Genesis on the Brink of Collapse | foobar

Transcript

foreign [Music] everyone welcome back to another episode of Empire we got Santi joining us he's drinking this like fancy kombucha hot chocolate healthy drink like he's really trying to stay afloat over here um and then we're uh we're also joined by Fubar so Fubar and Santi welcome to the show guys hey hey Jason it's great to be here hey thanks for having me yeah of course Fubar uh welcome to Empire for the first time Santi what are you uh what are you drinking over there it's like a collagen with like collagen protein like chocolate flavored in a Hogwarts mug so um

it's been I don't know about you guys uh I'm curious how much sleep you're getting um and what are you doing to like stay stay kind of focused uh in your lane I will I will admit I'm really happy that the camera's pointed like right here right now my office is messier than I think it's ever been in my entire life you can't see my floor my wife would be very embarrassed that I'm admitting this uh on the podcast but you literally can't sing before there's so many clothes on the floor right now so it's uh I think that tells you kind of how how my week is going yeah we do we do lots of feast and famine there are weeks where nothing happens and then hours where months happen so I think the best you can do is just try to make for

make up for it elsewhere exactly that cools down exactly so um all right we're obviously talking about FTX and we're um all right let me let me time stamp this actually because we're everything's happening so quickly right now in crypto so it's Wednesday November 16th it's 2 15 in the afternoon 2 15 Eastern um I think this episode will probably come out later on Wednesday or maybe Thursday morning so I just want to time stamp that um right now I think the biggest thing that's happening is Genesis is Genesis pause withdrawals and that's impacted a bunch of C5 platforms the biggest one being being Gemini so I think the best place to start would be would be with Gemini Fubar do you uh I wrote This Thread that's been doing pretty well on

Twitter just kind of explaining it so I can walk through Genesis or Fubar I don't know if you want to kind of take what's happening as well sure thing um I'm probably better updated on the on the general situation than the details of what's been going on with Genesis today but it does it does seem like obviously FTX went under uh they were a premier institutional custodian for a lot of protocols companies other exchanges even and so we've seen cascading effects come from that to figure out figuring out whose balance sheet had exposure Genesis obviously very large lender in the space um seems like they they've organized

some calls today with um with with top people to discuss the details of the situation I haven't been privy to exactly what they said in those but it does seem to be a concerning sign yeah yeah they sent me go go ahead Santa I wasn't part of the call I didn't want to join but I did get the invite um but there was a I mean I think people fairly summarized it was like a fairly short seven minute call um you know and saying that basically anyone that has used kind of their lending platform is impacted although some other operations remain unimpacted so if you want to trade with them sounds like that's operational

and I think that's like a you know I get I guess Jason I don't know if you want to go through like the just a quick update of all the stuff that's going on because there was a common denominator here of there are a couple of companies a couple of programs within those companies that are impacted but I think what we it's best that we just cover it to the best of our ability in like the next five six minutes because there's a lot of fun try to walk through Genesis then because I think we have to help play the background before we yeah let me light the background for Genesis all right so basically all right so there's this guy Barry Silver Barry silbert started um second Market second Market uh created markets like secondary markets around um like less mainstream assets essentially in in financial

markets he get he he discovers Bitcoin uh they had a bunch of institutional clients at second Market in 2013 uh Barry starts Genesis Genesis was the first uh the first OTC Bitcoin desk in 2013. um two years later dcg uh Barry starts dcg the first two companies in like the dcg dcg digital currency group big Holding Group the two first companies were Genesis which was the big uh originally started as the big OTC desk then turned into the lending desk and like a trading desk they acquired a custodian and some more folks and then grayscale so those were the first two companies under the dcg uh in the dcg portfolio now gen now dcg uh they own coindesk they own Foundry which is the

largest U.S mining company they own Genesis they own grayscale they acquired luno which is a consumer app uh they also have a huge VC portfolio they've invested in over 2 200 crypto companies so they basically built this like the Standard Oil of crypto essentially um Genesis since starting as a as an OTC Bitcoin desk in 2013 they've evolved uh over the last eight nine years they're now crypto's largest lending desk uh and one of the largest trading desks by far so if you just look at some of the numbers from a year ago um at kind of the height of the market like if you take a snapshot snapshot of their Q4 numbers uh they originated over 50 billion dollars in loans they had over 12 and a half billion dollars of

active loans as of the end of last year uh 31 billion dollars of of spot volume traded and 21 billion dollars of derivatives uh notional value volume traded so just like moving absolute size right then what happened uh was three arrows so Genesis was actually the biggest creditor to three arrows they lent them 2.4 billion dollars um uh Genesis then filed like a one and a half or 1.2 billion dollar claim against three arrows dcg again the parent company of Genesis stepped in they assumed the 1.2 billion dollar claim so that left Genesis without any outstanding liabilities so people were you know kind of trust uh Genesis was able to regain some trust but then uh

things continued to unravel over the summer so Genesis actually had some pretty large exposure to Babel Finance for those who don't know Babel they're not as big in the States but it's kind of like a block buy um blockfi in Asia uh they got hit really hard and they had some pretty large exposure to Babel then in August uh there's this guy Michael Morrow who's actually at second Market with Barry back in the day Barry tapped Michael morrow in the early days of Genesis to become the CEO so long time CEO of Michael Morrow he resigned well resigned got fired not really sure what happened there um everyone I know on a personal note left like VP of derivatives VP of risk like all my friends at Genesis they within like a three week span they all left so

