TBW #59: Lessons from the Ledger crisis

TBW #59: Lessons from the Ledger crisis

Read all about The Big Whale's 59th Premium newsletter.

Hello Whales and welcome to the little newcomers who have just joined us in the Premium edition! There are more of you every week. Thank you so much 😍

To devour this week

🖊️ Editorial

🗣 Our exclusive news

🎙️ Pablo Veyrat

💶 European attractiveness


Lessons from a crisis

A living hell 😬.

There are no other words to describe what Ledger has just been through. After a week of criticism on social networks, the world leader in digital wallets announced on Tuesday that it was postponing the launch of "Recover" and that the code for this new service would be available as "open source".

In a blog post, Ledger boss Pascal Gauthier went back over the completely botched announcement of this new service on which the 🇫🇷 unicorn has nonetheless been working for two years! "Our communication error took everyone by surprise and didn't allow our users to fully understand Ledger Recover", he explained.

As a reminder, the aim of Recover, which was spotted fortuitously 10 days ago by a customer, is to offer a backup solution for recovering one's seed phrase in the event of loss. Although optional, this service - which aims to "democratise" the use of wallets, particularly the Nano X - changes their nature somewhat, hence the protests from a (large) part of the community, and Ledger's backpedal....

This sequence is a triple lesson both for Ledger, and more broadly for all companies in the crypto ecosystem (and even beyond).

The first is that being the leader in your sector exposes you enormously. Ledger is world-famous and its millions of customers are particularly demanding 🧐.

The second is that communication is crucial, especially in sectors like web3 and on subjects as important as...

The third, and probably most important, is that you need to listen to your community. While the goal of getting as many people on board as possible is totally laudable, it can't be done against those who have supported you from the start 🤝.


Our exclusive news 🔥

👉 Coinbase weaves its web outside the US

No longer too dependent on the US market. For months, Coinbase has been exploring every possible avenue to expand its geographical footprint and escape, as far as possible, the regulatory onslaught of the stock market watchdog 🇺🇸 (SEC).

A few weeks ago, the Wall Street-listed exchange announced the launch of a derivatives platform in Bermuda for its institutional clients outside the US.

According to our information, Brian Armstrong's group has just signed a partnership with European platform Bitpanda to continue along this path. The aim of the partnership is to enable Coinbase's professional customers (Coinbase Institutional), including banks and investment funds, to invest in crypto products in the European Union.

"With this partnership, Coinbase continues to expand outside the US and opens up other revenue channels," says a person close to the company.


Mapping the European ecosystem

All European projects that wish to do so can enter their information and appear in "The Ocean".

Each project included in this mapping will have the opportunity, after a vote by The Big Whale's 300 founding subscribers ❤️, to:

👉 Pit the project to The Big Whale community (20.000 members)

👉 Be visible (with a listing) within a dedicated space in The Big Whale

The questionnaire is available by clicking here, and only takes a few minutes. 😎


Pablo Veyrat (Angle): "We almost stopped everything"


By Grégory Raymond and Raphaël Bloch (in Paris)

A little over two months after the Euler Finance hack, Pablo Veyrat* looks back at the episode that could have taken Angle's life. The co-founder of the protocol also talks at length about the future of the euro stablecoin, agEUR, as well as the challenges facing decentralised finance!

The Big Whale: At 25, you have the opportunity to do a lot of things, and you chose to work in the crypto ecosystem, and more specifically in decentralised finance. Why such a choice?

Pablo Veyrat*: I discovered decentralised finance at the end of my studies. I was at Polytechnique, and that's where I had my first course on cryptocurrencies, then I had a second one when I went to Stanford in the United States. I was immediately fascinated by the subject.

Given my engineering training, it's clear that I could have gone to work in the ecological transition, which is in fact the path most people my age are taking, but I saw in DeFi the opportunity to build a fairer and more efficient financial world.

The traditional system doesn't work well, there are too many middlemen who are expensive and work too opaquely... When I understood how DeFi worked, and what transparency allowed, I told myself that we could create some really interesting things.

