Infinity Newsletter, RUNZ & #FastCrypto [01.23 — 01.27]

Jan 27

27 Jan 2023 Market Commentary

Crypto markets up ~6% while CEX volumes down ~10% this week, with BTC & ETH topping 23k and 1.6k, while CME ETH futures were in backwardation (coinciding with Shanghai upgrade) earlier in the week. DeFi Yields saw a (slight) increase while staking on LDO decreased by 20 bps.

Traditional markets saw another positive week, with equities maintaining strength and flat-ish rates market ahead of next week’s FOMC (1-Feb-23), where the undefunct economists largely predict just two 25bps hikes (1-Feb & 22-Mar) in 2023, leaving the range at a cool 4.75-5.00%.

Now, a short story on the liquidity of money. Will quantitative tightening (QT) become the new normal?

We’ve seen a (so-far) once-in-a-lifetime event occur with the FRED M2 registering its first YoY decline to $21.2T (Dec-22) vs. $21.5T (Dec-21), having peaked at $21.7T (Mar-22). While the $0.5T contraction (from Mar-22 to Dec-22) accounts for just 9% of money printed ($5.8T) since Jan-20. In general, QT is seen as a tightening of financial conditions, leading to lower asset prices via higher yields.

The $0.5T contraction stems from the Fed’s commitment to QT, with Fed Governor Waller suggesting last week that the (US, i.e. global) banking system had sufficient liquidity, important as the Fed operates an ample (no longer scarce) reserves regime, and pointed to the $2 trillion of excess cash sheepishly sitting in the Fed’s o/n rrp facility.

For liquidity, Waller suggested QT would be maintained during a period of rate cuts (i.e. a declining Fed Funds Rate). Question for Governor Waller, who views every trillion of QT equating to a 25bps tightening, is how integral the Fed’s standing repo facility (SRF), a backstop measure and somewhat replacement of the retired discount window, will be to maintaining liquidity.

The SRF forms an important appendix to stem money market volatility, as we saw during the previous QT cycle (2019), GC repo borrowers were hit with (uncharacteristically) volatile overnight rates (EFFR, SOFR), specifically on 16 & 17 September 2019. The SRF (starting in July 2021) allows the temporary expansion of the Fed’s balance sheet to accommodate intraday and overnight liquidity crunches.

There is a high chance the SRF will be tested this year, as the market direction (up / +ve) maintains divergence from the Fed’s new normal (down / -ve), pushing liquidity to the fringes. As Perry Mehrling famously said, “In finance, a lack of liquidity “kills you, quick,” only question is whether the SRF will be liquidity’s antidote.

As we noted in our 13 Jan 2023 weekly recap, the Fed adjusted its monetary policy transmission from the FFR to IOR and, as such, banks (via loan creation = asset returns) are back to presenting systemic risks, where any liquidity crunch (Libor-OIS) will test the new Fed regime, during another period of QT. The only thing we can say is, “Take a view on how you think history will rhyme.”

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FastCrypto 01.26.2023

Aave Community Voting to Deploy Version 3 on Ethereum
Aimed at improving risk management & capital efficiency. V3 only includes wBTC, wETH, wstETH, USDC, DAI, LINK and AAVE. Interest rate models vary from v2, with main difference coming from stablecoin rates.
Maple Finance Plots Comeback With New $100M Liquidity Pool for Tax Receivables With 10% Yield
The new USDC pool enables firms to receive cash advances with a discount on their tax rebates and funding programs. Firms pledge their receivables as collateral to the loans, and investors in the liquidity pool will earn a return once the IRS transfers the credit. The target yield of the liquidity pool is 10% annualized.
GHO to Arrive ‘In Weeks’ After Aave V3 Launch on Ethereum
Stani Kuchelov said GHO would be released “in weeks,” but declined to get specific.
MakerDAO community backs plan to deposit $100 million into Yearn Finance
The vault is expected to earn an estimated yield of 2% per year for MakerDAO, worth $2 million. In line with MakerDAO's strategy of generating income from its treasury reserves by attracting interest from both centralized and decentralized entities for partnerships where they deposit assets into the reserves.
Layer 1 blockchain Injective launches $150 million ecosystem fund
Pantera, Jump Crypto, Kraken Ventures, Kucoin Ventures and Delphi Labs joined in backing the fund that aims to support interoperability, DeFi, trading, proof-of-stake infrastructure and scalability solutions.
DYdX pushes back $156 million of token unlocks for investors to December from February
83 million tokens — 30% of the 277 million tokens destined for investors in total — will be unlocked On Dec. 1. After that happens, 40% of the total tokens will unlock monthly over the following six months, then 20% over the following year and 10% the year after that.
Deribit seeking Dubai license to maintain crypto options dominance
The firm will move the main headquarters as it seeks a Full Market Product license under the Virtual Asset Regulatory Authority (VARA) regime. "Clients want checkboxes, check for audit, check for custody, check for license."
Sushiswap to launch a perp dex on Sei Network, 'Head Chef' Says
Sei Network, is “focused on having an order book and matching engine in their consensus layer. The perpetual futures, or derivatives market, represents over $1 quadrillion in value in traditional markets, according to Chainlink.
Binance USD Stablecoin Sees $2B Reduction in a Month Amid Token Mismanagement
BUSD’s circulating supply fell to $15.4 billion on Wednesday, paring down $1 billion the past week and $2 billion in a month. The drop extended BUSD’s decline from $22 billion in December.
Cardano-Based Overcollateralized Stablecoin Djed to Launch Next Week
Djed will be backed by other tokens and requires more than 400% in collateral value to be posted before it is issued to a user.

FastCrypto 01.27.2023

Sui-based wallet raises $4.2 million led by Gumi Cryptos and Boldstart
Round led by Boldstart Ventures and Gumi Cryptos Capital, with Tribe Capital, Matrix Port and AllianceDAO.
Moody’s developing stablecoin scoring system
Moody's is developing a system to score stablecoins. It will include an analysis of up to 20 stablecoins and rate them based on the quality of attestations on the reserves backing them. The company won't consider it an official credit rating.
Brevan Howard adds senior leader to crypto division
BH Digital hired former Dragonfly general partner Kevin Hu to focus on investing in listed digital assets based in the firm’s new Abu Dhabi office.
ISDA releases standard definitions for digital asset derivatives
The International Swaps and Derivatives Association (ISDA) is working on two papers to address fundamental legal risks in the crypto markets, such as the insolvency of crypto exchange firms. Along with other things, the papers will offer guidance for market participants regarding crypto ownership and the role of intermediates in the event of bankruptcy.
Aave purchases 2.7M CRV to clear bad debt following failed Eisenberg attack
The move follows the community approval of AIP 144, which deployed a swap contract that acquires 2.7 million units of CRV, with a USD Coin, which would clear “excessive remaining bad debt”.
88x Finance partners with Axelar Network for cross-chain yield aggregator
88x said it intends to provide vault automation strategies and diversification through predefined investment strategies running across multiple blockchains. “Within a single interface, users can enjoy yield farming opportunities on ETH, BNB Chain, Avalanche, Polygon and many more networks — without the need to switch between wallets.”

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