The peak produces hypocritical support, and the dusk witnesses true believers.
The peak produces hypocritical support, and the dusk witnesses true believers.
The encryption industry also seems to be facing a twilight moment this year: from the fall of Luna to the thunderstorm of 3 AC, and then to the collapse of the FTX empire, a series of negative events have cast a shadow over the development of the entire industry.
Do you still believe in Crypto?
It is not a wise choice to blindly recharge beliefs in troubled times; how to learn from all that has happened and make reasonable judgments on the future of the industry is even more important.
Shenchao edited and sorted out the wonderful viewpoints of Shenyu in the private sharing session, and shared them with readers.
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Three black swans stir up the dusk of the exchange
In 2022, the currency circle is facing a huge turning point.
Luna, 3 AC and FTX are three large-scale black swan events, and their destructive power and influence far exceed previous years. Going back to the source, we found that the crisis had quietly laid the groundwork for an earlier time: the FTX incident can be traced back to Luna’s thunderstorm, and the recently released internal data also confirmed that many of FTX’s deficits originated from an earlier time.
Observing the source, audiences who are familiar with the principles of DeFi can understand that Luna’s rapid thunderstorm this year is a typical Ponzi scheme: a market anomaly, a rapid run together, and Luna, which has a market value of tens of billions of dollars, died instantly. In this incident, a large number of centralized institutions were not fully prepared for market expectations, resulting in them having more risk exposures. For example, 3 AC quickly changed from a risk-neutral hedge fund to a unilateral gambler.
In the subsequent timeline, crises followed one after another.
In June, there were a large number of institutions in the market holding asymmetric positions, using high leverage to go long on Bitcoin and Ethereum, and blindly believing that certain fixed points would not be broken, which led to mutual lending among institutions. We also saw the 3 AC event; by September, with the completion of the Ethereum Merge, the market began to show signs of recovery, but an unexpected event caused a thunderstorm on FTX.Regarding the FTX incident, from CZs point of view, it may be a normal commercial competition, a sniper attack on competitors financing.
But things unexpectedly caused panic in the market. In the end, Sams big financial hole was made public, which then caused a rapid panic run, which eventually led to the rapid fall of the FTX business empire.
Among the three major black swan events this year, several notable but often overlooked points are worth pondering:
First, institutions are also likely to go bankrupt.
Especially for large institutions in the Western world, after the influx of a large number of institutional users in 2017, the correlation between the entire industry and the US stock market has become highly correlated.
For retail/individual investors, these institutions appear to be mysterious, and they also bring a lot of funds and capabilities. However, judging from this years black swan incident, a large number of institutions in North America actually had some misunderstandings about the entire risk management or the understanding of the entire Crypto world during the entire incident. Afterwards, a large number of accidents occurred, resulting in chains among many institutions reaction.Therefore, our conclusion is that,
Institutions are likely to go bankrupt and reorganized, and unsecured credit between institutions is highly transitive.
Second, quantitative and market maker teams will also lose a lot when facing extreme events.
During the rapid rise and fall of the market, especially during the decline, the market will be full of distrust of institutions. As a result, a large amount of capital fled, and liquidity was seriously insufficient, which in turn caused a large number of market-making teams to passively turn the high-liquidity assets in their hands into low-liquidity assets, and then faced lock-up and could not withdraw cash.
In multiple rounds of black swans, multiple such market maker teams/quantitative teams were affected.
Third, the asset management team will also face shocks.
The asset management team needs to find low-risk or even risk-free interest rates for a large number of assets in the market to provide investors with benefits. In essence, there are only two ways to realize alpha income: lending and token issuance.
The former generates income by lending market liquidity, while the latter issues tokens to the market through the consensus mechanism of tokens (such as PoW, etc.), ICO and Defi head mines. During the operation of the asset management team, a large amount of loan assets and related derivatives have been accumulated. Once there is a black swan event of institutional thunderstorms, there will be a chain reaction of loan assets, and they will face a large number of shocks in extreme market conditions.
This cant help but remind people of traditional financial markets.
