The Tally Newsletter

Share this post

The Tally Newsletter, Issue 72

newsletter.tally.xyz

The Tally Newsletter, Issue 72

June 17, 2022

monetsupply
Jun 17, 2022
1
Share this post

The Tally Newsletter, Issue 72

newsletter.tally.xyz

Welcome back for issue 72 of the Tally Newsletter, a publication focused on defi and DAO governance. We’ll keep you updated on key proposals, procedural changes, newly launched voting systems, shifting power dynamics, and anything else you need to know to be an informed citizen. 

In this issue we cover:

  • Crypto Market Contagion Driven by Celsius, 3AC and stETH

  • Fei Protocol’s Hack Compensation Proposal

Plus quick updates from Tally and the DAO ecosystem.


Crypto Contagion Continues with 3AC Blow Up and stETH Volatility

TL;DR: Losses triggered by the Terra collapse are continuing to reverberate through the space, with stETH liquidity and hedge fund Three Arrows Capital becoming the latest focal point of market stress.

Over the past weeks, the crypto markets have faced continued instability and sharp price declines. While there are several contributing factors, growing stresses on Lido’s stETH staking derivative and the unraveling of hedge fund Three Arrows Capital seem to be primary factors driving the market down. This has forced a range of governance responses across top DAOs and defi protocols.

Illiquidity in Lido’s stETH staking derivative is a key driver of the recent market breakdowns, with pressures in turn kicked off by the collapse of Terra UST last month. During the early phases of the Terra crash, key Terra investor Jump Crypto withdrew tens of millions of dollars worth of assets from the primary Curve stETH-ETH liquidity pool and converted proceeds to ETH and then stablecoins to help support the UST peg.

Source: Coingecko

In addition to forcing price down below parity with ETH, this also contributed to growing illiquidity in the stETH market. Curve concentrates liquidity for stable assets around a 1 to 1 ratio, which reduces slippage in normal conditions but has the negative effect of reducing available liquidity as price slips farther away from parity. Combined with the removal of liquidity, this had the effect of significantly weakening the stETH market and increasing downside volatility. 

Even though stETH price recovered to around 0.98 ETH in the aftermath of the Terra collapse, lower market liquidity significantly increased risk of collateralized positions on defi protocols including MakerDAO and Aave. Aave in particular was a driving force in this year’s parabolic ascent of stETH supply, due to a “leveraged staking” strategy where users could borrow ETH at low cost and then invest the proceeds into stETH to capture the spread. The figure below shows how stETH in circulation more than doubled in the months following Aave’s vote to accept stETH as collateral. 

Source: Coingecko

Retail focused lending platform Celsius and hedge fund Three Arrows Capital were caught on the wrong side of the stETH trade, having invested significant sums into the asset which they were then forced to divest at a loss when they were faced with withdrawal requests and margin calls. This caused contagion to several centralized counterparties across the Crypto space including Genesis (prominent lending desk and prime broker), Derebit (options exchange), and Blockfi (crypto lender). There are also rumors that 3AC may have managed funds on behalf of some of their VC portfolio companies, which could trigger a wave of failures across early stage crypto projects.

Twitter avatar for @thedefiedge
The DeFi Edge 🗡️ @thedefiedge
3AC invests in different seed rounds of companies. The protocol raises money usually in USDC / USDT. Well, the treasury is usually sitting around doing nothing. So a common deal 3AC did with their protocols is "manage" their treasury.
6:49 PM ∙ Jun 16, 2022
717Likes109Retweets

Aave also faced growing risks of cascading liquidations on stETH collateral. If stETH price fell enough to trigger some liquidations, the forced selling could potentially create a vicious cycle of further declines and liquidation pressure. 

Aave’s risk manager Gauntlet put forth a proposal to disable further ETH borrowing or stETH supplying, as well as raising stETH liquidation ratio to 90% (from current 81% value) to try to reduce risk of this negative feedback loop being triggered. But this would have the effect of increasing losses in the event of a severe stETH price fall, and also provided no protection against positions using stETH collateral to borrow stablecoins or other non-ETH assets. This prospect was made more dangerous by the fact that Celsius held a 100 million DAI borrow position mostly collateralized by stETH.