When did you first come into contact with cryptos?

It was in 2019. I had obviously followed the Bull market in 2017 because I had friends who had invested, but I hadn't looked too hard to understand. To me, it all looked like a bubble, a Ponzi scheme 👀.

It was really when I took the time to understand the technical fundamentals of cryptos and especially DeFi that something clicked. In 2020, I decided to give it my all.

It happened pretty quickly... You immediately had the idea of creating the Angle protocol?

I first applied to a lot of crypto companies, but they didn't want me (laughs). It was only afterwards that I decided to develop my own protocol, Angle, whose main function is to issue a euro stablecoin: the agEUR.

With hindsight, I think it's a good thing I wasn't selected by other companies.

Stablecoins have become a major topic. All the projects together are worth 130 billion dollars, but for what practical use?

I may disappoint some people, but it's still not of much use in "real life". Today, the point is to transfer money. When I send a stablecoin to the other side of the world, it costs next to nothing, and it's very quick. No more than a few minutes at the most and it works continuously.

For a bank transfer outside the eurozone, you're going to wait several days. If you're in the middle of a weekend, when the banks are closed, it takes even longer.

I think stablecoins have a great future in ensuring cross-border transfers. In fact, Société Générale recently launched its own stablecoin, CoinVertible, which is a real use case.

Société Générale, via its subsidiary Forge, works with the Maker protocol (which issues the decentralised stablecoin DAI). Do you also work with Société Générale?

There are discussions well advanced.

Do you see any other uses for stablecoins?

The other current 'use' of stablecoins, which is less mainstream, is the possibility of generating returns. In what is known as decentralised finance - although I prefer the term 'open and composable finance' - stablecoins are at the centre of all interactions. It's a bit like the cornerstone of DeFi.

Stablecoins come into play when you take out a loan, when you take on leverage, and so on. Because there's a lot of volume around them, you can generate a return.

Our vision is that stablecoin holders benefit from a return because the reserve backing them is made up of, for example, tokenised government bonds.

What impact and benefit for the real economy?

Thanks to these new infrastructures, companies would be able to borrow stablecoins by pledging any of their assets as collateral, which is obviously not possible today. This would thus considerably improve their financing capacity to grow 🚀.

There are still a lot of regulatory uncertainties to achieve this system, but our goal with Angle is to provide liquidity to businesses and individuals. The aim is not to remain in a vacuum in DeFi, as is still too often the case.

You have chosen to develop a decentralised stablecoin, which requires a complex technological infrastructure to maintain its parity. Why didn't you opt for a simple, centralised solution?

The operation of a centralised stablecoin is only simple in theory. In reality, it requires a lot of regulatory infrastructure, relationships with banks, audit firms, etc. It's easier to write the code yourself!

More seriously, I think a decentralised stablecoin can provide more utilities. On Angle, borrowing rates are only 0.5% because it's fixed at the protocol level. On the other hand, if you want to borrow USDC (a centralised dollar stablecoin) on a platform, you're going to get rates of 3% or 4% because there are many parameters and intermediaries involved.

In my opinion, there's also a regulatory advantage. When I borrow USDC, who can guarantee that the person I'm borrowing from hasn't financed North Korea? With a decentralised protocol, the stablecoin I borrow is created at the time I make the transaction. We can therefore be sure that the stablecoin is "clean" 🧐.

The European MiCA regulation, which has just been adopted, defines a framework for centralised stablecoins. Do you know if this applies to you?

It's still a grey area, so we can expect that the exchange platforms operating in Europe won't take the risk of listing us to avoid potential problems. To anticipate this, we are going to focus our efforts on becoming a leader within DeFi because this part of the sector is not yet covered by MiCA.

When the regulators work on the subject, we will make sure that we are also a leader on compliance, even if that means making sacrifices on what we can offer...

Do you have any exchanges with the authorities on this subject?

We try to be pro-active. That's why we're members of Adan (the trade association that defends the interests of the sector). I've already had the opportunity to talk to the Autorité des marchés financiers (AMF), I took part in the discussions that led to the publication of a report by the banking regulator (the ACPR), I've also met the Minister Delegate for the Digital Economy, Jean-Noël Barrot.