that was in August by Q3 their numbers had fallen drastically so all those numbers in the beginning of this podcast those that all Fallen like 80 um all right so now let me get into the the important part like why is the downfall of Genesis so bad basically anytime you see a C5 platform offering yield so like Gemini's earned product or like you know you can earn five percent on block fi or like any of those products most of them use Genesis to help the con to that like genesis is the earn product so if you are a C5 platform that offers yield you probably use Genesis and the way that it works is uh you give your crypto to German so let's let's use Gemini here I have I have five eth I give my I give my let's use let's

use more generalized things I give my crypto to Gemini Gemini gives my crypto to Genesis Genesis gives my that crypto to a fund the fund borrows the crypto from Genesis at like let's say I'm gonna make numbers up here six percent Genesis gives Gemini back five percent so they make that extra one percent and then Gemini passes on four percent so the yield to to the user so voila you now have you now have yield in crypto this this whole system only works if um if the counterparties that Genesis lent to can actually repay the borrow right so if Genesis can't actually get the crypto back they can't give the crypto back to gemini or to the C5 platform which means Gemini can't give you back your crypto and Santi it sounds like

um you might have been a user of Gemini like basically every whale that I know uh in crypto gives money to Gemini to excuse me to Genesis um instead of giving like if you're kind of a consumer you you earn yield on block buy maybe or Gemini if you are maybe more of an Institutional player or fund or a whale you just give directly to Genesis to earn that yield so a bunch of Institutions family offices big crypto Wheels they can't get their crypto back today and that very long-winded there but that that is why Genesis halting withdrawals is so bad is because they sit at the center of crypto's capital markets they custody funds they help institutions earn yield they are the yield product for C5 platforms so pretty long-winded that's where we're at

now Santi how did uh how did I do there yeah it's really good um like I never used them I never lent them my coins I purely used them to trade um mostly like Stables um so I have no exposure to them but although I'm I think your summary is fairly correct um so just just for context today obviously what has been percolating there were suspicions that like genesis was in a precarious situation I think all of this we have to remind remind ourselves and just go back to a lot of it was you know funds chasing the sweet anchor yield of like eight percent Luna collapses and they're a lot of folks are caught off guard right and it's these dominoes that are

falling around three arrows goes down uh then FTX tries to step in and absorb a lot of the issue you know those problems with block find Voyager uh that have been lending to three arrows Genesis gets caught there but Barry kind of like delays their you know you know covers a lot of the shortfall but really FTX like um blowing up was what caused the you know we are we are in this position because it's just it's just I think most people weren't anticipating that um and so one of the like very important distinctions I want to make right if you're if anyone's listening now and you know you've been either using you know if you're a there are a couple

of important points one is if you're a customer of Gemini that doesn't necessarily mean that you're impacted and let me explain why like of course this all could change in real time right but my understanding is it's really the people that were in the earn program that is estimated to be around 300 320 million based on what I've heard um so yes big but not like billions um and certainly not as big as other collapses but still it is only the users that had funds on Gemini then then decided to like earn and be part of this earn program that are impacted right because then they are they they were the ones that have taken on exposure and counterparty

risk to um to Genesis but my understanding is if you're just a regular depositor of Gemini it's okay it was down today for an hour like the exchange but it's back up and operational um and I haven't talked to users directly but I think if you try to withdraw just your traditional funds it should be fine right I haven't actually tried I have money I have money on Gemini both in the North like normal [ __ ] like just crypto sitting there that I've made Spa purchases with and then I also have I never got some like sushi sitting in their urn product or something like that so I would assume the sushi I can't maybe it's important to confirm that because yeah it's a big distinction

right and the same is true for like other like um lending programs any like these earning programs are the ones that have been impacted because they as you explained earlier are the ones that it's sort of like it was just a referral to to Genesis right um and so what end up what whatever ends up happening with Genesis if they are insolvent if they get bailed out if you recover 80 cents on the dollar or whatever that is then it is the users of that earned program that are ultimately going to be like the creditors um in in that claim yeah that does seem like the key distinction and the proper distinction though FTX went on there because they well among among other things lent every

customer deposit to a random Prop Shop hedge fund internalized maybe maybe not but that was without customers knowing without customers opting in the yield if it had ever materialized would have flowed to said Prop Shop exchange under the hood um and these I think more robust institutions that do properly segment customer deposits and then opt-in opt-in lending obviously lending the monies going somewhere and you hope it comes back but you you would think that there's good segmentation there yeah and the other important thing to note here is obviously there are two

other important stable coins here Gemini dollar gusd and usdc right um and so because Circle also had this like earned program um that Genesis uh was a like a counterparty and they've now have reduced the yield on that program to effectively zero um and I think I saw a statement from Jeremy earlier that their exposure to Genesis were like like in the one or two percent like one or two million range so very small um no way it's that small one or two million I I kid you not um we'll we'll link it anyways the

important thing is there I mentioned this because there's now a lot of fun right of hey what's gonna happen to usdc and gusd like are those insolvent you know and people are like fighting to the best of my knowledge those are not impacted and are fully backed dollar one-to-one fully collateralized and audited so unless a Regina believed that the audit is fraudulent not correct and or um you know somehow there's some fraud going on in these teams let me just there's really no reason to there's really no reason to at the moment to have concerns ongoing concerns around

like these two stable coins but let me know if you disagree with that uh no no so I I think um the I don't there's no usdc fud in my mind like there's I love Circle and uscc and like I think that um they I was looking at the reserves basically like there was like they they have one-to-one reserves I'm pretty sure like somewhere close to that um here's here hold on let me just pull up this one thing basically all right I'm looking at what Jeremy said or I'm looking at what a circle said Circle yield is an over collateralize fixed term yield product Genesis is a counterparty to Circle in this product total Circle yield customer loans outstanding our two okay this is where your number is coming from 2.6 million as of November 16th my question about

