December 21, 2022

The biggest crypto news and ideas of the day

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Welcome to The Node. This is Daniel Kuhn and Xinyi Luo, here to take you through the latest in crypto news and why it matters. In today's newsletter:

In the news: FTX has $1 billion in cash, Core Scientific files for bankruptcy and Winklevoss twins present Genesis with a plan to get Gemini's money back.
The takeaway: Legendary cryptographer David Chaum writes about how centralized exchanges can adopt solutions like multi-party computation to beef up their custody and clearing systems.

– D.K.

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Miner Affair

Core Scientific, one of the largest bitcoin miners by computing power, said it would continue to mine throughout its bankruptcy process, which started Wednesday. Core is the first publicly traded mining company to declare bankruptcy during the bear market, but far from the only overstretched and undercapitalized operation.

Loaners' Plot

Winklevoss-founded crypto exchange Gemini has presented a plan along with other creditors of crypto lender Genesis and its parent company Digital Currency Group to "provide a path for the recovery" of an estimated $1.8 billion in assets loaned to Genesis. The committee asked for a response this week. In November, Gemini suspended withdrawals for its "Earn" lending product that promised over 7% returns generated, in part, by Genesis. Meanwhile, Auros Global, the troubled trading firm that reportedly lost $20 million when FTX imploded and has since missed millions in debt payments to DeFi protocols, is restructuring its loan book.

FTX Contagion

FTX has over $1 billion in assets, the exchange's new operators told a bankruptcy court Tuesday. This is the first indication of what little cash remains at the firm founded by Sam Bankman-Fried, who allegedly misused $8 billion in customer funds in an ill-advised spending spree before landing in jail. Some $720 million in cash assets is being held in U.S.-based institutions, with the remaining funds scattered across various companies and jurisdictions. Separately, crypto exchange Coinbase is now worth less than the total market value of dogecoin because of a stock slump.

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Sound Bites

"[Sam Bankman-Fried] should've kept quiet because the only people who were interested in what he had to say...are the prosecutors and the regulators."

– Mintz & Gold partner Ira Lee Sorkin, on CoinDesk TV's "First Mover"

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The Takeaway: Risk-Free Exchanges?

(Markus Spiske/Unsplash)

Crypto marketplaces such as FTX have caused huge losses to users because of the lack of full custody coverage. These issues stem from the way current electronic markets were simply designed as copies of paper-based markets.

Of course, the big irony in Web3 is the fact that all major crypto markets were built in a centralized manner. David Chaum, legendary cryptographer and privacy advocate, has recently been on a tear arguing for exchanges to use stronger cryptography to protect client funds.

He writes about one potential solution – multi-party computation – in his Crypto 2023 opus:

"Multi-party computation (MPC)...was coined by me to describe what are now increasingly often-deployed cryptographic techniques. These allow multiple encrypted inputs to be converted to a cleartext output by an agreed algorithm. The 'computation' is in effect performed by the cryptographic protocol itself such that no party can decrypt the encrypted inputs posted, but all parties can be certain that the cleartext output was computed correctly from exactly those inputs."

What this means is the keys issued by an exchange are useless to anyone except the trader in question – who maintains control of their assets. He writes further about particular instantiations of this technology, including use of other advanced cryptographic solutions like zero-knowledge proofs and atomic swaps.

"It is immediately applicable to crypto markets, where the need is most urgent and acutely felt," Chaum writes. "Once deployed, it will demonstrate that traditional markets can benefit significantly from adopting such best practices from crypto."

After the collapse of FTX, it's clear something needs to change inside the crypto industry. A step towards making exchanges a little more resilient and expanding user control over their own assets is a step in the right direction. At the very least, if Web3 will continue to have centralized points of failure, at least sprinkle in a little "crypto."

– D.K.

NEAR Protocol: Optimized for Disruptive Developers

When discussing the optimization of blockchains, many will look to improve on the three pillars of blockchain technology: security, scalability and decentralization. While improvements to these blockchain fundamentals may improve the capabilities of the network, it falls short of making improvements for its users.

While Ethereum recently moved to proof-of-stake (PoS) to work on its fundamentals, NEAR protocol has already set itself on a strong foundation, 10 years ahead of Ethereum's roadmap. Continue here.

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Off-Chain Signals

Not Just Democrats: FTX Exec Gave Tens of Millions to GOP Causes (Blockworks)
Washington Needs a Crypto Rethink (The New Yorker – soft paywall)
2022 was the year of crypto's climate reckoning (The Verge)
EY 'Did Not Initiate' Transfers of $1.7M in Bitcoin Linked to Defunct QuadrigaCX (Decrypt)