What you have to understand is that we're working for the development of our industry. We are not anarchists, we have nothing against the state. The aim is to improve finance. We just need to be given the means to do so.

You recently went through a very difficult time with the hack of the Euler Finance protocol, which hit Angle hard. What happened?

Some of Angle's assets that support our stablecoin are placed in other protocols to work and make money for us. We used to do this in Compound, Aave and Euler.

Unfortunately, the latter got hacked and we lost $18 million 😬 which was around a third of Angle's total assets.

We'll come back to the hacking later, but wasn't it a problem to have so much money on a single protocol?

It wasn't a mistake. The decision that led us to choose this type of allocation had been authorised by a governance vote. Everything had been planned.

Many have forgotten, but before the hack, Euler enjoyed an excellent reputation. I know that others would have preferred to put caps, but our strategy was the right one.

What did you do to avoid a 'bank run' by your users who had to rush to get what was left in Angle's reserve before anyone else?

Fortunately the hack took place on a Monday morning and we were able to intervene very quickly. We paused the protocol, as I am a signatory to a multisig that allows this to be done in an emergency.

In the end, no one was able to take advantage of an asymmetry of information to the detriment of those who were unaware of what was happening. Our responsibility was to ensure that everyone had the same level of information. We then quickly communicated the state of our reserves so that everyone could check.

Did you consider putting Angle into liquidation?

That was one of the options on the table, we almost stopped everything, but it wasn't the only one. We could also have been bought out by another protocol, raised funds with Angle Labs (the company run by Pablo Veyrat that is helping to develop the protocol, editor's note) to make up for the losses, or raised funds in cryptocurrencies via the protocol itself... Fortunately, everything has since returned to normal.

The hacker has in fact finally returned the stolen funds to Euler (after an agreement stipulating that he would keep around 10% of the loot). What was your experience of the negotiations?

Hacks worth 200 million dollars (the total amount stolen from Euler, editor's note) are fairly rare, and it's even rarer when the perpetrator returns the money. As far as I know, the Euler team played a role in the negotiations, but I don't know whether it was the FBI or Euler that dealt directly with the hacker 💸.

Have you also been interviewed by the FBI?

Yes, by videoconference. We were also questioned by the US Department of Justice. Naturally, we told them everything we knew, but I don't think we taught them much.

Mainly, I explained why Angle had put so much money into Euler. Like Euler, we were presumed guilty to begin with.

The US authorities are traditionally very strict with crypto project holders. How were you treated?

It's true that I wasn't very serene about talking to them. However, our American investors, who made the introduction, immediately reassured me, and things went very well.

How did the return of funds go?

To be honest, we didn't really like Euler's method, because the conditions were a bit arbitrary and we feel that some other creditors were favoured. In the end, we lost $100,000.

However, as the hacker had returned the funds in ethers (ETH) and its share price appreciated, we ended up making $1.5 million.

Finally you can thank the hacker, he made you money!

The protocol ends up in a better financial position, but I would much rather have avoided this episode. There is real reputational damage. Angle hasn't been hacked, but we are indirectly involved in a hacking affair.

Are you experiencing a crisis of confidence in the protocol?

It's possible. Now, our job is to reassure people, to insist that it wasn't Angle that was hacked. I was very pleasantly surprised to observe that there wasn't a big leak of liquidity when we restarted the protocol.

Only 8% of the agEUR in circulation were burnt by people wanting to get their assets back. This shows that the majority of people still have confidence in the project and that the agEUR continues to be used as before.

Do you plan to improve Angle to prevent such an event from happening again?

We're working on two things: firstly, a new system in which the protocol wouldn't be affected as much if it happened again. Then, on a device that would make Angle insensitive to a loss in value of the USDC (an asset that makes up a large part of Angle's reserve, ed. note) as we observed in March during the banking panic in the United States.

Our ambition is to build the most robust, resilient and autonomous stablecoin issuing protocol possible.

