Stay Safe Out There
Welcome to the first issue of Crypto Curious. Thanks for joining me.
I don’t know if this makes it an inauspicious time to start this newsletter, but it’s been a brutal week for crypto. Bitcoin is currently down 67% from its all-time high; Ethereum 75% (small consolation (?) that Netflix is down 76%, Shopify is down 77% and PayPal also down 77%). Notable names are blowing up and there’s dread that things can still get worse from here. But what do we say to the God of death? Not today.
My goal with this newsletter is to help people better understand the rapidly evolving and fascinating world of crypto. I’ll try to focus less on news and instead try to highlight stories that illustrate some of the big themes, concepts and changes in crypto. So even if you don't understand every detail of the particulars (like today's discussion of stETH), hopefully the ideas being discussed will expand your understanding of how crypto works.
As an avid skier, I’m borrowing the trail map system. Topics will go from green to blue to black as a measure of their level of complexity or technical sophistication. We’ll see how that goes.
Finally, I’m starting this with a small group of friends and colleagues. If you enjoy it, please share and have your friends sign up here. Let’s go!
🟢 Crypto Legislation
New technology always warps the existing landscape. But when you take a technology that is inherently borderless and resistant to centralized power, it’s going to be a challenge to nail that jello wrap legislation, most of it from the 1930s, around that tech. At least some Senators are trying.
"US Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) unveiled the full version of their long-awaited crypto regulation bill." They even wrote a Medium piece summarizing the recommendations. Some of the highlights:
Define what is and isn’t a security.
Put much of crypto under the regulation of the CFTC (commodities) instead of the SEC (securities).
New efforts to define regulation around disclosure, stablecoins, taxation, etc.
This is nowhere near becoming law, but it is a broadly pro-crypto stake in the ground providing some frameworks for regulation.
I've long thought that the biggest risk to crypto was regulatory. Sure, Bitcoin is *technically* unstoppable, but, practically, there is much that governments can do to make Bitcoin, Ethereum and, especially all of DeFi hella inconvenient. Established players like Coinbase and FTX have been pushing for regulation a) for some business clarity and b) because they know they can better afford the costs and hassles compared to young up and comers (see Google/Facebook re GDPR).
Josh Hannah taught me five years ago that every day that Bitcoin doesn't die, it gets a little bit stronger. We're seeing that effect on the legislative side as well. As Fidelity and Goldman and all of these other companies start integrating crypto, they become increasingly invested both financially and emotionally. Bit by bit, crypto becomes more embedded and has more proponents to stand up for it.
🟦 Free Money!
Remember the good old days of the first Internet boom, when companies would just give sh*& away to get you to try their product? I think I stocked up on enough free offers from Drugstore.com that I didn't have to buy razor blades for half a decade. Well, everything old is new again.
With crypto, you can incent early usage by allowing users to also be owners ("Web3 is the internet owned by the builders and users, orchestrated with tokens"). This most often happens with an "airdrop" where you give tokens away to a select set of people to try to build network effects.
Optimism is what's called a Layer 2 network. As Ethereum gets more crowded and expensive, one solution is to have a parallel world where transactions can happen faster and cheaper, but still be compatible and “settle” on Ethereum. But launching an L2 is a pretty classic network effect problem: you need a critical mass of people to use your chain to make it interesting. So Optimism decided to give away 5% of its market cap (potentially/extremely theoretically worth $250 million) to people that met certain criteria (mostly relating to having used the protocol).
Of course there were problems. Some people got an early jump (we'll call them the Optimism Sooners), others couldn't claim, many got delayed. Then once people got their hands on the free tokens, they, not surprisingly, started selling them and the price tanked. Then people got upset at the people who sold and said they shouldn't get more free money in the future. It's the circle of life.
◆5% Off Ethereum?!?
Ethereum is in the process of moving from Proof of Work (i.e. burn a bunch of computer cycles as "proof" that you're not cheating) to the much more energy efficient Proof of Stake (i.e. put your ETH up as collateral as "proof" that you're not cheating). Proof of Stake coins pay out interest to incent holders to stake their coins and support the chain (rewards range from 4% for ETH to 14% for Polkadot).
To make these rewards accessible, companies like Lido have sprung up offering.... It works like this:
It’s complicated to stake on your own and you need a lot of ETH to do it anyway. Loan us your ETH and we’ll give you stETH instead.
We pay you 4% interest. And your stETH kinda sorta works like regular ETH since lots of places will let you use it to borrow/lend against it.
Eventually, but not for a little bit, we’ll let you convert it back into regular ETH.
If you're a committed long-term holder, this is nice little boost and for most of it's history, ETH and stETH have traded at close to 1:1. But after the Terra/Luna collapse and with some other protocols potentially teetering, the peg has fallen as low at 0.93. Here's a good write-up.
While this may have all sorts of implications for different parts of the market, it also presents a relatively simple, long-term trade:
Instead of buying ETH, buy stETH. Rather than 100 ETH, you get 105 stETH.
Receive 4% interest.
Wait. Possibly a long time (1-2 years?).
Convert your stETH into ETH. You get your 5 bonus ETH, plus let's say 4 ETH for a year of interest and now have 109 ETH instead of 100 ETH. 109 > 100, right?
To be 100% clear, this is not investment advice. There's all sorts of issues with this. You need a bit of sophistication to even buy stETH (can't get it at Coinbase). There's some smart contract risk if Lido gets hacked. stETH won't even be able to convert to regular ETH a) until the merge happens (could be September, could be end of year who knows), b) then another 6 or so months after the merge for a new “hard fork” to enable withdrawals and c) even then there will be a queue to convert. Oh, and we will likely cover this next time, but it may cause Celsius (a hedge fund disguised as a bank) and 3AC (a highly leveraged hedge fund disguised as a regular hedge fund) to go bust.
That's it for the inaugural edition. Have any questions? Got feedback? Just hit reply.