The Crypto market is developing extremely fast. In the past 10 years or so, it seems that the development process of the traditional financial market of more than 200 years has been completed. There are not only excellent stories, but also problems that have been repeatedly staged in the history of traditional finance. For example, a large number of bank behaviors that hollowed out commercial loans also occurred in the FTX incident. And everything seems to point directly to the operational problems of centralized institutions.At the same time, the FTX event alsoBasically marks the arrival of the twilight of the centralized exchange.
Around the world, everyone is in a state of extreme panic about the opacity of Cryoto, especially CEX, and the possible chain reactions. The data side is also confirming this judgment. In the past month, a large number of users have transferred assets on the chain.
Before dusk, Private Key loses his battle with humanity:Although the ownership of the underlying assets in the Crypto world is guaranteed by private keys, in the past 10 years of development,Centralized exchanges do not yet have a reasonable third-party custodian to help users and exchanges manage assets, thus combating the human nature of exchange managers,
As a result, the exchange always has the opportunity to touch the users assets.
In the FTX incident, the influence of human nature seems to have been traced.Sam has always been a restless person.All kinds of overtime and staying up late, not allowing myself and money to be idle, I also saw it during DeFi Summer
Sam often transfers huge amounts of assets from the exchanges hot wallet to various Defi protocol punch mines.
When human nature yearns for more opportunities, human nature cannot resist more temptations.
A large number of user assets are placed in the hot wallet of the exchange, and it seems logical to use assets to obtain risk-free (low) returns; from Staking, to digging Defi investment, and then to invest in early primary market projects, when the income is getting bigger and bigger , misappropriation may also intensify.The black swans have turned the industry upside down, and the enlightenment left to us is self-evident: for regulators and large institutions, we should learn from traditional finance and find a suitable way toLet CEX no longer assume the three roles of exchange, brokerage, and third-party custody at the same time by one entity;
Outside of CEX, other centralized institutions are facing drastic changes in the industry, and may also need to make changes.
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Centralized institutions, too big to fail to rebuild properlyBlack swans not only stir up CEX, but also industry-related centralized institutions. A large part of the reason why they are affected by the crisis is thatThe risk of the counterparty (especially CEX) is ignored.
Big but not down is everyones impression of FTX. And this is the second time Shenyu heard this concept: In some group chats in early November, most people voted that FTX was too big to fail.For the first time, SuZhu personally told Shenyu:
Luna is too big to fall, and someone will come to save her if she falls.
In May, Luna fell.
In November, its FTXs turn.
In the traditional financial world, there is a lender of last resort. When a violent incident occurs in a large financial institution, there are often some third-party organizations, even government-backed organizations, to carry out bankruptcy and reorganization to reduce the impact of risks. Unfortunately, not in the world of Crypto. Due to the transparency of the bottom layer of the entire Crypto world, everyone will use various technical means to analyze the data on the chain, so the entire collapse occurs very quickly. A little clue, a burst of chaos.
This phenomenon is a double-edged sword, good and bad.
The advantage is that it accelerates the bursting of bad bubbles and makes these things that shouldnt happen die quickly; the disadvantage is that there are almost no windows of opportunity left for those less sensitive investors.In such a market development process, Shenyu also maintains the previous judgment: the FTX incident basically marks the arrival of the twilight of the centralized exchange,In the future, they will gradually degenerate to become a bridge connecting the fiat currency world and the Crypto world,
And solve KYC and deposit problems through traditional methods.
Compared with the traditional method, Shenyu is more optimistic about the more open and transparent operation method on the chain. As early as 2012, there were discussions about on-chain finance in the community, but at that time, due to limited technology and performance, there was a lack of suitable carrying means. With the development of blockchain performance and underlying private key management technology, decentralized finance on the chain, including decentralized derivatives exchanges, will gradually emerge.
In the second half of the game, centralized institutions also need to rebuild in the aftershocks of the crisis. And the cornerstone of rebuilding remains ownership of assets.Therefore, in terms of means, use the currently popularGrasp the ownership of the assets of large institutions, and then carry out the safe transfer and transaction of assets through the third-party co-management and the co-signing of the exchange, so that the transaction only takes place in a short time window, reducing the risk of the counterparty and the third party as much as possible triggered a chain reaction.
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Decentralized finance, looking for opportunities in crisis
Will the situation of Defi be better when CEX and centralized institutions suffer from it?