this is that there's a report from June 2020 that indicates that Circle lent out about 250 million so if Genesis only accounts for 2.5 million who where's the rep like where's where's the rest who's the rest attributed to do you see the question I'm asking I do I don't have the answer to but I do see your question yeah so that's a strangely trivial amount I mean that that Circle size so it feels so low right Fubar yeah from 40 40 to 60 billion you'd think you don't want to be organizing pockets of 2.6 million here and there yeah so so I'm curious yeah but I mean I think that I think that

usdc flood is totally fine I think that yeah Circle will be fine I mean I think this stems from they had what they had a relationship between dcg or uh yet Genesis and circle from like 2020 um for the yield no lending Services I think you're right by the way I'm Gemini earn well while you guys were just talking I looked this up I think it's just that Gemini earned pause withdrawals so yeah yeah exactly um I guess the other should we move on to like maker and discuss a little bit about that or uh I would just I would do the last thing on on Gemini's just that um on Genesis is that ever basically every C5 platform that I know uses that offer some sort of earned uses Genesis on the back end big one small

one everyone uses Genesis there's also Anchorage has a has a desk um that generates yield that like wasn't as big but it started has been getting bigger and bigger I haven't heard anything out of Anchorage so I'm hope that's one uh to definitely monitor yeah definitely monitoring what's going on in Anchorage um I haven't heard anything this is total I'm just you know but I do know that there's a lot of C5 platforms that starting in June they moved off of Genesis uh to offer the four to five percent and they moved into Anchorage so now I mean again an important distinction I'll make is if you're a customer of Anchorage custody and you haven't submitted or part of this earn program theoretically technically

you shouldn't be impacted like if you're just a pure custody um customer of Anchorage my understanding is unless you opt into earning some yield then you should be fine per your terms of services and you know yada yada yeah yeah so you're like you're not angry basically like like no it's not that I'm not worried it's just that like it's really important here to just understand are you just using them for Pure custody services or at some point in the relationship a lot of these custodians started offering the ability to earn some yield on your coins and if you wanted to clip some yield

then yes at some point you became you took on some counterparty risk of Genesis and or some other players that were trying to capture yield and do this Arbitrage of off chain on chain yield spreads um that included you know just funds hedge funds in the space like through arrows that were like doing these strategies a lot of them of which have blown up um and in solvent now and so that's my understanding of this whole situation um now there were a lot of pro we'll have to monitor which projects and funds that were holding a lot of stables or

coins you know a lot of them the rationale was oh look we're in a bear Market we're super long X coin or just sitting tidy on usdc oh hey look here's a counterparty that's offering me four or five percent why not do that and I think the lesson so far um has been you know a lot of these uh lenders grossly have miscalculated counterparty risk and the question for me is like at what point does Gemini Gemini's internal team that is acting as a referral like a referral platform for Genesis right they're just customer from Gemini

you're referred to Genesis now that customer maybe not really truly understand or know anything about Genesis but look it's in their platform so presumably they've been vetted right by the risk management team like at what point the two questions in my mind is how often and what kind of due diligence was going on at Gemini to to like constantly verify the solvency of their counterparties and this is something that is just traditional like best practices right and what were the attestations that were being done to improve the solvency because look Luna collapsed a while ago and there have been speculations of Genesis being in a precarious situation if you're Gemini like I think the important question will

be uh Hey at what point do you stop the program do you protect your customers and do you ask Genesis to like call back like you know what I mean like yeah because by the way every risk management team across crypto has failed pretty much you got to keep your customers alive right even if even if you're just purely a middleman if you're passing people along to to other counterparties that will bankrupt them then that's I mean obviously the the bankrupt thing of them is terrible but it also means that your customers are are becoming insolvent and so there's less future business to be done there um absolutely yeah

how much of the is a broader question but how much of the focus on yield at all costs do you think is healthy and how much do you think is Extreme obviously we have um obviously traditional Finance is built on what's the risk-free rate of U.S treasury yield and then [ __ ] and then I mean ethereum has native staking yield now um but then D5 summer I think kicked off just this extreme obsession with types of hyper optimization of why are you getting 13 here when you could getting 16 elsewhere and this constant rebalancing

um that that that has continued the search for yield even as natural yields have compressed significantly um how much of that do you think is healthy and how much should the industry move away from so okay so I would argue that D5 summer didn't kick it off um I would actually argue that um consumer VC back consumer apps actually kick this off and I'll make the connection here which is that if you look at um Uber I have no idea where where in the world you live but I I live in New York and Ubers used to be five dollars you can take an Uber anywhere anywhere in New York for five dollars today I can take an Uber anywhere in New York it's about 40 to 50 bucks right so

they were basically subsidizing 90 of the ride using using VC dollars and uh that that works great right like that's this proven VC model for building consumer apps that works incredibly well with consumer apps uh where you basically just burn a boatload of VC money for to subsidize to subsidize the uh the the yield essentially uh or to Subs to like subsidize the cost of this stuff you're seeing what what we did in crypto with all these C5 platforms is we copied the cons the VC back consumer app model but we applied it to fintech apps and I think that's where things got really dangerous um is because once the yield once the capital Runs Out um you see this like violent unwinding

uh because it's all you see this violent unwinding that like when when things like violently unwind in consumer apps like nothing happens you just the right the cost of my Uber just goes from five bucks to 50 bucks Well when things violently unlined in in fintech and in crypto you people lose a lot of money I think like I partially agree with that but like I've said this over and over like I think during D5 summer you have to ask yourself like if you don't understand where the yield is coming from you're the yield like and you know at some point it's not sustainable to clip you know or like multiples of what traditional rates are without without sensing like not that it's not sustainable it is

