Categorizing risks

June 24, 2022June 26, 2022 Stan

Sam Bankman Fried, founder of FTX, is putting Crypto on his back. He has bailed out 2 companies so far, and possibly more to come.

“We take our duty seriously to protect the digital asset ecosystem and its customers.” – SBF

Is he the Saint of Crypto, or a wolf in sheep’s clothing? Only time will tell!

Today I’ll be Covering:
• Unknown Risks. A framework for thinking about risks
• The SBF Takeover. SBF is going on a shopping spree.
• DYDX to Cosmos. They’re ditching ETH for Cosmos.

Let’s go!

⚠️ The Unknown Risks

All the events this month has made me re-visit and think about risks more.

Even if you had zero exposure to Terra, Celsius, or 3AC’s portfolio companies, you were still affected. Every project has had its price affected, even the safest ones like BTC and ETH.

I want to introduce you to a framework called the “knowns, knowns” made famous by Donald Rumsfeld. It’s a way of categorizing various risks.

1. Known, knowns

These are the risks that you are aware of and can prepare for.

• You know it’s possible to be hacked, so you secure your funds with a Hardware wallet
• You know DeFi platforms can be exploited. You check to see if auditors have certified the protocol’s safety.
• Auto-compounders tend to be hacked. The yield might not be worth the additional risks.

These errors are the most preventable.

2. Knowns, unknowns

You know there’s a risk, but you’re not sure about its impact.

• A protocol has an anonymous founder. You’re not sure if they want privacy, or they’re hiding a shady past.
• You’re putting your Bitcoin into CeFi for yield, but you don’t know how they’re generating that yield.

3. Unknown, Knowns

The risks are KNOWN to some, but they are UNKNOWN to you.

• Terra Luna and Anchor Protocol fall under this. Some of the insiders knew that Terra was a some. Several people called Terra Luna a Ponzi. They knew, but most of us didn’t.
• After this cycle, we’re all going to be more cautious of charismatic, cult leaders. The next generation though? They’re going to believe the hype and attacking anyone that’s “fudding” their bags.

4. Unknowns, Unknowns

This is the hardest one and would fall under the black swan category.

These are situations we can’t predict or plan for.

What happened to Three Arrows Capitals falls under this. No one saw this coming. There weren’t any Exposé threads warning us about 3AC’s potential insolvency.

Takeaways:

Categorize your Risks using this framework. The first two categories are low hanging fruit, and highlight a lot of preventable mistakes. It’s kinda like playing Chess. Stop blundering your Queen.
Don’t underestimate the impact of unknowns, unknowns. You could be 100% in BTC and have zero exposure to anything else, but these events can still severely impact prices.
These Types of Events will Happen Again. Never underestimate human greed. There will be a new generation of investors who will won’t understand what happened with 3AC, Celsius, or Terra.
Diversify. I love Crypto, but I think being all into one sector is idiotic. Hedge against it with real estate, cash, equities, and other assets, etc.

Recommended Reading: The Black Swan by Nassim Nicholas Taleb

📰 The Fast Five

Categorizing risks — “You couldn’t live with your own failure. Where did that bring you? Back to me.”

Three Arrows Capital owes Voyager $657m. Voyager is a mobile-based Crypto exchange. They trusted 3AC with a ton of money to generate yield. Well, they’re about to issue a default notice to 3AC soon.

$657m? It baffles me that my degen cousin has better risk management than billion-dollar Crypto companies.

Sam Bankman Fried bailouts rekt’ed companies. SBF (founder of FTX) is playing Santa Claus. SBF gave BlockFi a $250m line of credit. They also gave Voyager Digital a $200m line of credit + 15,000 Bitcoin credit. This bailout is why we’re not seeing sub 20k bitcoin and sub 1k ETH.

In the words of Kanye, “No one man should have all that power.” This is concerning.

Solend drama. Solend is the largest dAPP on Solana. There was a $216m whale that was in danger of liquidation on Solend. They tried contacting the whale without success. So what do they do? They vote to take control of the whale’s account.

They faced a ton of backlash since it’s not very “DeFi”. Now they’re reversing the decision.

UniSwap Moves into NFTs. Uniswap Lab acquires the NFT marketplace Genie. The most exciting part is they’ll be airdropping USDC tokens to qualified Genie users.

It’s a confusing move to issue USDC for airdrops.

DYDX switches Team to Cosmos. DYDX is the #1 decentralized place to trade perpetual contracts. They’re moving from being on an L2 on Ethereum to building their own chain on Cosmos. The primary concerns revolve around decentralization on Starkware. We could see other large Ethereum dapps following the same play.

This is huge for the Cosmos ecosystem and a multichain future. Basically, they didn’t think they could achieve the decentralization + speed required by being on Starkware. Some people believe it could be for regulation / security law concerns.

The Cosmos Ecosystem is gaining more traction. The problem is the ATOM token itself doesn’t have as much value accrual as I’d like in an investment.