline and will be released in 2023. The Big Whale will obviously be going to see them in situ 👀.

In the Web3 universe, there's a lot of talk about Europe or North America, but the "new continent" may not be the one we think.



👉 Proof of reserve: Binance's bluff

A "breakthrough", "progress"... Ever since Binance announced that it would be introducing a Proof-or-Reserve system, part of the ecosystem has been full of praise for the biggest exchange platform on the planet. The compliments are all the more plentiful given that the company headed by Changpeng Zhao, aka "CZ", has announced that the system will be audited by Mazars. But what is really going on? According to our information, the French firm will not be auditing the entire reserve of the platform registered in many areas of the planet - particularly in Europe. "Contrary to what Binance claims, it only concerns part of the platform's accounts", explains a reliable source. Another source added that the reason for the partial audit was that the exchange's organisation was "very complex" and "not very easy to understand". Not necessarily very reassuring 😅.


MakerDAO: The temptation of traditional finance

The protocol recently decided to invest the reserve of its stablecoin, DAI, in traditional assets such as US government bonds. A decision that is far from unanimous in the community.

👉 First of all, what is MakerDAO?

MakerDAO is the decentralised autonomous organisation (DAO) that manages DAI, the fourth largest dollar stablecoin on the market ($5 billion capitalisation). The protocol was launched in 2018 on the Ethereum blockchain.

Unlike centralised stablecoins such as USDT ($65 billion) and USDC ($63 billion), DAI does not rely on a traditional dollar reserve.

Its value is "backed", i.e. supported, by crypto-assets, which is not without consequences: to ensure the stability of the reserve, an over-allocation mechanism is needed in case crypto-asset prices fall.

An example: you need to send $1,000 worth of ethers to generate 500 DAI. In the event that ether falls by around 50%, the collateral is liquidated on the markets, but the DAI remains stable. Pretty clever 🤓.

In recent months and to cope with the continuing depreciation in crypto prices, the DAI reserve has been fed mainly by other stablecoins (USDC, GUSD, USDP). Currently, the DAI is thus "protected" by around $7.7 billion worth of cryptos placed as collateral by the community, which is remunerated for this.

Maker is remunerated by the Gemini exchange platform with 1.25% on the GUSD (Gemini's dollar stablecoin) it holds if its balance is maintained above $100 million. According to the latest figures, Maker holds $500 million in GUSD.

As a sign of the trend, Maker is also in talks with platform Coinbase for a $1.6 billion loan in USDC against a 1.5% yield.

All these decisions were voted on by the community, i.e. the holders of the MKR governance token, whose price is hovering around $600.

Basically MakerDAO had not planned to put its reserve to work; its objective is to maintain parity with the dollar. But that was without taking into account the new macroeconomic environment and the very strong competition from other stablecoins...

👉  A problematic dependence on the USDC

Since 2020, most of Maker's reserve has relied primarily on the USDC stablecoin (nearly 50%) issued by American company Circle. "This stablecoin has the advantage of being highly liquid and regulated in the United States, but its weight has become too great and its returns are limited with the new market conditions," concedes Sébastien Derivaux, who is responsible for risk management at MakerDAO.

According to financial analysis firm Kaiko, the remuneration on the USDC in the Aave lending protocol has fallen from 2.3% to 0.6% in the space of just 15 months. As a result, MakerDAO saw its least profitable quarter since at least 2020 between July and September.

To adapt, the organisation is exploring other options such as investing in traditional finance assets (the word is out 😬 ). "There are other ways of finding returns," confirms Sébastien Derivaux.

This decision also comes at a time when the USDC is particularly exposed. This summer, several of its addresses were frozen after US sanctions against Tornado Cash, a tool that anonymises cryptocurrency transactions. 

👉 US government bonds

But back to the "real world" assets Sébastien Derivaux is talking about. At the beginning of October, the Maker community decided to invest $500 million in US Treasury bonds with a short maturity, i.e. "1 year".

Why? Because interest rates have soared and MakerDAO can take advantage of this. The yield on US bonds has risen from 0.04% to 4.7% in just over a year! A system that its competitor  Circle (which issues USDC) has understood well and has already been using massively for months.

Maker has also set up other arrangements. "We lend DAI to projects such as those of Société Générale ($30 million) or the American Huntingdon Valley Bank ($100 million)," explains Sébastien Derivaux.

"The aim of these investments is to finance projects that demonstrate that DeFi has a positive impact on society, he continues. "We could eventually diversify into corporate bonds," explains the Frenchman, who concedes, however, that this will take time.

And so much the better, because this gradual shift towards traditional finance and its "centralisation" is not to everyone's taste. "Maker goes where the yields are, and at the moment they're in US government bonds," explains one industry expert.

"People were starting to leave DeFi, so we had to be able to remain attractive," stresses Sébastien Derivaux. And traditional financial products are part of the solution, at least for the next few months. At least for the next few months.

In a note published in mid-October, analysis firm Kaiko explains that this decision is "good in the short term", but also stresses that it has an impact on the decentralised dimension of the DAI and raises questions about the long term.

To reassure the community, this pivot towards decentralised finance is supposed to be temporary. Investments in "real world" assets should be limited to 25% of the reserve within three years. "However, this date is not set in stone. It could be pushed back depending on regulatory developments and market conditions", Sébastien Derivaux concedes.

In the long term (if all goes according to plan), Maker's reserve should consist solely of ethers, the cryptocurrency at the heart of the Ethereum ecosystem. "The aim is to make as much profit as possible to acquire as many ethers as possible and dispense with traditional finance," explains Sébastien Derivaux.