as you can clip really high coupon on a junk bond but you kind of know that that junk bond is a junk bond the problem that I think a lot of people in crypto have been not perhaps fully aware of because maybe they were indirectly like not they're buying a stable coin called look Terra that they think is a stable coin that ends up not being a stable coin um and partially because you know these platforms to your point Jason were just making it very easy for them right um and I think that's that's been I think the problem right where even earning eight percent

after like D5 has been on a bear like in a bear market like D5 summer ended a year and a half ago right even even before even out like we've been almost like two years in this where yields and D5 haven't been that that compelling right D5 summer is fairly like compressed like very but still though you had these like weird urn programs that were giving you six eight percent and you're wondering gosh like how are they pulling this off and you know it's just like a Time lesson I know it's I don't want to meet sound like you know like I'm preaching here like look at some point it's just like if the yield's too good to be true

you just gotta ask yourself like how are they clipping this yield um and unfortunately a lot of people just like turned a blind eye to that there's like like anchor like anchor was giving you eight percent to be fair like anchor was like the last Sweet Farm if you will that a lot of people are doing in size and and and you know so many that that was partially the bigger problem like a lot of these farms in D5 summer lasted a few days and they could as soon as that like the pool grew anything north of 5 million 10 million the yield was like fairly low fairly

quickly like gone to you know to not very compelling or worthwhile but anchor for a while like supported a lot of capital in size and that caught pretty much every major Fund in the space off guard because they were trying to clip yield and so your initial question for you is a good one which is I think the days of recursive leverage and capturing yield are long gone like we're not going to go back to that state liquidity is going to dry up has already dried up fairly substantially any major you know borrower lender in this market is

tightening and showing up drastically if they're still alive yeah the the market makers and lenders are if if not if not dead hooked up to an IV at this point um I mean it comes I think I think yield comes from a good place like the original a pro a profitable protocol can redistribute um Can fees fees to users and whatnot and that is and that is a good sign in its base fundamental original state of what the of what the proper um winners winners are but the problem is that that's gotten so distorted that

it's turned from a it's turned from a measure of success into a measure of risk how does how does the market price this is it a is that a 20 or a 70 default rate um so yeah it'll be interesting to see what how that how that progresses yeah do you guys have a solution here because I mean so you said this line that people in crypto love to say including myself which is like if you don't know where the yield is coming from you are the yield but like you can get you can get three percent right now on Marcus by Goldman Sachs or I can get like probably 0.01 on my Bank of America account or something like that I don't really know what they're doing with the

money like I don't actually know where the yield is coming from um but I'm not uh you're muted you're muted you're absolutely right look this is uh the I'm not saying that like there's no place for fractional Reserve banking in the world like look this is how banks operate as soon as you deposit funds you know you don't know what they're necessarily doing with that um and if you have concerns about you know being a depositor in a bank you're better off just holding treasuries it's closer to the printing press um nonetheless like there is a state of the world where this continues to operate um it just needs to be

heavily regulated yeah unless of course you're like uh look you're like uh supplying liquidity to a protocol as Fubar as you said yeah or at least made or at least made transparent or maybe super funds flow on chain controlled by code and whatnot absolutely if you're uh if you're a you know a deposit or an obvi and there's a huge borrowed demand for a particular asset and you happen to have that asset then the Market's going to price that and yeah but you're but you're seeing that fairly like in real time and and that's the beauty of D5 here um there have been I'm not saying by the way D5 is perfect uh because this a lot of D5 Champions

and Bulls like it's important to like say there's still a lot of risk in D5 smart contract risk cream for instance had an issue where they onboarded a questionable collateral type and that was used as exit liquidity like you know but at least at least people are monitoring that and and the problem that I go back to here which is my biggest concern is what were the risk management teams at these earned programs really doing and to what extent and veracity and thoroughness were they inspecting books and it's clear that they probably weren't so do you do you see a world where on on the verifiable transparency

veracity front the two paths are we need better inspectors or we need a way to program this better um that's a great like who regulates the inspector who it's like it's like SMP and the rating agencies wasn't it the I think the the auditor for FTX and maybe this was a meme that got blown out of proportion but I believe their tagline was the first Auditor in the metaverse and and we don't yeah yeah I think like look at the end of the day

um I feel much more comfortable being enforced by code with some recourse off chain like I mean I think that's the like yeah code is law to some extent but like also there's recourse because everything is transparent and then you can have a claim off change say hey look something was done here or there and like funds were misappropriated or whatever but having the guarantees and the transparency of a smart contract is very powerful and I think it's uh that becomes very powerful especially moments like now uh and maybe this is a good segue into maker because you're um but what I'll say is that's the kind of the issue right rating agencies were in the 2008 Global financial crisis

where you know anyone that's seen the movie The Big Short or just has any understanding what happened they were rating some you know junk or Crap as AAA and it's like who's they have reputation but they clearly like lost it but they still exist it's a bit of a [ __ ] show right yeah you want to explain the maker situation with Gemini gusd sorry you're the maker delegate I mean basically Gemini's all right so I think it's Tyler Winklevoss maybe it's Cameron um you know one time this summer I was in uh it's in New York and I saw Cameron and Tyler play uh I I went and saw them play

