What Could SVB Contagion Look Like?
Euler Finance Exploit | Revelo Intel Use Case | ApeX Protocol | Chainlink GameFi | Secret Network Bridge
GM Intels, this is your Daily Bolt briefing.
In today’s edition we bring you declassified research on the latest events in crypto: from the Euler Finance exploit to the USDC depeg.
Yesterday we also released a project breakdown on Camelot, marking our 22nd live breakdown.
While this breakdown is available for premium members, we have 2 breakdowns available for FREE members, with more coming soon…
Over and out.
Key Discussions Happening Today
1/ The Daily Gwei Refuel #548 - USDC Drama & Euler Finance Exploit
Preview: Anthony Sassano gives a recent recap on everything new in the Ethereum ecosystem. Click here to listen to the full episode.
Length: 27 mins | OUR NOTE: 4 mins
USDC drama seems to have come to a close with Jeremiah Lair announcing that 100% of USDC reserves are safe and secure.
Silicon Valley Bank, Signature Bank, and Silver Gate were all shut down over the weekend by US regulators due to liquidity issues and potential bank runs.
There was a lot of volatility within DeFi and Unchained over the weekend, leading to a lot of MEV (Maximal Extractable Value) extraction.
Aztec Network announced the sunsetting of Aztec Connect, the layer 2 network for private transactions.
2/ DeFi Podcast Ep. 28 – Nick Drakon, Founder of Revelo Intel
Preview: JF Saine and Morrissey are joined by Nick Drakon to discuss Nick's opinions on the L1 wars and using Revelo Intel to make intelligent investments based on a review of quality information in a timely manner, we recommend this episode to all market participants. Click here to listen to the full episode.
Length: 67 mins | OUR NOTE: 8 mins
Here are some key takeaways:
Nick Drakon is the founder of Revolo Intel which aims to collect and organize new information for DeFi investors.
Equities markets have high availability and usefulness of structured, unbiased, objective information, scoring 10 out of 10.
The availability of such information in crypto is low, with a score of 1 or 2 out of 10, making it difficult for investors to make informed decisions.
3/ CryptoCoinShow - Introduction of ApeX Protocol
Preview: Ashton Addison from CryptoCoinShow discusses with Tekla, Head of Business Develop of ApeX Protocol about the overview of the protocol, features, and future developments. Click here to listen to the full episode.
Length: 25 mins | OUR NOTE: 3 mins
Here are some key takeaways:
ApeX is a non-custodial, non-KYC derivatives DEX built on a decentralized and permissionless Apex protocol.
ApeX Protocol launched on the main net officially in November 2022 and has become one of the most well-adopted dexes on the market with more than 11,000 unique users and trading volume exceeding 5 billion.
The users can mint and burn SBTs (Soul Bound Tokens) as well as tailor them through smart contracts.
4/ Planet IX Twitter Spaces March - What is GameFi with Chainlink?
Preview: Beat Happening, CMO of Planet IX is joined by James Lawton, Chainlink Labs Head of Blockchain Gaming to discuss the world of NFT-based strategy games, the impact of Web3 on the gaming industry, and how PLANET IX utilizes VRF and Automation. Click here to listen to the full episode.
Length: 57 mins | OUR NOTE: 3 min
Here are some key takeaways:
The point of GameFi is the ownership of assets derived from games and the financialization of those aspects.
Planet IX is focused on creating interconnectivity between assets in the game and making it fun for users to make choices.
The Verifiable Random Function (VRF) is one of the most popular use cases for Chainlink in gaming, ensuring verifiable and secure randomness on-chain.
5/ Secret Spaces - with Secret Saturn - Mar. 14, 23
Preview: In this Twitter space, Secret Network is joined by Secret Saturn to talk about the new Secret dashboard, updates and more. Click here to listen to the full episode.
Length: 47 mins | OUR NOTE: 1 min
Here are some key takeaways:
The idea behind the dashboard is to have a one-stop place where everyone who isn’t really familiar with every tool that is available in the ecosystem has a nice way to start off.
The dashboard shows the overall network stats, connectivity needed to other Cosmos chains and dApp page overview of the ecosystem.
They integrated Axelar’s bridge to seamlessly bridge assets to Ethereum and other EVM compatible chains.
On the Revelo Intel platform, we’ve summarized these 5 episodes and in total, would have saved you: 3 hours and 24 minutes!
To get access, you just have to sign up for a FREE plan.
Note of the Day
Coin Bureau - The Banks Are Failing!
Silicon Valley Bank Collapse and Everything it Means
In this episode, Guy talks about Silicon Valley Bank, bank run, $USDC depeg, bailout and more.
Read our notes below to learn more.
SVB Background
Silicon Valley Bank or SVB was a 40-year old bank based in Santa Clara, California.
At the time of its insolvency, it had about $209B in assets and was the 16th largest bank in the U.S.
They claimed to have banked at least half of the U.S.’s venture-backed startups.
They managed to do it by offering attractive loans to startups in return for these startups using them as an exclusive bank.
They had a strong relationship with the startup founders and the VCs that backed them.
SVB provided personal banking services to these founders as well as offering attractive mortgage deals which created additional incentives for the founders to use the bank.
SVB was also FDIC insured.