"Holding ethers or any other decentralised asset is the only way to resist regulation because reserves will be beyond the reach of any sanction," Kaiko points out.

To date, traditional assets account for two-thirds of Maker's revenues, valued at just under $1m a month ($4m in the third quarter, according to analyst firm Messari).

👉 The centralisation dilemma

So what to do? "I hear the criticisms," says Sébastien Derivaux, but no one has yet found an entirely decentralised solution. If there was one, we would obviously have chosen it."

Projects that have remained exclusively in the decentralised universe are not at their best. One of the most striking examples is the RAI stablecoin. Currently, its holders are exposed to negative returns of 6% 🫤.

"What is happening at Maker is, in my opinion, an illustration of DeFi at a crossroads," analyses Stanislas Barthélémi, crypto expert at KPMG. "We end up with two contradictory trends: on the one hand, a DeFi that wants no connection with traditional finance and risks being marginalised, and on the other, a TradFi-DeFi hybridisation that creates risks vis-à-vis regulators and reinforces the centralised nature of DAI", he stresses.

For him, this vagueness is maintained by co-founder Rune Christensen: "He has put to the vote a proposal that is ideologically pure in the long term (doing without real-world assets and de-anchoring with the dollar to avoid censure from Washington), but which is not simple, if not impossible, to implement and clashes with reality."

👉 Governance ill-suited to the challenges?

Would Rune Christensen have too much power? What is certain is that the project is not sufficiently decentralised in practice, notably due to the non-participation in votes of many members - venture capital funds and exchange platforms that refuse to take a position for legal or neutrality reasons.

During the last major vote organised by the community at the end of October, Rune Christensen's voice represented 74% of the votes cast 😵💫. We've had better decentralisation!"

"MakerDAO is one of the oldest DAOs and has actually been operating in this form since 2020, but the governance models are still too simplistic to be resistant to attacks from inside or outside what are known as DAOs, so it's a term that needs to be put into perspective," analyses Stanislas Barthélémi.

The symbolic case of MakerDAO was the subject of an analysis by Vitalik Buterin, co-founder of Ethereum, in a long blog post published on 5 December. "The protocol and its financial reserves have not been attacked because the majority of MKR tokens are held by a fairly small group who are not prepared to sell because they believe in the project. This is a good model for launching a stablecoin, but not for its long-term management and development. For decentralised stablecoins to work in the long term, they need decentralised governance."


👉 Towards a new system?

The Maker community spoke out on 31 October in favour of the "End Game" proposal put forward by Rune Christensen. This plans to reorganise Maker into a series of "MetaDAOs" that will autonomously develop their own business models.

These MetaDAOs will operate in parallel with the main protocol and should have their own governance token.

"MakerDAO had become too complex, so we had to break it up into several sub-parts", explains Sébastien Derivaux. "We'll keep the Maker Core structure above, which will look after supervision, while the MetaDAOs will focus on more concrete applications," he continues.

This new organisation will enable new economic incentives to be put in place to attract more users. "Yield farming mechanisms (returns from cryptocurrencies) will be making their arrival", confirms Sébastien Derivaux.

In any case, all these changes are not without consequences for the project and its future. According to our information, a schism in the community that would result in a "fork" (separation of opponents who would retain the operation of the historical protocol) cannot be ruled out.

Even in DeFi, the temptation of traditional finance can come at a price.


"Stax": Ledger's bet to go mainstream

The world leader in digital asset custody has just unveiled its new digital wallet. The aim? Reach the general public.

This is what we call a well-kept secret. After months of work behind closed doors, Ledger has just announced the launch of its new digital wallet dubbed "Stax".

The product was presented on Tuesday in Paris at the now famous annual unicorn conference 🇫🇷 (Op3n) where The Big Whale 🐳 was in attendance. "This is an important step in Ledger's development", said its CEO, Pascal Gauthier.

For this project, the world leader in digital asset preservation pulled out all the stops as it worked with... Tony Fadell. The 53-year-old American is quite simply the creator of the iPod, which made Apple a global success in the 2000s.

"When Ledger came looking for me, I first thought about it," explains Tony Fadell. And then I said to myself that I had to go and invent the iPod of crypto." Nothing less!

A real challenge for Ledger

In contrast to Ledger's previous products - the Nano S and X - the Stax is not presented as a USB flash drive.

It is a kind of credit card with a dual touch screen (it accepts more than 5,000 cryptos) that offers a larger surface area and simpler use than the Nano where there is a small screen and two buttons.

"The aim of Stax is to bring the security of the Nano with simpler use for the general public," stresses Charles Guillemet, head of technology at Ledger.

Is this a guarantee of success? Far from it, and Ledger knows that the challenge is huge. While sales have risen sharply in recent weeks thanks to the fall of FTX - Ledger has sold more than 6 million devices since its creation - users need to get hold of the product. And agree to pay €279; the Nano X costs €149.

The Stax will try to make people forget the commercial failure of Ledger Blue, a wallet with a screen released in 2016 that never found its audience. This may be due to a less polished design and few additional features compared with the Nano. And also the price: like the Stax, it was sold for 279 euros.

Several customers reacted to the Stax's by explaining that it was "too expensive". The first Stax are due to arrive at the end of March 2023. Ledger's investors, however, are reassuring. "When it was launched, the iPod was also considered too expensive and that didn't stop it from becoming a huge success."

It did, however, take two-three years before it really took off.

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