at uh at a venue like playing guitar just makes me think I'm like man they probably should have been spending more time uh on the wrist parameters not playing guitar but uh anyways September 29th like two months ago Tyler posted to the maker community and basically said hey look we've had this really deep relationship between Gemini and maker for a while right we've custody maker and die we've traded maker and die we've our earned product supports maker um and died Nifty Gateway people can use dye with a credit card or consumers are able to select dine maker as the reward basically he posted um to the maker forum and just said we want to help gusd um help Gus to encourage the use of gusd in the maker ecosystem so Gemini

partnered with maker to pay them 1.5 1.25 annualized on all the gusd they have in the PSM currently it's at 473 million gusd um this kind of puts into question I I so I think there's two questions here one is I think we're about to reach the debt threshold in the PSM which is I think 500 million and then there's also a question around the uh gusd stability right because so Gemini GSD is Gemini stablecoin it's reportedly backed one to one by cash and cash equivalents Gemini offers a lot of the problem of this earn product one of the one of the reasons people use Gemini is because they offered 8.5 on gusd

um I think they've pulled that down to like five or five and a half percent but um so so one question here is like is USD stable the other is um we're going to reach the debt threshold of the gusd PSM so I think I think those are the two things to talk about here is that what do you guys think about that yeah it's um I think overall you're probably closer to the situation than me being an active maker delegate but the issue is that stable coins don't have native yield without off without off chain treasury management or something like that um we have we have tokenized dollars but

we don't have tokenized treasuries at this point and so a lot a lot of these offers there's the Gemini one I think coinbase proposed a big deal as well um to act as intermediaries to get it to get a bit of yield back to the holders of these stable coins but there's there are huge just risks and opaqueness surrounding it um because there are these middle men taking rent so how that all plays out how it gets intermingled um say if Geminis are in program goes down for some other reason to do maker assets get siled or do they get lumped

in with the rest of the losses they're tricky questions yeah I I don't think um I don't think the maker stuff with GOC is that big of a deal so current reserves are like 472 million gusd that there there is a maximum debt ceiling of 500 million um like so you know gusd here for for those who don't know PSM is the peg stability module so gosd could be used alongside usdc to Mint die one to one maker is generally pretty prideful of its of the over collateralized nature this kind of like backdoor the protocol I'd say I I think this is kind of a nothing Burger um I don't I don't know if you think it's a bigger deal than I think it is something but well dye has a supply of

five and a half billion so something capped I mean that's that that's Max 10 percent um let alone I mean it this isn't as long as you're not committing complete fraud it's it's often a couple cents to get wiped off the dollar in the worst case not to mention maker Equity so yeah I don't think this is a cause yeah for concern but it is a an interesting piece of scaling and whatnot I would say the bigger thing that I'm paying attention to is so earlier today uh or excuse me earlier in this conversation explaining kind of the relationship with Genesis and then dcg the other another sister company is grayscale right the largest asset manager in all of crypto does this right now gbtc is trading at a 40

premium excuse me discount does this like is there any there's there's some fud going on that uh like grayscale could be hurt by this or that they might be forced to sell like dcg might Force sell gbtc I don't even know if they could even do this but like sell gbdc to make up to cover some of the hole which would drive the discount down even further Santi are you following this at all or Fubar are you following this um yeah GB grayscale products are the Widowmaker creative crypto they're so tempting and tantalizing they draw in the best and brightest and then wreck them and dump them out in the process making it even more tantalizing so

obviously there's a bunch of Bitcoin within the grayscale trust backed one for one trading and 40 discount um there is a two I think two percent asset management fee annually which is grow grossly high but so far lower than 40 percent so if you think there's any so it's it's an ARB play on future Redemption either ATF conversion or some winding down of the trusts itself so the trick is that people lever this up too often that was the three AC undoing in particular um as they

yeah you have to find buyers on the open market or else the price goes goes down you get liquidated for which further exacerbates the problem um so it certainly hasn't I'd say probably one of the biggest it's a very large contributor to Contagion in general is institutional players that institutional come in at institutional size come in and they make basic assumptions about the space like they're like this horrible clothes um Regulators will act reasonably to protect uh to protect investors in this

regulated product and then the regulated product just pulls out the bottom while the spot the the spot unfamiliar ones as well and that I think causes a bad feedback loop of both burning institutional players who are trying to dip their toe into the space and do it in a moderately Safe Way um and exacerbates liquidity problems all over because of the lockup yeah I think that's the two things more important things to reiterate there are like it's really this levered ARB discount play that has caught a lot of

players off guard um now if you're there for a sec just for background for folks who don't understand it really quickly borrowing fubark correct me here but the flow is like you want to just capture that spread his so for for context there was a time where these products traded at a massive premium yeah no one kind of believed that they were ever trade at a discount much less this level of a discount um like this lasted for years and there were some people that are very

profitable doing it but like everything that is hugely profitable at some point gets armed out um so particularly three hours at some point was the largest or one of the largest holders of some of these products including like gbdc and ethg and they were fairly late into the trade where that premium where you would like I'm trying to explain it here I'm probably going to get it wrong but you like borrow the underlying spot I think from someone like block fi and Fubar step in here and then yeah you use that to

to subscribe to gbdc and ethg is that right yeah the underlying mechanics um I'm forgetting their exact names or whatnot but the specific type of trust that it is has a six-month lock-up period upon new share creation yes and then can't be withdrawn ever really or at least not under any any reasonable conditions so one so one way people can um only only certain types of approved share creators can deposit BTC and get back gbtc with the six month lockup and

so this initially was trading at a what 10 20 maybe even 40 premium yeah because there was more institutional demand than um than shares available and you you'd think that the arm would close but the six-month window of delayed selling means you can't do it atomically you have to take on you have to take on six months of prices yeah so if there was demand for call it a thousand more shares of gbtc than there was then people would go in and create a thousand shares but then six months passed and people are demanding ten thousand so the ARB keeps it so the ARB keeps increasing so what