As a result, MakerDAO took swift action to disable their Direct Deposit Module (D3M) that supplies DAI into Aave. While Aave’s proposal was soundly rejected by voters afterwards, Maker took the position that any high risk proposal on an integrated lending market merits removing liquidity as a precaution. Defi’s inherent transparency has prevented much of the fear and contagion risk that is engulfing centralized crypto platforms, but as protocols become more heavily integrated (for example Maker is planning to implement additional D3Ms to other platforms like Compound), cross-DAO coordination and politics will play a growing role in risk management and user safety.

Fei Reimbursement Vote Moves Through Multistage Governance Process

TL;DR: The reimbursement for the Rari Fuse lending pool hack would put significant pressure on Fei’s balance sheet, and also represents the most pivotal use so far of their objection-based “Nope DAO” voting mechanism.

Fei protocol is currently in the final stages of voting on a proposal to reimburse losses in their $80 million hack from earlier this year. But with the crypto markets in freefall, this has become controversial as it would significantly reduce collateralization for their primary product the FEI stablecoin. The prolonged governance process to reach this point has also faced scrutiny and claims of bait and switch tactics.

Twitter avatar for @cobie
Cobie @cobie
This TRIBE / Rari stuff is a complete mess. Hard to be more bearish on DAO governance than after following this. In April, $80m exploit on Fuse happened: https://t.co/SeWvGd53Xv
Twitter avatar for @JackLongarzo
Jack Longarzo @JackLongarzo
While not the hot topic of this week, the post mortem on the recent Fuse exploit is live. It analyzes the nature of the vulnerability, the response from the team, the current proplems that need solutions, and additional security measures being taken. https://t.co/wfn3hFRBhz
11:46 PM ∙ Jun 15, 2022
781Likes97Retweets

Shortly following the hack, the Fei community seemed largely aligned with providing compensation to users. This included an affirmative Snapshot vote to this effect. But in the ensuing weeks FEI collateralization fell and opinions shifted. 

The next stage of Fei’s governance process queued the compensation proposal in a governance multisig with TRIBE holders given the option to veto automatic execution via the “Nope DAO”, a specially implemented governor contract. The veto was executed, and while this was primarily intended to force a full on chain vote rather than block the proposal outright, this was widely misconstrued on Twitter and other public forums as a rejection of user compensation.

The proposal is now live for a final on chain vote, but as collateralization has continued to fall it seems a majority of TRIBE delegates are rejecting the current compensation scheme. With voting ending later today and no voters in commanding lead, it remains to be seen if compensation will be fully abandoned, or if an alternative mechanism will be proposed to reimburse victims without jeopardizing FEI stablecoin holders. This episode also laid bare disagreements (or misunderstandings) over the role of Snapshot votes and other “soft commitments” within DAO governance. 


In Brief: 

Tally News

  • We hope we’ll see you next Wednesday, June 22, at the DAO NYC conference:

Twitter avatar for @tallyxyz
Tally @tallyxyz
the tally team is getting geared up for @DAO_NYC_XYZ next week! a gathering of some the best + brightest minds in the DAO Space ✨ see you there 🤝
Twitter avatar for @tommylower
tommy @tommylower
this @tallyxyz summer 22' merch we just designed is drippy af this team just keeps leveling up
7:39 PM ∙ Jun 15, 2022
9Likes2Retweets
  • Euler Finance lending protocol launches governance on Tally:

Twitter avatar for @eulerfinance
Euler Finance @eulerfinance
The EulerDAO launch is fast approaching! EulerDAO will utilise @tallyxyz's robust platform for delegation, so learn how to delegate votes in the guide below if you intend to be a delegate or actively participate in governance. blog.euler.finance/delegating-vot…
Image
1:18 PM ∙ Jun 14, 2022
21Likes6Retweets
  • Undercollateralized lending protocol TruFi holds first on-chain votes with Tally:

Twitter avatar for @TrueFiDAO
TrueFi, now on 🔴ptimism @TrueFiDAO
Now live: the FIRST EVER @TrueFiDAO on-chain vote - a new era for the decentralization of #TrueFi Head to @tallyxyz and use your staked $TRU to vote for the TrueFi DAO to claim ownership of the tfLP liquidity pools on the TrueFi Protocol 🗳 Vote here: bit.ly/3zurpme
Image
7:41 PM ∙ Jun 9, 2022
29Likes4Retweets

