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Nemesis

November 2022

Nemesis

Disclaimer: while I have tried to be factually correct, there may be errors in here. I will be revisiting this post to update links and make corrections as necessary. This article may contain speculation and opinion, all of which is mine alone and does not reflect the opinions of my employer, or anybody else. I reserve the right to change my opinion in light of new facts that provide support to the contrary. None of this is to be taken as financial advice, and is not an inducement to buy, sell, or otherwise make any investment. I am not a financial advisor, auditor or accountant. Besides BTC, ETH, and SOL, I do not hold any positions in any of the coins mentioned. ABOVE ALL, READ AT YOUR OWN RISK!

Prelude

In the wake of the FTX/Alameda blowup, it’s time to reflect on how we got here. First, I will put this out there that I believe that the vast majority of FTX employees probably didn’t know what was going on with respect to Alameda and the large hole in customer funds, are hard working, and generally want to do good in the world. It is likely that the blowup is a result of a combination of poor risk management, and potentially the actions of a few bad actors. It is not my intention to lump these people into the same category, or otherwise besmirch them. No besmirching here. I will leave out any character judgments about the employees as I try to unfold varying ideas, as I reflect on what this means for Solana, and the greater crypto ecosystem.

Solana Magic

Circa 2016, before I had ever heard of SBF, I had only dabbled in crypto, bought a little bitcoin, and GPU-mined ethereum in my 2-bedroom apartment. To pay for life, I sold all of my crypto, went to rehab for a tenacious drinking habit and coincidentally avoided the bear market of 2018. Through 2020 I went down the bitcoin rabbit hole, and that’s where I stayed, playing with hardware wallets and flashing firmware to second-hand ASICs I bought online. I completely missed DeFi summer, and resolutely, in early 2021 I took it on myself to “learn this DeFi thing.” Two weeks of losing money on Uniswap, and a tryst with the Perp Protocol was enough for me to realize that I didn’t have either the funds nor the patience to play there. But I had kept hearing about Solana on Twitter so, on a whim, I downloaded the Solana CLI. A small transfer from the Sollet Bridge and I was immediately whisking trivial sums to and from paper wallets I created, all from the command line. It is my experience that this was the first usable chain that had reasonable services, and it was completely non-custodial. I was mystified by its potential.

I was able to accumulate a respectable bag of SOL and quickly branched out, searching for anything the chain had to offer. It only took a moment to stumble upon the Serum DEX, which didn’t require an account, just a wallet in order to trade tokens. Despite some minor confusion about the open orders accounts and settling funds, I can only describe the experience as magical, using something with an exchange-like feel, but it was merely an on-chain program. I was instantly sold.

I really only had one goal when exploring DeFi products: without viable access to leverage, borrow, or any reasonable means of going short crypto through conventional routes, I was trying to find a way to hedge my crypto bags safely. Kraken allowed margin, but you couldn’t segregate the accounts, it was expensive, and eventually the system was shut down. Perp Protocol sucked, frankly, and there was DYDX on Ethereum. But then a nifty venue came along: Mango Markets. To this day, I believe it was the ultimate crypto Swiss Army Knife, offering the ability to lend and earn yield, borrow, withdraw, and trade perp contracts. Perps were an option, or it was possible to borrow spot cheaply and sell it, thereby creating a short position. The answer to hedging was there: being able to blend long and short exposure without having to sell the underlying. The utility this unlocked was huge–no longer being beholden to high gas fees, or exorbitantly large margin accounts for tradfi futures that had few contracts were also too large, thinly traded, and that didn’t keep crypto’s 24/7 trading hours. Compared to the other options, Mango was a fucking oasis.

You know how 2021 went, prices were a roller-coaster ride, the chain suffered debilitating congestion, but on-the-whole, the year was very good to Solana. An internal voice told me that I will need to explain to my significant other that, whatever happens, “I took profits on SOL over $100.” I parted with about 2/3 my bag mid-late 2021, and that decision has proven to been the absolute correct one, since shortly after, I had to deliver a significant pound of flesh to the tax man for the good fortune I had found.

2022 Doldrums

2022 has been mostly dull, but punctuated by a series of embarrassing events causing significant damage to the chain’s reputation:

By some miracle I avoided nearly all of these negative events. My heart goes out to those who were not so lucky since, as you can see, there were myriad ways to get decapitated in a very short time frame. The year has grinded on, but, as a fortuitous consequence of me trying to do my taxes and figure out wtf I had done here, my skills started to emerge as a semi-decent on-chain analyst (disclaimer: I have no professional credentials, I am an electrical engineer by trade). This has allowed me to peel back the curtain, and honestly, I am a little disgusted by what I have found.