Startups, which usually have immense capital commitments, cannot practically hold accounts with balances below $250K that is insured by FDIC.
Over 85% of the funds that were deposited in SVB were in accounts over the $250K balance.
Deposits jump from $69B at the end of 2019 to $189B at the end of 2021.
Much of their recent growth was driven by their clients across all segments obtaining liquidity through liquidity events such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions and other fundraising activities.
SVB had a lot of assets that they needed to generate a return on.
In order for them to generate a return, they decided to buy long-dated securities which included treasury bonds and mortgage-backed securities.
By the end of 2022, SVB had over $120B in these securities vs. only $74B in loans.
It was all well and good when the deposits were coming in and interest rates were still low.
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Start of the Bank Run
When the Fed started to raise rates last year, it caused a great deal of excess VC capital to dry up.
The risk return of investing in startups was less attractive than investing in bonds and government debt which are now yielding more attractive returns.
Startups found it a lot harder to raise capital hence there wasn’t a steady stream of deposits going into SVB.
Long-dated securities are naturally more sensitive to interest rate changes.
The moment the rates started to increase, the value of these bonds started to fall.
SVB didn’t have any sort of interest rate hedges or other risk management in place.
A bond portfolio of $120B with an average duration of 5.6 years means that for every 10 basis point rise in the 5-year treasury, the bank lost about $700M.
The balance sheet was a ticking time bomb.
At the end of 2022, SVB had marked market losses on securities exceeding $15B.
SVB got a call from Moody’s and they were told that they were planning to downgrade the bank on account of the falling value of its bonds.
The plan was to sell $20B in lower yielding bonds and reinvest that into assets that delivered higher returns.
SVB was of the view that they could make up for the shortfall with a share sale.
Moody’s downgraded them by one notch with the understanding that the share sale raise would go ahead and that there was a plan to recapitalize the bank.
Once the news got out of the potential share sale, the stock value plunged by 60% last Thursday down to $106.
Venture capital firms started advising their portfolio companies to withdraw funds from the bank.
It led to the collapse of the SVB into the hands of the FDIC.
SVB banked around 65,000 startup companies in the U.S.
Over the weekend, there were legitimate concerns by thousands of startups over how they were going to make payroll in the new week.
$USDC Depeg
SVB was one of the banks that Circle used to store cash reserves that backed up its $USDC stablecoin.
The fears caused $USDC to slip off its peg which continued over the weekend as more and more people rushed to convert some of their $USDC holdings.
Circle made the announcement that $3.3B of its $40B reserves were held at SVB.
This meant that at least 8% of their reserves that were supposed to be backing the $USDC was potentially inaccessible.
There was also the fear that this realization could lead to a flood of redemptions when the banks opened on Monday morning.
Everyone knew that Circle had a large stack of government-backed securities at BlackRock.
Over the weekend, Circle came out with a strong statement about their reserves and the exposure to SVB in which they said that $USDC liquidity operations would begin as normal on Monday morning.
A bulk of their cash holdings are at BNY Mellon.
$USDC slowly regained its peg by Saturday night.
Will they spread?
There are many banks with similar structures to SVB.
Banks have a total of more than $600B unrealized losses on their fixed income securities since last year.
People may have decided that they were going to pull their funds out of a bank that the Feds would allow to fail and hold it in one bank that they wouldn't i.e too big to fail bank like JP Morgan.
It raises the question of how fragile the U.S. banking system is in general.
There’s $22T in the banking system.
The FDIC has $124.5B on its balance sheet as well as a $100B line of credit from the treasury.
It means the FDIC only covers roughly 1.3% of all deposits.
The fractional reserve banking system is nothing but a confidence game.
Bailout or Not?
The word “bailout” is pretty toxic because the notion that taxpayers should be held liable for the losses of a bank is ludicrous.
There should be a distinct difference drawn between the senior management and shareholders of a bank, and the customers who have funds stored there.
The collective disdain that some may have for the plight of the customers is unwarranted and unhelpful.
The most at fault are the policy makers that shut down the economy and flooded it with cheap money.
The easy money led to some runaway inflation that was anything but transitory and once they realized that was a mistake, they quickly reversed course and have been aggressively raising interest rates ever since.
On Saturday evening, it was reported that the Fed and the FDIC had been in discussions with the banking executives about a fund that would backstop deposits.
On Sunday night, there was a joint statement by the Fed, treasury and FDIC that they would be backstopping all the deposits at SVB and that customers would have access to their funds come Monday morning.
$USDC managed to regain its peg by Monday morning and has managed to maintain it since then.
What It Means
It shows that not only are banks badly managed but those that are supposed to be overseeing them are asleep at the wheel.
It shows that the volatile monetary policy of the Fed is having severe impacts on bank balance sheets.
It shows that the fractional reserve banking system is structurally unstable and is one bank run away for being a systemic risk.
It was a net negative for the crypto industry because buried in that statement was the announcement that Signature Bank had also been forced to shut down.
Signature was one of the few U.S. banks that remained friendly to crypto.
In less than a week, the sector has effectively been unbanked.
Circle’s dependence on the traditional financial system led to $USDC’s biggest depegging event.
This could further reinforce the need for a completely decentralized, safe and permissionless financial system.
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