With a large amount of capital spillover in the entire crypto world and the interest rate hikes in the macro environment, Defi is facing a major impact: Looking at the overall yield, Defi is still inferior to US Treasury bonds. In addition, investing in Defi should also pay attention to the security risks of smart contracts. Considering risks and returns comprehensively, the current situation of DeFi is not so optimistic in the eyes of mature investors.
In the pessimistic environment, the market is still brewing innovation.
For example, decentralized exchanges around financial derivatives have gradually begun to appear, and innovations in fixed-income strategies are still rapidly iterating. With the gradual resolution of public chain performance issues, Shenyu is also optimistic that the entire DeFi interaction method and possible form will undergo new iterations.However, this kind of update and iteration does not happen overnight. The current market is still in a relatively delicate stage: due to the black swan event, encrypted market makers suffered losses, resulting in a serious lack of liquidity in the entire market, which also means that
Extreme cases of market manipulation occur from time to time.
Assets with good liquidity in the early days have become very easy to be manipulated at this point in time; once price manipulation occurs, due to the large number of combinations among Defi protocols, many entities will be inexplicably affected by price fluctuations of third-party tokens, Lying in the gun caused him to be in debt.
The Shenyu team currently prefers to find a more stable investment method and obtain new asset increments through Staking. At the same time, a system called Argus has also been developed internally to monitor abnormalities on various chains in real time, and to improve the overall operational efficiency through a (semi) automatic method. When industry OGs are gradually cautiously optimistic about Defi, we are also curious when the entire market will usher in a turnaround.
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Looking forward to market reversal, both internal and external factors are indispensable
No one enjoys a crisis all the time. Instead, were all hoping for a turnaround. But to predict when the wind will change, you have to figure out where the wind is coming from.
Shenyu believes that the last round of market volatility is most likely due to the entry of traditional investors in 2017. Due to the relatively large amount of assets they carry and the relatively loose macro environment, they have jointly created a round of enthusiasm. At present, it may wait until the interest rate is cut to a certain extent before hot money flows into Crypto again, and the bear market will usher in a reversal.
In addition, in previous rough estimates, Shenyu believes that the total daily cost of the entire encryption industry, including mining machines and practitioners, is roughly between tens of millions and 100 million U.S. dollars; and the current flow of funds on the chain shows that , the volume of daily capital inflows is far less than the estimated cost, so the entire market is still in the stock game stage.
The tightening of liquidity, coupled with the stock game, and the poor environment inside and outside the industry can be regarded as an external cause for the failure of the market to reverse. The internal reason for the upward trend of the encryption industry comes from the growth point brought about by the explosion of killer applications.Since many narratives in the last round of bull market gradually fell silent, there is still no clear new growth point in the industry. When the second-tier network such as ZK is gradually launched, we vaguely feel the changes brought about by the new technology, and the performance of the public chain is further improved, but in fact we have not yet seen a clear killer application; when it comes to the user level, we still have no idea. It is clear what is the application form that allows the assets of large-scale ordinary users to flow into the encrypted world. therefore,
There are two prerequisites for the end of the bear market: one is to lift the interest rate hike in the external macro environment, and the other is to find the next growth point for the outbreak of new killer applications.
But it should be noted that the reversal of the market trend also needs to match the inherent cycles in the encryption industry. Considering the merger of Ethereum in September this year and the upcoming halving of Bitcoin in 2024, the former has already happened, and the latter is not far away from an industry perspective. In this cycle, there is actually not much time left for application breakthroughs and narrative explosions in the industry.
Things will never be smooth sailing. I hope that every participant in the encryption industry will be a solid Builder, not a spectator who misses the opportunity.
Attachment: AMA Wonderful Questions and Answers
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Question 1: What is the main direction of innovation in the future of the encryption market?
There are only two future tracks in the entire encryption market, or in other words, the entire industry has basically developed around two things in the past 10 years:The first thing is performance, that is, the problem of TPS,
From the expansion in 2017 to the present, the general direction still needs to be solved by a multi-layer network. At present, zk in the second-layer network is the most likely, but there may be a relatively long period before the final landing and use, which may start at least two years time.In fact, it is also a cliché, and it is the core problem that has been hindering the emergence of a large number of new users in the entire industry. With the influx of traditional capital and the influx of a large number of new users in the past five years, whether it is Gamefi or a game application like StepN, the MPC-based private key wallet may make the user experience and threshold more balanced . So basically in the long run, these two major directions, I think this is the core problem that the entire industry must solve.