people would do to make this a quote unquote delta neutral strategy is they would they would um buy they would buy buy or borrow BTC stick at the trust and while they're waiting in six months Short Spot Bitcoin or whatnot to hedge out the price risk and try to capture that arm but then when when the premium goes from plus 40 percent to minus 20 you lost 60 percent these were often levered plays because it was risk-free money well it was it was an arm that made money for years um so people just got confident and

cocky and then what happens is institutional demand switches um there's a surplus of these shares nobody wants to buy them and so price goes deeply negative right yeah so I think this is the so we've seen folks so Chris bernitski came out earlier this week he's like I'm loading up on gbtc Hal press came out yesterday he said his fund made a large BTC buy I think he said quote yes we did buy all of the gbtc shares I think this is the thesis if I had to get it right is um is that the FTX failure is going to push Regulators toward regulation and hopefully some clarity here Bitcoin is going to be the one of the assets that gets labeled a commodity it sounds like a lot of other things might get labeled Securities Bitcoin needs to get labeled as Commodities and that gvgc will be the

first to get converted into an ETF and that 40 discount will collapse um and maybe go to zero because there's no liquid because the it unlocks the liquidity there's not that six month lockup anymore uh and so you so that's a so if it's one spread yeah at a 40 discount if a 40 discount if that spread closes that's a 67 gain if I'm doing the mental math right that might be wrong um so that's so that's so that's your money maker um yeah now importantly I don't think they're using much leverage here I think they're just buying yes like I think they're just yeah exactly yeah uh hoping for some Redemption window to open via an ETF or

yeah probably the only solution at this point um uh before FDX like what uh I don't think if there's been any developments for the last hour but what are the options what happens to Genesis and dcg and all the Predators um all right well there's another uh I would assume that DC so dcg raised a 10 billion dollar valuation about a year ago I would assume that dcg is racing to raise Capital right now um I so D so dcg put in crap I should know this number they they um they funneled like 140 million into inequity in into Genesis in like an

emergency stop Gap last night that was last week of 175 million I believe last week okay maybe 175. well I think I think it was that Genesis reported that they had exposure of 175 and dcg funneled backstopped 140 of the 175 of that but anyways when I saw when I saw the 140 number I'm like that's weirdly low basically um thank you we have a we have a great producer uh Garrett is highlighting the the numbers in the in the show notes as we talk here uh great great shout out shout out Garrett here um dcg is a funneled 140 into that when I saw that number um it just feels like Barry Barry's kind of at the end of end of his cash pile I

would say I always thought of Barry as having like an infinite cash pile it feels like if he really had all the cash he just would have done 175 of 175 I have a this is a total speculation I know nothing here I would assume that Barry and dcg are racing to raise Capital to backstop Genesis if they do that I would assume that they raise it the 1.52 billion dollar range those are my assumptions here there are other speculations going on like uh what's that business worth though the genocide business like yeah other than the the claims right but their book but like the actual business itself of all a lot of the executives have left

like and their reputation you know it's like uh would you I guess the if you're Barry the options are continue to fund rate raise at the hold Co dcg and then stop Gap and and save Genesis maybe there's a liquidity mismatch maybe there's some of the collateral that's stuck in FTX three arrows bankruptcy proceedings that might you know take 10 years plus and get some sort of probabilistically 65 between five and 70 cents on the dollar good luck um would you save it even coinbase debt is trading at 50 cents on the dollar so would expect an

even higher discount exactly less blessed public more long pale blending stuff yeah that's a great point and so you you either save it or you let it go you sell this to someone I don't know who would want to buy it hoping to them like be really aggressive and trying to recover some of the funds hmm I want to make sure I understand oh hold on I want to understand fubar's point one more time so wait so coinbase has publicly traded debt at like 50 below par that anyone in the world can buy right now so you're saying

the Genesis loan book has to be at least like a 75 haircut or more here is that am I understanding that correctly yeah coinbase bonds are I think 50 below par 15 APR or so so I'd expect them to be the not not not the risk free rate but the Benchmark rate for publicly traded um or Public public large enough to be public crypto in from Market making lending companies yeah I would assume what's also going on right now is there's a lot of bidders who are doing what what happened in the FTX situation which is there's a lot of bidders who want to take a look at a

loan book but they don't actually want to do it so yep exactly can be letter of interest yeah uh so or you let it go you try to sell the book what's the other thing that I just want to touch on is what happens to Gemini here well just one last point on the on the Genesis side of things I would expect that we see something that looks like a binance when binance came in it was like we're going to acquire FTX they look at the books and then they pull out I would expect we see something similar you know people people said binance Finance for the Genesis thing I don't know I don't think we see binance here because of the U.S regulations I don't think they have any interest I think CZ has enough like Apollo

uh yeah like like one cents on the one cent on the dollar or five cents in the dollar have bring in like a really aggressive like bankruptcy restructuring lawyer and then like recover 20 cents again they not they don't need to underwrite a full recovery here all you need to do is there's again all of this comes down to on what price do you get the book and there is a clearing price it's not zero maybe it's one maybe it's ten maybe it's 50.