Sam’s Chain

Solana has always been synonymous with SBF, FTX, and Alameda Research. It is undeniable that they have left their mark on the chain, from bringing the liquidity, providing an on-ramp via the Sollet Bridge, to erecting the Serum on-chain order book that the ecosystem relied upon. In exchange, they were able to launch their tokens here, fomenting and selling into insatiable retail demand.

The ugly side to this is that SBF and his empire cast a negative aura on the chain. Everything good that came to it was explained as something of Sam’s doing, unfairly dismissing the fervor with which Toly, Labs, and the many devs brought new programs and products to the chain. It’s worth reflecting on everything they’ve done:

On virtually every promise made, the devs delivered, meanwhile all of these positive developments that came to us in 2022 were overlooked, and were overshadowed by the controversial relationship Sam and Alameda had with the chain. Skeptics mostly looked on at earlier token launches they supported here, and correctly, identified the tokenomics as mostly predatory. With a few exceptions (MNGO, SHDW) Solana’s most promising projects, for whatever reason, were launched with heavy VC/seed allocations and discounts, short vesting periods, and very low float to fully-diluted value ratios; the trait that we can now accept is characteristic of “Sam coins.” Even before FTX’s collapse, one need only look at the market cap of these coins (FTT, SRM, MAPS, OXY, …) to see that the value has been wrung out of them almost entirely. I will follow up with more detailed analysis on these types of tokens later, that I hope will corroborate what I am about to say here (TBD). But previously, I took away that the high FDV/low float was merely a reason to stay away from the coins, had no opinion that the arrangement could be more nefarious. Call me slow, but I no longer believe that’s the case.

Scam Coins

I don’t know if it was deliberate, but I now believe that the high diluted value, low float enabled two critically dangerous behaviours:

  1. The low float enabled token prices to be boosted with very little effort, and using modest amounts of capital to do so
  2. The high FDV of such tokens enabled anyone with a significant holding in the token to a) pledge it as collateral to unlock enormous sums of real assets, and b) potentially use those assets to further support the collateral’s coin prices.

The extent to which this was done is unclear, so I’ll pause now and just say it’s a working theory (“claims”). however, it is known that 4.65 million FTT and 63.75 million SRM (the two most recognizable Sam coins) were pledged to Voyager as collateral on huge BTC and ETH loans. Voyager being a creditor not known for its deftness in risk management.

In his interview with amateur journalist Tiffany Fong, SBF explained that only about half of FTT was free-floating “but not like a factor of 30, or something.” Well, depending on how you measure the circulating supply of SRM (the float) is about 300-600M, on a total supply of 10B. That’s an FDV:float of 15-30–he seemingly was describing another one of his coins. Further, we do know that the Financial Times procured a statement showing token values that exceeded the floating market caps of the tokens at the time (e.g. SRM circ supply ~$300-600M, but displayed as $2.2B on the FT statement). These anecdotes support the idea that although the float was quite low, Alameda was able to express the value of its locked tokens, or even the total token supply for financial statements, and possibly, obtaining collateral.

Theory in brief (conjecture): the incredibly high FDV : float ratios of these coins could be, and plausibly were used as a cudgel to grow to relevance, command market dominance, and effectively “Avi” both creditors and FTX depositors alike (note: If, as an onlooker, you don’t understand this reference, it is an allusion to Avi Eisenberg’s “highly profitable trading strategy” whereby he was able to deposit MNGO tokens to Mango Markets, temporarily pump the coin’s price to absurdly high levels, to enable him to withdraw the entirety of the assets from Mango on margin). The scheme’s undoing appears to only have happened once Alameda could no longer support the floor price of its collateral, as was demonstrated by Caroline’s failed “I’ll buy all of your FTT at $22” offer to Binance’s CZ.

End of a Dynasty

Now, I only named the previous sections as I did to point out that Sam’s tokens and reputation superseeded the hard work of developers who have spent any time here. While his role in the chain’s history was vital, it’s been nearly impossible to separate his influence from the narrative, and with his reputational capital now gone, it is essential that we do an about face and condemn all of the bullshit that we tolerated from him and Alameda, as the de facto benevolent dictator.

