🔍 USDC De-Pegs & Bitcoin Rallies

If you haven’t been living under a rock, you’re probably inundated with headlines spelling the doom of bank failures in the US. If you’re a rock dweller, the 16th-largest bank in the US has collapsed, recording the second-largest bank failure since 2008.

Here’s a quick rundown of how it happened. Silicon Valley Bank attracted a ton of deposits from clients, largely venture-backed companies and biotech firms. The bank used the money to buy fixed-rate, long-term bonds issued by the US government. All of this happened over the past few years when interest rates were next to nothing. However, as interest rates began to rise, the long-term bonds bought by the bank began losing value. This is what typically occurs since no one wants to invest in the old bonds that yield less interest. To adjust for lower interest, the bonds trade at cheaper prices.

For a while, things were fine because the bank’s depositors weren’t demanding their money back. The losses on the bond portfolio didn’t show up in the bank’s books either. When banks buy bonds, they have the ability to classify them in one of two ways: Available-For-Sale (AVS) or Held-To-Maturity (HTM). There’s only one difference that matters – when bonds classified as HTM go down in price, the bank doesn’t need to reflect the loss in its books. These unrealized losses among US banks have risen to a record $680B in 2022.

As interest rates began rising, depositors of Silicon Valley Bank (primarily startups) began facing serious headwinds. Deposits began going down and withdrawals began inching up. On Thursday of last week, depositors of Silicon Valley Bank panicked as it became the target of a bank run. With everyone demanding their money back, the bank had to sell its portfolio of long-term bonds at a loss. Withdrawals of $42B of deposits, or 24% of the total, had to be serviced, causing the bank to take a $1.8B loss on bonds. Silicon Valley Bank had become insolvent and was forced to halt withdrawals.

The Federal Deposit Insurance Corporation (FDIC) took over the bank. Regulators in the US made a joint statement that all depositors will be able to access all funds in their accounts. Capital in the FDIC’s insurance fund will be used to backstop withdrawals. The Federal Reserve also created a program to provide $25B in one-year loans to any banks that need it. As the market viewed the collapse as more reason for the central bank to cut rates, crypto rallied with ETH price rising 15% since Monday.

Contagion from this fallout was fairly contained as the bank runs have not yet spread to other banks. However, the bank’s failure found a way to strike at the heart of the crypto economy. Circle, the issuer of the second-largest stablecoin USDC, held $3.3B of reserves at Silicon Valley Bank. Just before the FDIC took over, Circle had requested funds to be wired out to other banks. Looming uncertainty over the backing of USDC caused the token to de-peg and trade as low as $0.85. While USDC has since recovered, the event threw a surprise stress test for much of DeFi.

Most of DeFi leverages USDC in some manner or other, but perhaps some of its most important functions are to serve as collateral for crypto-backed stablecoins and to act as a medium of exchange for on-chain value transfers.

USDC forms 48% of the collateral backing DAI and 92% of the collateral backing FRAX. This led to even more de-pegs occurring alongside USDC with DAI trading as low as $0.86 and FRAX trading as low as $0.88.

Further, eight of the top 10 liquidity pools on decentralized exchanges use either USDC or DAI as one of the token pairs. Almost all of the USDT liquidity in Curve’s 3pool was drained. As traders dumped USDC into the pool, the total value locked in USDT dropped 97% from $206M to below $6M. Curve recorded the highest daily volume in its history at almost $8B on Saturday.

Nearly all of the liquidity in the USDC-USDT liquidity pool on Uniswap v3 was also drained. Most of the damage was relatively contained for Uniswap, who also recorded the highest daily volume in its history at $11.8B on Saturday.

🎬 Bull vs. Bear – SVB Banking Fallout

In the wake of Silicon Valley Bank’s collapse, this week’s edition of Bull vs. Bear has been unlocked for all viewers. We don’t normally do this but… since this topic is crucial and the discussion was so good, we wanted to share Tuesday’s episode with as many people as possible. Bull vs. Bear is a premium livestream covering macro trends and market outlooks. This week, Kevin and Jason delve into the impact on funding for crypto projects, historical market returns after a Fed pivot, the attractiveness of treasury bills affecting capital flows to crypto, and the recent crypto rally and its effects on the markets. Watch the episode here.

