The good, the bad, and the ugly
The slow-motion, rolling crypto collapse following the Terra/Luna implosion in May 2022 seems to be gathering pace. Contagion bankruptcies, insolvencies, liquidations, and rumors of such in Celsius, Voyager, 3AC, BlockFi, and other DeFi crypto lenders, exchanges, and tokens soon followed the Terra/Luna collapse. Yesterday, news of Sam Bankman-Fried’s (SBF) FTX and Alameda insolvency and potential buyout/takeover and quick rejection by Binance appears to have accelerated the crypto carnage to the next level. Binance is the world’s largest crypto exchange, and FTX was the third largest.
Twitter threats between Binance CEO Changpeng Zhao (CZ) and SBF followed by Coindesk’s leak of Alameda’s balance sheet started the FTX run. Alameda is a crypto hedge fund run by SBF that is an extension of FTX. FTT are tokens issued by FTX and are the primary assets of Alameda. From the leaked Alameda balance sheet:
Total assets: $14.6 billion. This is comprised of $5.8 billion FTT token, $1.2 billion Solana token (SOL), $3.37 billion in unidentified “crypto held,” $2 billion in “investments in equity securities.” This leaves roughly $2.2 billion in assets. According to our sources, hundreds of millions of dollars of the remaining assets are comprised by Alameda’s holdings of the Serum (SRM), Oxygen (OXY), MAPS, and FIDA tokens, all of which are from other SBF projects. According to this balance sheet, Alameda only had $134 million in cash on hand in June 2022.
Total liabilities: $8 billion, of which $7.4 billion is “loans,” with another $292 million worth of FTT token owed. The remainder is unidentified by the Coindesk article.
Alameda’s balance sheet fits the description of SBF’s infamous interview with Bloomberg in May 2022, where SBF used the analogy of an “empty box” to explain how yield farming works. SBF stated that one essentially takes an empty box and establishes a protocol associated with the box that promises something down the road from the tokens created out of thin air by the protocol. Through supply maintenance, marketing, governance, voting rights, or the crypto grapevine, the token begins to gain value. Future tokens that return far above normal yield accrue to new participants who invest real money to acquire the high-yield token. The token’s market cap climbs with the inflow of money, increasing the cycle upwards in valuation. It continues until the rug gets pulled or, for whatever reason, a run begins, and it rapidly collapses, often as quickly as overnight. The contagion from the collapse to associated cryptos then reverberates through the crypto space.
Running below the surface of all of this is a crypto foundation built upon sketchy offshore and unaudited entities like Tether. Tether has an unbroken history of financial mishaps, fraud, and criminal activity, yet, it has become the backbone of the crypto ecosystem. No one seems to understand how it is all held together, though well-documented wash trades, fake volume, and movements by large crypto holders, known as whales, intimate a system that is on borrowed time if traditional financial oversight and regulation are ever brought to bear on the largest players.
That is one side of the crypto space. On the other side are legitimate, revolutionary businesses attempting to leverage the blockchain into mass adoption while disrupting and economizing traditional finance and business models. It’s a Jekyll and Hyde ecosystem. Take the case of OTOY, its Render Network, and its token RNDR.
OTOY has created a better rendering solution. OTOY states:
“The Render Network® is the leading provider of decentralized GPU based rendering solutions, revolutionizing the digital creation process.”
Using distributed GPU computing power, Render provides a blockchain-based platform for artistic creation that disrupts the previous centralized, high-power, and high-cost rendering solutions. Think of the previous barrier where only well capitalized entities with access to massive and expensive computing power, like Pixar, could provide rendering capabilities. Now think that with the Render Network, every artist is their own Pixar. The Render Network democratizes artistic rendering creation and makes it financially available to anyone with a vision and a computer.
Necessary for Render’s network solution is a cryptocurrency in which to denominate one’s artistic creations on the Render blockchain and receive compensation. OTOY issues the token RNDR for this purpose, and it trades on cryptocurrency exchanges. Unlike many other cryptocurrencies emanating from empty boxes that are merely speculative tokens with no real use purpose or underlying value, RNDR acts as a valid currency to denominate artistic contracts on the Render blockchain. In this sense, the more RNDR acts like a traditional currency defined by a unit of account, the greater Render’s ability to grow its network.
Unfortunately, despite its legitimate real use case, RNDR faces all the instability issues of all cryptocurrencies. Crypto turmoil may cause volatile changes in RNDR price unrelated to the demand of its network. As a paired trade with BTC and ETH, RNDR price may change up or down in line with volatile price changes in BTC and ETH. These price changes have no relation to the actual supply and demand use case for RNDR on its network. In other words, RNDR becomes associated with everything wrong with cryptocurrency and the blockchain despite not being part of that problem.
Price volatility beyond the Render Network’s control presents limiting issues for the growth of the network. Artists using the Render Network want to create content and earn a requisite income for the value of their work. They do not want to become cryptocurrency speculators and deal with the volatility and scam side of the cryptocurrency space, which includes trading on crypto exchanges whose terms of service may prohibit access to accounts randomly at the exchange’s discretion. The stability of value problem holds true for the other side of the artist; those who contract the work.
There is a wide belief that the crypto space is going through growing pains, and it will all get sorted out as the space matures and regulators finally catch up and eliminate the more illicit players. Even if this is true, it does not solve the long-term issue for real use tokens like RNDR. RNDR requires stability of value to achieve its goal of revolutionizing the digital creation process. In the previous five days, RNDR has risen in value by 60% and then fallen in value by 50%.
For RNDR to stabilize its value and attract more and more users naturally inclined to its global solution requires that RNDR be linked to a monetary standard of reference or unit of account. This hold true for all legitimate blockchain solutions. The absence of a link to a monetary standard of reference plagues the entire crypto space and has turned it into a speculator’s playground and casino rather than a foundation for revolutionary progress. The crypto solution for instability of value and rampant volatility is stablecoins like Tether, but as previously noted, Tether is the heart of the problem, not the solution. It is possible for cryptocurrency to act as a monetary standard of reference and move beyond stablecoins and fiat. This is the original promise of Satoshi’s bitcoin, who erred with Bitcoin’s fixed supply protocol.
Real use cases like the Render Network that are leading the way to revolutionary change are limited and hobbled by the absence of crypto monetary stability. This would not be a long-term problem except that the issue remains unrecognized. There is more attention invested in the crypto speculative arena than in its revolutionary potential that requires cryptocurrency stability. There is a solution. When people start using crypto for everyday purchases of goods and services, then blockchain’s disruptive potential will begin to be realized. The crypto space continues to move further away from that goal than toward it. Previously, cryptocurrency use for everyday transactions was expected to happen at any time. Now, it is rarely discussed and no longer mentioned as a goal.
Legitimate enterprises like OTOY and many others essentially become economic prisoners of the larger crypto space in which they must exist. It is a problem that requires a solution before crypto enterprises can achieve their disruptive potential.
Disclosure: I maintain a private investment in OTOY.