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Question 2: What do you think of the current market situation and what will happen in the future?
The entire industry is now in a stock game market state, because the outflow of assets is still relatively serious, so there is no doubt that it is definitely a bear market now, and the currency price has also fallen a lot. Compared with the previous rounds of decline, the asset retracement is around 80%, so it is still difficult to determine when it will bottom out. Because even if it is not the bottom, it is still the bottom range. How long will this time last, what state will it last, and when will there be the next thunder?So I think there are two potentially big turning points, the first is
The end of the entire interest rate hike cycle.Judging from the way of seeking a sword, the shortest rate hike cycle in the past few decades has lasted for more than a year. If the rate hike starts in March 2022, it will be at least for a time period in 23 years. From the perspective of the industry, there must be a new growth point and tipping point for the influx of new traffic funds. This matter requires continuous observation to judge the range. But it is uncertain whether it will continue to fall, and whether there will be more black swans in the future.But there is no doubt that the currency price has been relatively low.
From another indicator, from the perspective of miners, we have already shown a typical signal of the bottom cycle, that is, the mining costs of miners are no longer able to cover marginal costs, and they are less able to afford electricity bills.
But I want to remind everyone that the miners in this round of the market have experienced a 21-year mining ban, so 80% of the miners are currently in developed countries, and the agreements of their mines often cannot be turned off flexibly, so Even under such circumstances, many miners are unlikely to choose to close their mines, so there may only be a small decline in computing power. Last weeks data showed that the mining difficulty has slightly decreased.In addition, the special situation of North American mines is that a large number of miners have done mining machine loans and unsecured loans with many lenders in the past bull market cycle. Now, although we haven’t seen a large-scale sell-off of many mining machines, we have also seen two interesting phenomena:The first one is that a large number of mines are going bankrupt and reorganized,This is also a move with Western characteristics.The second is that the second-hand market price of mining machines may have dropped from tens of dollars per ton in the past to around $10 per ton.
It is already in the range below the production cost price.
So from the perspective of miners and production supply, they are already in the range of surrender, so I am sure this is the bottom range. However, we may still have to observe the inflection point for how long it takes, and it is a very good time for individual investors, because we can see that these institutional investors are already under water, and many of them have even gone bankrupt and liquidated.
Often at this time period, when the market is full of blood, if you still have cash reserves that don’t affect your life, you can build positions in batches at the right time. In the long run, it should be ok, and the cycle should be shorter. It may be one or two years, and it may be three or five years.
Question 3: Signature Bank is going to sell 10 billion encrypted digital currency deposits. Is this a landmark event that will cause a tightening of stablecoins in the encrypted market? Will Signature Bank and Silvergate be affected by FTX? What does Yuzong think?
The first question is that the outflow of stablecoins will definitely be a landmark event, so you can check the circulation of stablecoins in the entire industry every week. In fact, the large-scale outflows will still affect the liquidity pressure and price impact of the entire industry. Relatively large.
The second question, I personally feel that the two banks have a limited relationship with FTX from the current public channels and data, and the degree of impact is relatively limited. After all, it is more traditional. Although there will be some lending business, the data looks relatively good.
For this kind of bank, as cryptocurrency investors, we would not normally use it as a private bank. That is to open an account and serve as a legal currency entrance and exit, so there is no need to put a lot of assets on it.
Question 4: If CEX wants to continue to grow in the future, what is their position in the industry and what is the future development like?
This question can be viewed from two angles.
First, because of FTX’s thunderstorm, it is also relatively ruthless to kill institutional investors. In the future, supervision will definitely be tightened, especially for centralized exchanges. Therefore, for a long time in the past, the centralized exchanges in history were all-in-one, and they may be spun off later. This is also an inevitable process of the development of traditional financial markets. From this perspective, I think the status quo of centralized exchanges may change.