📝 This Week in Delphi Research

Brace Yourselves, Shanghai is Coming

Shanghai is a hard fork of Ethereum tentatively slated for the second week of April. With the upgrade, nearly 15% of the ETH supply that was previously locked away can potentially come into the market, ready to be sold. However, it’s not as simple as it sounds. In this report, Ceteris dives into the nuance by estimating the cost basis of staked ETH and visualizing the potential sell pressure.

Analyzing Market Behavior for Key Airdrops

Airdrops are one of the most sought-after events for users of on-chain projects. They aim to reward loyal users and increase user stickiness, but they don’t always go as intended. In this report, Priyansh studies some key airdrops, such as UNI, LOOKS, APE, OP, and BLUR, to analyze their incentive mechanisms, distribution models, token utility, and many other themes.

Are Infinity Pools the Next Big Speculation Primitive?

Implementing leverage in crypto is not easy. Crypto leverage trading lacks the composability and permissionless nature of other DeFi products. Enter Infinity Pools, an upcoming leverage trading DEX that offers unlimited leverage on any asset pair, with no liquidations, no oracles, and no counterparty risk. How is that possible? Jordan explains it all in this report.

Botto: The Decentralized AI Artist

With Midjourney and Stable Diffusion capturing everyone’s imagination, generative AI is having a moment. But besides collecting and acquiring AI artwork, what if you could own the AI artist instead? This report by Teng introduces you to Botto, a decentralized, autonomous, generative artist governed by its community via the BOTTO token.

Wishful Thinking – Monthly Chartbook February 2023

Chartbook is a collection of interesting charts and trends we’re watching across crypto and markets. This month’s edition, with contributions from Jason, Michael, Jimin, Joo, Teng, and YH, is a collection of interesting charts and trends we’re watching across crypto and markets. The report primarily focuses on the macro outlook, crypto’s market structure, and on-chain observations across L1s, L2s, DeFi, NFTs, and gaming.

📖 Delphi Reads

Euler, a lending protocol that held over $400M of user assets, has suffered an exploit that has caused a loss of $200M. The protocol’s EUL token has lost over half its value since the attack. Read a postmortem of how the attack occurred here. A lot of other protocols interacting with Euler were also impacted. Get a rundown of the contagion here. In related news, an anonymous user is now trying to broker a deal between Euler and the exploiter via Etherscan.

A new video by Delphi Media presents a guide to understanding the Ethereum liquid staking landscape, how different liquid staking mechanisms work, and the risks to ETH liquid staking. Watch the video on our YouTube channel here.

Arbitrum just announced the ARB airdrop that will take place on Mar. 23, 2023. The long-awaited token will grant holders governance powers only with fees on the network still to be paid in ETH. The snapshot was taken in February and parameters to qualify include the number of transactions and applications used, and the duration of usage. Be sure to check your eligibility here.

🗓️ Calendar

Introducing our newest section: Calendar. Keep updated with the most significant catalysts and events in crypto and stay ahead of the curve.

March 17 – ApeCoin Unlock: Apecoin (APE) will begin a 1-month unlock of 4% of its total supply. This includes Yuga Labs’ first allocation unlock.
March 18 – Stargate Unlock: 3.8% of the total supply of Stargate (STG).
March 23 – Arbitrum Airdrop: 12.75% of the total supply will be distributed to Arbitrum ecosystem users and DAOs.

🔥 Meme of the Week

Silvergate announced last week that it would delay filing its annual report as it needed to answer requests from its auditors and deal with regulatory actions. Subsequently, a majority of the bank’s clients like Coinbase, Circle, Paxos, Crypto.com, Bitstamp, Cboe Digital Markets, Galaxy, and Gemini stopped doing business with the bank. Silvergate also closed its network used by institutions to move money to crypto exchanges. And now, the bank is talking to FDIC examiners about how to salvage the bank’s conditions.

Meme via @tier10k.