What a time to be alive. Exchanges are firing big chunks of their employees, crypto lending desks are blowing up, funds are insolvent, assets that were supposed to be pegged are de-pegging. And meanwhile, amidst all this - DeFi protocols pay you less than the fed for your cash.
The big story this week is the potential insolvency of a large OTC crypto lender. They have paused withdrawals, and by all accounts are currently in the middle of a liquidity crisis. It appears that they hold large blocks of illiquid stETH and ETH deposited into the ETH 2 beacon chain that they can't get rid of to meet customer redemptions. Hence freezing the customer accounts.
We don't really know how bad it is. They might have other illiquid assets on their books that they can't redeem. They might even be insolvent. They are under no obligation to tell us, and because CeFi is opaque, all we can do is speculate. As horrible as it is, this incident proves the importance of the transparent and decentralized systems that we're building in DeFi. DeFi might be expensive, its UX might be clunky, but it is transparent and there is zero counterparty risk. And holy shit does that matter right now.
I'm not sure what happens next. On the one hand, if all they have is a liquidity problem (as opposed to a solvency problem), this might turn out to be relatively benign. Yes, people might need to wait to receive their funds until they become liquid, but there would still be funds for them to withdraw.
On the other hand, this could be the start of a significant contagion event - the kind of thing we saw in 2008 in TradFi and have never before seen in crypto. Only in this case, there'd be no bailout. We have no idea what other liabilities this company held. If they were a big borrower from other crypto lenders things could get even worse. Who knows where the buck might stop. If you have exposure, directly or indirectly, to lenders who have uncollateralized loans on their books I would think hard about whether it might be time to take that cash out and keep it somewhere you know is safe.
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