From the second point of view, I think that with the development of other decentralized exchange derivatives, the possible competition will be greater, and users will be educated and have a clearer understanding because of the impact of these events. cognition. Under such circumstances, for centralized exchanges, it has played a very critical core role, that is, to develop a set of solutions that match traditional finance, allowing these investors to learn, understand and recognize the entire Crypto The underlying assets of the world. Another function is that it will serve as the core channel for deposits and withdrawals, and it will also make the interaction between the entire Crypto world and fiat currency smoother and the channel more smooth. So I think these should be two very important roles in future CEX.
Its core trading functions, especially derivatives trading, will coexist with decentralized exchanges and will even be gradually replaced.
Question 5: Is it possible for Grayscale to have a thunderstorm?
Todays bankruptcy reorganization, or the current predicament, may not trigger a chain thunderstorm in Grayscale, because the two companies should be relatively clean and isolated from the known public data of the SEC and Coinbase. According to the custody data of Grayscale, the assets managed by Grayscale itself should be safe unless there are major unknown factors.
In addition, from a business point of view, Grayscale is also a very good cash cow. If Genesis’s parent company DCG has relatively large debts, it may transfer Grayscale; at the same time, companies and consortia with more cash in hand, You may be more likely to recognize Grayscale and start to acquire it.
So judging from the known data, I think the possibility of grayscale thunderstorms is unlikely. However, its negative premium in the secondary market may continue for a period of time, because of liquidity and market fears, so if some colleagues consider arbitrage in the secondary market, I think it is okay, but be cautious, because this cycle lasts It will be longer.
In addition, it includes some chain reaction predictions, who will continue to thunderstorms, from the current known information, there is not much that can be mastered or seen, because the centralization is relatively complicated and it is a black box , It takes time and energy to analyze some of their address associations and asset transfers, and then it is possible to figure out the underlying logic.
At present, there may still be some unexploded incidents fermenting and expanding in the entire market, but my more vicious and larger-scale incidents have basically passed, and there may still be some marginal, small and medium-sized incidents, such as 3 An example of AC is the aftershocks after the Luna event.
In fact, if there are small exchanges in the next month or two, there will be thunderstorms one after another, which will be based on the FTX incident. Basically, in 1 to 2 months, some long-tail asset-related companies will gradually be exposed.
Question 6: What does the Cobo MPC solution look like? How to match the needs of the market?
Cobo has been focusing on the management of the underlying private key and the handling of risks on the chain. It has been three to five years since we focused on investment in 2018. During this process, we have been thinking about the entire industrys private key management. After more than two years of thinking about the final form, possible on-chain interactions, and internal risk management between organizations, the thinking has gradually become clear. We call it Cobo’s three-step strategy internally:The first step is through a fully centralized solution Cobo WaaS
(Wallet as a Service), which packages the underlying private key management interacting with the blockchain, chain access, chain abnormal status, such as hard fork monitoring, etc., into a set of standard services, allowing institutional users to pass an API It can access dozens of public chains and support multiple Tokens. It is very convenient to support their own business for secondary development on this basis. This is the purely centralized solution we first proposed.
We have built some Loop clearing networks on it. The core problem is to prevent everyone from repeating unnecessary construction in the direction of wallets. At the same time, it tries to provide a set of standardized interfaces so that everyone can access various underlying blockchains and use the functions of sending, receiving, storing and transferring these assets on the blockchain.In the second stage, with the development of blockchain technology, we have also arrived at DeFi summer, with more on-chain interaction scenarios. In addition to the earliest on-chain sending, receiving, storage and transfer, we combined internal demand to create Cobo Argus An internal early version of , which is essentiallyAllowing a team to manage assets on the chain with multi-person and multi-authority collaboration,
Because in the Crypto world, I have used this multi-signature solution for a long time. In essence, multiple administrators have equal rights. Each operation requires multiple people to review at the same time, which greatly reduces the team Collaborative efficiency.So the on-chain version,We use smart contracts to allow different people to have different permissions,
For example, some of us can manage funds and let the funds be sent and received; some people can only do some currency hedging, such as doing some specific currency transactions to hedge some risk exposures, which may have a limited speed limit Stream these things, and some other operators may go to claim some income....
Different roles are defined for different scenarios, different permissions are assigned, and a series of encapsulations are carried out for the management of various DeFi interactive assets on the chain. Everyone can match various internal assets in the form of a team requirements, while managing the risks of various agreements, supplemented by monitoring data dashboards.