Ethereum Ecosystem

  • B Protocol affiliated Risk DAO organization releases bad debt dashboard, showing extent of current insolvencies across Compound based lending protocols:

Twitter avatar for @Risk_DAO
Risk DAO @Risk_DAO
Introducing the Bad Debt Dashboard: As part of our efforts to increase transparency around DeFi borrowing and lending protocols, we’ve just launched a new dashboard that tracks bad debt across Compound compatible protocols.
medium.comIntroducing the “Bad Debt” DashboardAs part of our efforts to increase transparency around DeFi borrowing and lending protocols, we’ve just launched a new dashboard that…
3:30 PM ∙ Jun 8, 2022
229Likes65Retweets
  • Lido considers plan for dual LDO and stETH governance of Ethereum liquid staking protocol, intended to reduce governance risk for users:

Twitter avatar for @randomishwalk
randomishwalk @randomishwalk
@LidoFinance + other community members - feel free to RT & share as needed. My scratch notes and additional questions that popped into my head during the dual gov proposal discussion
Image
Twitter avatar for @LidoFinance
Lido @LidoFinance
Stop by today at 16.00 UTC / 12noon ET as @_skozin, @hasufl and @inkymaze discuss the dual LDO + stETH governance proposal, and the implications it may have for Lido users, LDO holders and the greater Ethereum community. https://t.co/CeJk1l2HKu
4:49 PM ∙ Jun 16, 2022
22Likes7Retweets
  • Lido’s stETH liquid staking token falls as much as 5% below peg, pressured by withdrawals potentially caused by financial stress at CeFi lender Celsius:

Twitter avatar for @Crypto_Joe10
CryptoJoe @Crypto_Joe10
stETH is depegged, trading at .95 Liq is drying up & smart money is pulling capital. Coupled w/ the rumoured risk of Celsius' functional insolvency, there could be significant selling Me & @Riley_gmi & have been researching this for the past week Here is what we found
Image
4:02 PM ∙ Jun 10, 2022
1,968Likes580Retweets
  • Balancer votes against reissuing unrecoverable BAL rewards to Fei Protocol

Other Ecosystems

  • Twitter founder Jack Dorsey hints at decentralized web platform, “web5”:

Twitter avatar for @jack
jack @jack
this will likely be our most important contribution to the internet. proud of the team. #web5 (RIP web3 VCs 🤫) developer.tbd.website/projects/web5/
Twitter avatar for @TBD54566975
TBD @TBD54566975
Web5: An extra decentralized web platform https://t.co/LDW3MZ8tON
5:35 PM ∙ Jun 10, 2022
12,569Likes2,705Retweets
  • Avalanche based Trader Joe exchange faces small exploit on fee disbursement contract, with rival Pangolin later facing similar issue:

Twitter avatar for @shunduquar
shung (🌞,🌈) @shunduquar
So turns out that Trader Joe was exploited for ~$1M and this was kept a secret. Later, the same exploit was used against Pangolin to steal ~$300K of protocol fees. And the contract was audited by Halborn. I will explain the exploit so no one else makes the same mistake. 🧵1/9
Image
8:01 PM ∙ Jun 9, 2022
510Likes149Retweets
  • Cosmos ecosystem’s Interchain Foundation faces criticism from Notional validator over ATOM delegation program:

Twitter avatar for @gadikian
Jacob Gadikian @gadikian
I would like to highlight some really special, privileged validators: thoracic-boron-678.notion.site/ICF-Delegation… https://t.co/yKVlzP3Lbd
Twitter avatar for @CosmosGov
Cosmos Governance @CosmosGov
Validators play an important role not only in the security of the Cosmos Hub but in its governance. When you stake with a validator you are also trusting them to represent your interests when voting (although you can always override their vote with your own). 🧵 1/4
9:53 PM ∙ Jun 15, 2022
3Likes1Retweet

Thanks for joining us for Tally Newsletter issue 72. Be sure to check out the Tally governance app and join us on Discord for the latest updates!

Anything we missed? New developments or protocols you’d like to see covered? Drop us a line at newsletter@tally.xyz 

Best,

Nate, Tally

Share this post

The Tally Newsletter, Issue 72

newsletter.tally.xyz
TopNewCommunity

No posts

Ready for more?

© 2023 Tally
Privacy ∙ Terms ∙ Collection notice
Start WritingGet the app
Substack is the home for great writing