but if you have there's a price for this book is what I'm saying hmm I'm not getting near this book um to be to be fair I don't know enough about it is that info gonna come out public you think or stay under wraps football you think anything stays private in crypto uh no I would assume that it I think it's actually beneficial for those kind of things to go public because it brings trust back it brings confidence back to the market yeah that's what I would assume so um there are a lot of companies out

there who are saying we didn't there's a lot of companies a lot of funds who are saying we did not have exposure to FTX we didn't have exposure to Alameda we did not have exposure to three arrows Luna Celsius block fi Genesis or Gemini and I am sitting here 24 hours later they declare bankruptcy putting my tinfoil it is impossible for all of you to be telling the truth um like what are you guys looking at next for where the uh what happens next where do we go from here or what companies or what types of companies like what happens next in the next six hours or a day because next like two hours next year I think what we're talking on we're talking about an hour at this point yeah we're we're

operating on a short timeline here um I don't know who are you want to go first people people get mad when you speculate that they're bankrupt yeah they don't react kindly to that um I I use I I I use lots of proxies for operational management quality and trust that are sometimes correlative and sometimes not but I don't know that I have any specific name to drop as the next shoe to fall Fubar that's why we bring you on man you are you're you're the and on here

a lot of hearing rumors that that ethereum assault is insolving who are the who are these validators getting paid out with new tokens printed every block what's going on here yeah yeah that is that is signal that is signal right there um I I've said enough names here to it's I think it's fair to assume that we should the point that Adam makes is a good one not just in these moments but just always um it's not to say that you should never have any counterparty risk sometimes it's difficult right to have zero

counterparty risk but if you have counterparty risk it's just it's a time to reassess that and it's a time to be extra careful and I'll tell you what I did I've minimized and have zero counterparty risk at this point and everything is either fully withdrawn back to Fiat um or some stable coin and the stablecoin that I feel most comfortable this is not an endorsement but I feel most comfortable is one that is fat backed one-to-one and the one that I feel comfortable with is uscc again not an endorsement and again I'm monitoring the situation in real time um and anytime Jeremy tweets I you sure know that I have an alert on that yeah

um but at this moment in time I don't have a growing concern on the redeemability of uscc one one yeah um but but if there's anything this week has taught us it's a it's what I said to you the other day Santi it's like you just got to move quickly when there's smoke when there's smoke right um I mean I didn't move fast enough I didn't move fast enough that Sunday I sat down it's Wednesday Today I sat down on Monday and was gonna pull some money off of Gemini and was like yeah I'll get to it on I'll get to it like this weekend I'll get to it later it's just like I've made these mistakes so many times we I added a similar thing with Tara and Luna happened where we had a chunk of change or I had some money and just you know like yeah so we'll

we'll watch it play out she was just taking like 80 cents on the dollar so yeah yeah so I think um you know I don't want to speculate um I think there's a lot of thought going on right now it look don't outright dismiss the fud but also don't act impulsively but at the same time if acting impulsively is gonna ensure your survivability and you have too much funds with one counterparty probably best to segregate and contain risk that no single wallet or counterparty or asset can destabilize you you know what I mean it's like the horcrux model we always bring on Harry Potter spread it out

you can easily create wallets you can easily self-custody you know if you don't have to use an exchange and you have some probability that it could go under or just pause withdrawals and that's going to make your life complicated and difficult take it off go off chain you know go Cold Storage and if you're really not reading the service agreements of an earn program and you don't understand where even five percent is coming from two percent is coming from now is not the time to get cute go Clinton on treasuries God damn it we're definitely in a guilty until proven innocent regime yes um the the the the evidence you need is

not you don't need overwhelmingly like beyond the Reasonable Doubt evidence you need enough to doubt that's that's that's good enough and even that said there are I see certain areas where people risk 10 like Risk 100 for a 10 upside while ignoring the cases where your downside is 10 percent the upsides of a hundred um so regardless of whether things come to fruition or not I'd say for most for most people they Panic they panicked on false positives more often than not but then you're prepared for the actual scenarios where it is

necessary you do need to act quickly if you're somebody who's only ever used the centralized exchange and doesn't know what metamask is if you're it's good to go download that practice with it see what see what uniswap is custody of seed phrase and whatnot and then you're ready you can do that in a semi-callm manner uh take your time learn some stuff Tinker with small enough Tinker with small amounts of money and then when it really matters that you have to act impulsively in the moment you're ready you're prepared yeah absolutely there's a reason why companies do fire drills on a regular Cadence yeah I think I posted uh posted a tweet

about Netflix's chaos monkey tool yesterday or they have an internal software service that'll go in and randomly kill off machines kill off Backup servers um to see if the website can stay up to test the healing mechanisms yeah and make sure that they're running they have this this constant I'd call it a learning process it's the the engineers learning what infra is reliable and what's not and the crypto industry should have that as well both for centralized exchanges and for users what is it like to get yourself to a safe place yeah one um last point I think we can maybe transition to as we talk about flood you know the disappointment of media as we've seen some of these puff

pieces but before we get there I just want to reiterate one point that is not lost on me which is you know if you have doubts about a particular solvency of a particular Exchange but a lot of them you can assume are going to be tested sooner rather than later and if they have proof of reserves and they're doing things correctly they should be able to process those withdrawals fairly in a in an orderly manner without having to cause major delays um and so this is going to be a stress test for every single major every single kind of exchange and or service provider or app out there

um and frankly that's a really good thing and and so you know I think when you talk about why things can go wrong if there's a bank run typically you get in a very tricky position when you're running a very levered book of fractional reserves and you can't call back those you know those loans that you've extended um the counterparty the the borrower might be solvent might be sound but there's two things that can happen that have happened here one the borrower might be go insolvent as we've seen right and then you can't call back that loan

uh to process a withdrawal or it's stuck in a place and so it's just a mismatch of assets and liabilities but that doesn't necessarily mean that that money will never be recovered it's just it's going to take a little bit of more time we've seen instances of both right one where the counterparty like the borrower the borrower blew up and so you can't recover those funds they're either stuck in FTX or you know you're going to recover some sense of the dollar and so you take a haircut on that and then you can't process the withdrawal of your the exchange or you know um or it's just going to take a little bit of time and so I think these next couple of weeks will understand exactly

this difference between purely just a mismatch which is the best case or some other which is a worse situation which is not just a mismatch but your counterparty blew up and there's uh it's a bad bad debt right you have to take a haircut on that yeah it's a good distinction good call um I have an interview in 18 minutes uh blockworks is still hiring actually for anyone who's looking for role so we have a bunch of bunch of open roles open so I have 18 minutes here do you guys want to talk about uh New York Times total puff piece you want to talk about uh why SPF is tweeting like random letters you want to talk about Solana you want to just wrap this