In the third stage, after the blockchain performance problem can be solved in the future, a multi-chain and multi-layer state will be formed. So at this stage, we tried to build a Cobo Chain---a decentralized hosting application chain based on the current technology accumulation of Cobo on MPC, after half a year of iteration. The way to drive these MPC nodes, so that everyones private key is scattered all over the world from day one, and manage workflow and various risks with programmable internal workflow.
The above may be a little further, but at present, after the outbreak of the FTX incident, the organization side has a relatively high demand for the security of the entire asset and the management of the private key. We also quickly transferred the MPC underlying technology accumulated on the application chain to The MPC WaaS version packaged into Cobo is also communicating with institutional investors to match various internal detailed customization requirements, standardized MPC requirements, super loop clearing network, etc. This area is iterative and Polishing the product, the ultimate state may be a decentralized custody chain, and day one can match the needs of different blockchains.
At the same time, we can also implant some relatively standardized financial scenarios and models in the application chain, such as embedding some models that are very mature in the traditional world into the original bottom layer of the entire chain. It is still very early, and internal brainstorming and prototype verification are still underway, and everyone is welcome to communicate.
Question 7: Will there be such a huge thunder again in the future?
No particularly large thunderstorms have been seen so far, but there will definitely be aftershocks, because the three black swan events this year all had assets in the order of tens of billions of dollars. Judging from the density and relevance of their outbreaks, they all exceeded imagination. In the entire encrypted world, there may not be many well-known institutions surviving now, and there are only a few left. From the known information, there are no major risk exposures and other issues. However, under the conditions of tightened supervision, it may also bring some new rounds of shocks, and the market outlook remains to be seen.
Question 8: Is it a better entry point now, why?
First of all, it is now the bottom range of the bear market, but it is unknown how long the bear market will last. First of all, the first point is to keep cash flow well. You need to sort out your own cash flow assets and future conditions, and you may make a relatively pessimistic expectation.
When the cash flow is stable and the pressure of survival is not particularly challenging, I think it is possible to deploy some major categories of assets in stages today or after March next year. In the bear market, there are still some new agreements and projects that are active and growing. The valuation at the current stage will be relatively much lower than that in the bull market, so we will build positions in batches.
In addition, look at whether there are new growth points in the industry and the emergence of new killer applications. If possible, invest in some assets at a relatively appropriate price and low cost, and there will be a better return in the next round.
Question 9: How should institutions prepare for entering the DeFi track?I think DeFi has 4 major directions,The first direction is stable currency,
Then there will be some more interesting stablecoins emerging in the near future, such as AAVE and Curve stablecoins.The second is a loan,
After the currency is ready, it comes to lending. At present, after experiencing extreme market conditions, the performance of lending on the chain is relatively good, but some problems have also been exposed, so basically there will be ideas to iterate, and to deal with some abnormal asset isolation problems. We are also observing the next step in the development of the entire lending.The third one is DEX,
After a long period of development, it was also a strong impetus for the emergence of the last round of Defi Summer. Now DEX is relatively mature. With the launch of ZK, the order book method may gradually improve.The fourth is derivatives and risk management,
It was relatively early, but after the FTX thunderstorm, the amount of futures derivatives and option derivatives on the chain began to rise sharply, so I think this may be the next new growth point.
For institutions, it must first establish awareness, and then create their own set of internal workflows for DeFi. For example, Cobo Argus is a DeFi interactive decentralization tool that can meet the needs of institutions. This is based on our internal It can be said that it is the only one on the market that can be polished according to the needs of customers.
For personal investment, if you want to obtain relatively stable income in DeFi, it is relatively difficult, so individuals should pay more attention to some staking single coins. These returns are average but may be relatively lower risk, and then individuals may try more mistakes with small funds and observe new growth points and directions. There should be one or two better growth points for the next round, so if you can Understanding these new things during this round of bear market should be of great help to the next round of growth and wealth capture.
Especially when we look back at the review, many stories that happened on EOS in the summer of 2018 will basically reappear later in 2020/2021, so if we replay the stories that happened in the last bear market, we can see them earlier in the next round Some hints and less trial and error. At this stage, you can observe more, do less work, study more, and read more.
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