Solana’s Values

The behaviour of VC’s and investors in the Solana space has mostly shaped the appearance of–or lack thereof–any values here. While unfair, the most reflexive responses to the question of Solana’s values it that it has none, people are only here for the money, and to prey on unsuspecting retail. Yes, there were those types that indulged in predatory token sales, and the community suffered as a whole from their actions. But the simple answer is also wrong, because, if you look under the hood, you’ll find thousands of engineers grinding away, working on some of the most challenging problems, and ones that are yet to be solved on other chains.

I will be careful to not shill anyone here, but some outstanding work immediately comes to mind:

What does the Solana community stand for? Progress, and engineering: chewing glass. Many people criticize the community as being careless in the design of certain projects, yet they fail to acknowledge that Solana is still incredibly young, it does not lean on years of prior work done in Solidity (as do all the EVM chains), and finally, outright ignoring the fact that everything has been improving dramatically, right before their eyes. I am not exaggerating in saying that, while the chain has earned it lumps the hard way, it is utterly unrecognizable in terms of reliability and performance to what it was just in 2021.

Beyond a culture of relentless improvement, the community is by-and-large honest. The users hate NFT rugs and scam tokens just as much as anybody else. The users are good to one another; I have yet to find a tribe less toxic, and so accepting, and that’s why I have found a home here.

The last bit I will say is that pound-for-pound, there’s no community with more tenacity. Despite the absolute terror wrought by the events I mentioned above, on-chain activity is still increasing, buildoors are still building. Even after the humiliation from FTX/Alameda, the community is plodding along, not to mention the chain, which endured annualized volatility of nearly 400%, for over a week!

Rebirth

Where do we go from here? First, I’ll just throw it out there that crypto cult personalities are nothing but trouble, whether it’s Do Kwon, Su Zhu, or SBF. Leaders can do wrong, and giving them a pass for questionable behaviour will be our own downfall. For my part I’ll try to suppress my overt admiration for Toly. Next, I’d like to suggest that we reduce our reliance on big VCs, trading firms, as market makers, or otherwise. Accept that the institutions are not coming right now, and that’s ok. When they do, we should be ready for them. The ecosystem will be smaller, closer in the short run, but this actually affords the little guy a better chance at “making it,” and protocols will be more resilient to failures. Let’s focus on organic user growth, and raw performance. Solana as a network is substantially hardened now, but we must strive to make the network perform flawlessly. It must be so good that it can’t be ignored. Eschew vanity metrics like TVL, wallet count, or whatever figures that merely go up and to the right. Upskill yourselves. Write things, become experts in the things you love, and share what you have learned with the community. Open source your shit! This adds to the credibility and defensibility of our infrastructure. Darkness only hides defects, the light of open source illuminates them. As that adage goes: many eyes makes all bugs shallow.

Nemesis

Now, we take a darker turn. At the beginning of this whole fucking thing I was rambling about becoming an on-chain forensic accountant (I am not) so that I could do my taxes, and something about being disgusted about what I saw. This is true, I am extremely suspicious of the big fish we have shared our pond with. With few funds left to play with, I began to wonder–what were they even doing here these past two years? I wrote bots and started watching everything from exchange balances, to big market makers, to treasuries and team wallets. I found anonymous whales more akin to soviet submarines whispering around on chain, with millions in tokens, yet nearly zero solana balance. Automated shuffling of coins from one place to another using small balances, presumably to not draw attention. Rampant use of one or more intermediate “burner” wallets meant to obfuscate direct links between identifiable sources. Throughout my whale watching, some usual suspects have emerged. While probably most of the activity has reasonable explanations, there are things I can see that can only be described as highly “sus.” I don’t know and cannot prove the identities of most of these wallets. But here they are, doing their business in broad daylight, either because they believe that what they do is above board, or they think that nobody is watching. For the most part, this is true; Solana just does not have the same number or caliber of on-chain sleuths that Ethereum does (with the exception of people like 0xTristan, amd a small cohort hanging around solana.fm discord). While I think it is reasonable for users to have a modicum of privacy on-chain, I’m not sure I feel the same for whales that hold outsized positions in publicly-available tokens. Team founders and devs should be able to get paid, but again, the public has a right to know about these transactions. With self-soveriegn finance comes the responsibility of self-defense, and the VC/fund/investor class has shown it is merciless when its book is at risk. So, for the habitual dumpers, exploiters, thieves, and would-be scammers, the community’s message should be heard loud and clear: be on your best fucking behaviour. We will all be watching.

So what’s all this about a nemesis? See gif below. As a member of the “dumb retail” cohort, myself and users like me are the “appropriate agent” to help clean up this chain. If you don’t like it, then sell me all your SOL for $3 and fuck off.

nemesis

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