Fubar it's on you I think on the yeah on the media coverage uh every day I wake up and stuff that's worse than I thought it would be so had had low expectations coming in but it does seem like they're trying to paint an extremely cozy picture of someone you if you go back and look at the articles about coinbase's CEO Kraken CEO which are both it seems much more honest transparent useful exchanges than FTX was um it's just biting and critical so

it's fascinating to see that this is the point where the um General Media policy of saying only bad things about tech takes a turn is with the genuine fraudster but I also suppose that it's it's useful for people to learn which sources are reliable and which ones aren't um gel Man Amnesia comes for us all where you read about you read about something in your area of expertise see how it's completely wrong then flip the page read about something you know nothing about and take all the words of

face value so I think yet another data point in people learning which sources are reliable which are hopefully hopefully it doesn't use as too crude of a weapon against the good actors in space I mean I agree with you before let me turn that into a positive statement though which is I think that this has been the last like 10 days the last couple weeks have actually just been a really bright light for crypto media right big shout out to Ian Allison at coindesk like his his story kicked all of this off uh the on-chain analysts have done an amazing job like using tools like etherscan and nansen to just basically pretty much uncovering crime Trails using the

blockchain I think Twitter like citizen journals uh have worked like Fubar I'm not sure if you've slept in the last two weeks of just like absolute ass off to aggregate information and just keep people up to date on everything I would say reporters like I'm seeing how hard block Works reporters are working right now uh there's all this there's a lot of like Twitter citizen journalism that's amazing but sometimes there's like not really sure what's rumor or what's Truth uh like I've seen how hard the block Works reporters have have worked to figure out to not only cover everything but to figure out what is truth and what is just rumor um I think I'll give a shout out to podcasts like I think we're doing a pretty good job Folks at bankless Laura Shin Unchained like on the margin Mike show Ford guidance Jack Farley like the

podcasts are giving really really thoughtful analysis I would just say it's a it's been a bright light in my mind like everyone who's been working really hard to bring truth to crypto is um has been doing a great job yeah it's a it's a great framing um really is kind of the Turning of the tide in terms of who has everybody has access to investigate on chain stuff and you really get to see who knows what they're talking about and in real time days or weeks faster than you'd get through traditional sourcing yeah so Santi anything else uh to touch on no I mean I think you guys are right on point there you know a lot of times we talk about more oversight of crypto

markets I think I absolutely agree with that oversight of off you know black box traditional service providers that operate as normal traditional financial institutions absolutely there's there should be the same level of rigor and oversight to understand really what exactly they're doing under the hood but oversight of on-chain stuff is there for anyone to inspect in real time and you can call it out if you have a wallet that is stacked the binance and binance is moving around a couple billion dollars you can immediately tweet to CZ and if there's enough noise I think right now every single major kind of player out there

is is monitoring Twitter and and responding to that q a in real time otherwise runs the risk of you know losing customers or trust very quickly so it's just an important distinction to make I'm fairly optimistic that this message is resonating with not just not just like to be fair like I have Bloomberg on all the time it's kind of therapeutic to just listen to the nonsense um it's like a soothing boys I kind of grew up in a trading floor and but a lot of a lot of the guests that have come on and a lot of the questions because historically like the traditional media has asked like leading questions right that like frame it in like a really bad light rhetorical questions but a lot of the a lot of the discussion has been I think fairly

constructive and has gotten it some like fairly right around this goes to the JPMorgan report um and I think there is some good journalism being made uh and Reporting and I think people are starting to understand that a lot of what happened at FTX could was in large part because of a lack of a regular like this regulatory loophole Arbitrage that pushed them offshore and they weren't very regulated and a lot of times there should have been emphasis there uh to protect consumers and and a lot of the stuff on D5 is just has been working well and has there are problems with D5 but transparency um monocustodial Solutions have been

operating to the fairly well yeah it's really nicely said all right housekeeping as we wrap this up I appreciate everyone listening I know everyone's super busy so I appreciate you guys listening one if you enjoyed this show uh Santi and I work on our ass off Fubar appreciate you joining us so just please hit that subscribe um I know something you gotta do you gotta do the the like yeah yeah no but actually Please Subscribe because it actually goes it really goes a long way if you're listening on like apple or Spotify and give us a review Santi cringes every single time I say this but it really does help the show uh the more people who review the higher we go and like when you open your Spotify app so it really does go a long way the other thing is that um I know the layoffs in

crypto haven't been as public this time around but they're I've been noticing that there's been some layoffs there's also layoffs in media protocol which was a Politico spin out just shut down yesterday um I just want to call out that we're hiring for a bunch of roles like VP of sales VP of Marketing sales people front end devs full stack devs research analysts branded content writers video editors so if you're listening to this and you have just been impacted by something or you just want to come work your crypto just feel free to DM me on Twitter um and yeah I think that's it stay staffu folks uh yeah sure that's it survive [Music]