With hacks like these, how do you think you can convince traditional finance to switch to DeFi solutions one day? Is the reluctance of some not totally justified?

These situations are certainly not good publicity. But many tend to forget that DeFi is something very risky 😅.

Personally, I only interact with protocols whose code I know has been audited several times and whose team has an excellent reputation. But sometimes that's not enough, and Euler made this point very well.

How do you build trust?

By being transparent and accepting that it takes time to create a solid protocol. It can be quite frustrating, but I think we need to impose much longer development cycles in our sector.

In web2, a platform can release a new feature every week without taking big risks, whereas in web3 we need several months to do all the testing and make sure there are no flaws.

I think specialist rating agencies could provide trust by assessing projects completely independently. I know that traditional agencies, such as S&P and Moody's, are interested.

You have said on several occasions that you want to make Angle Protocol a "common good" that belongs to everyone. How much influence does your company, Angle Labs, have over governance?

We designed the protocol, but we are no longer the only contributors today. We have less than 25% of the voting powers. Proof that control is decentralised, a recent vote put us in the minority.

We advocate continuing to increase this decentralisation, while being aware of the shortcomings this can have, particularly in terms of agility and decision-making. Nevertheless, I hope that we will continue to have an influence and that we will continue to be listened to when we make proposals.

How many of you are in the team?

There are currently nine of us. I wanted us to remain a small team to be agile and continue to innovate.

Angle Labs is registered in the British Virgin Islands. Why is that?

I'd like to make it clear straight away that it's not for tax reasons.

Why then?

First and foremost because it wasn't possible from a regulatory point of view to create something like Angle until two or three years ago. We domiciled our Angle Labs business in the British Virgin Islands and we repatriate the money from there to France. The French structure is called Nocturlab. It invoices Angle Labs for services.

If we had to do it all over again we would do it differently, but in 2020-2021 there was a lot of uncertainty, and we wanted to protect our investors, some of whom are American, financially and legally. In fact, they were the ones who advised us to do this.

Do you plan to set up Angle officially in Europe?

The protocol does not have a legal entity as such, but we want to concentrate the activity in Europe and in France. Discussions are still underway to determine what status should be given to a DAO (decentralised autonomous organisation, editor's note). It's complicated because everything is intangible.

Should it be an association? A cooperative? Or something else? It's still uncertain from a legal point of view. Some people set up foundations in the Cayman Islands or Switzerland, but I'm not interested in that. I want us to be established in France.

One of your investors is the famous American fund Andreessen Horowitz (a16z). What do they bring to the table?

I see them as another member of the team, because they have brilliant research teams. Every time we come up with new concepts, we talk to them. It's a very rich relationship, they're great!

There's a full-time person who thinks with us, who understands what we're doing very well. Sometimes they even go further than we do in their thinking! They are also very helpful with legal issues, as well as recruitment.

Isn't it contradictory to be a supporter of European sovereignty and at the same time be financed by a big American fund?

I would have preferred to have only French investors, but the a16z fund has a lot to offer and in particular a great deal of technical expertise in our subjects.

It's also a fund that can deploy a lot of money very quickly. This has been a huge time saver and the amount raised ($5 million in total) means we don't have to spend time raising money. We still have two years of cash ahead of us, so we can focus 100% on development.

How much influence do they have in the governance of the Angle protocol?

It's minimal, because they're not really involved in it. They haven't even 'locked' their tokens into the protocol to vote on the proposals submitted to governance. If they did, they would have 7.5% voting power.

The Big Whale organised its first Web3 Awards in February to reward the best talent and projects in the European ecosystem. Pablo Veyrat won the "Young Web3 Talent" award.

The replay of last Monday's Big Talk can be heard here: "Community fundraising: last resort or real opportunity?" 👋


Investments: has Europe become so attractive?


By Raphaël Bloch (in Paris)

Boosted by the arrival of MiCA regulations, the European Union is attracting crypto companies and investors. Since the start of the year, it is the geographical area that has attracted the most capital, ahead of North America. But this situation may not necessarily last.

The rest is available on The Big Whale website 🐳.

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