Top Stories of the Week - 12/2

In the newsletter today we talk about SBF’s efforts to change the narrative during a well-orchestrated media tour, the forthcoming shanghai upgrade for Ethereum, and Fidelity’s major milestone of enabling BTC & ETH trading for retail clients. Subscribe here and receive Galaxy's Weekly Top Stories, and more, directly to your inbox.

SBF Goes on Media Tour to Change the Narrative

SBF crafts a narrative for himself centered on ignorance. Just weeks after FTX and Alameda’s collapse, SBF has been busy embarking on a personal media tour. He's made appearances on The New York Times (NYT), Good Morning America, Axios, New York Magazine, and Mario Nawfal’s Twitter Space (with more appearances in the pipeline). His NYT interview was widely anticipated as it had been scheduled months ago, back when FTX was considered a marquee exchange. The fact that NYT still had SBF on their schedule, alongside notable figures like Mark Zuckerberg, Mike Pence, Ben Affleck, was surprising to many in light of FTX’s downfall. SBF seemed determined to control the narrative as best he could, officially confirming last week his intention to speak with Andrew Ross Sorkin on Wednesday.

Appearing virtually on-stage with Mr. Sorkin, SBF fidgeted throughout the hour-long interview. His usual hectic speaking pace was instead methodical and subdued. His body language was meek as his gaze frequently drifted towards the floor. Yet, his messaging was consistent throughout. According to Sam, he was simply unaware of how dangerous a position FTX and Alameda were in until it was too late. He blamed inaccurate reporting from internal dashboards for his poor risk management of Alameda’s position on FTX. While he admitted that he had made mistakes as the CEO of FTX, he was quick to point out organizational oversights, poor risk management, and a lack of accountability. When asked directly by Andrew Ross Sorkin if he had commingled customer funds, SBF simply said he didn’t “knowingly co-mingle funds” between Alameda and FTX.

Our Take

SBF’s interview concluded with a round of applause as Andrew Ross Sorkin thanked him for speaking against the wishes of his own lawyers and advisors. But the idea that SBF was acting in contravention of advice from counsel is extremely unlikely. Instead, it appears he is enacting a clear and well-orchestrated media strategy to portray himself as an idiot. Constructing this new narrative—that he simply failed, by accident, to enact proper risk management, accounting, and compliance controls, and not that he comingled, lied, and even stole—will likely not protect him from civil liability, but it could give him a chance to escape criminal prosecution. This calculated approach, possibly crafted by a team of lawyers and crisis management PR firms, centers on painting SBF as an incompetent operator who bit off more than he could chew.

His primary claim—that he was simply unaware at the size of Alameda’s margin position—doesn’t make any sense. It’s not just ridiculous because the owner of the hedge fund (Sam) would know if the fund was underwater by billions of dollars. It’s also ridiculous because that is not how exchange margin works—the funds of users who do not participate in a margin pool are not subject or available for borrow, and should still be backed 1:1. Also, users on FTX who stray into liquidation territory were liquidated immediately—why was Alameda not liquidated immediately like everyone else? SBF claimed that he “did not knowingly comingle funds,” but on Nov. 12, WSJ reported that Caroline Ellison admitted to FTX employees that she, Sam, Gary Wang, and Nishad Singh were “aware of the decision to send customer funds to Alameda” to cover loans that were being recalled from Alameda following the Luna collapse. And, as we discussed on a recent episode of the Galaxy Brains podcast, CoinMetrics has produced significant on-chain evidence documenting the misappropriation of client funds from FTX to Alameda, and has also exposed Alameda’s aggressive (and often losing) DeFi trading strategies (we spoke with CoinMetrics Head of R&D Lucas Nuzzi on last week’s episode of Galaxy Brains). The point is, the best evidence we have suggests that it was not simply a large margin position by Alameda overlooked by Sam that led to FTX’s collapse, but instead the intentional comingling and subsequent misappropriation of client funds to Alameda. To us, this looks premeditated and precise, not accidental due to ignorance and “poor dashboards.” But to hear Sam tell it, he didn’t steal our money, he just “screwed up.” 🙄 -AT/SQ

Scalability Improvements Unlikely in Ethereum’s Next Major Upgrade ‘Shanghai’

Ethereum core developers are gradually mapping out the scope of the network’s next major upgrade, Shanghai. Unlike the previous upgrade (“the Merge”), which was focused exclusively on transitioning Ethereum to a proof-of-stake (PoS) consensus protocol, Shanghai was expected to focus on improving Ethereum scalability and enabling staked ETH withdrawals. However, over the past two weeks, Ethereum core developers have reached a consensus about prioritizing the latter and implementing Ethereum Improvement Proposal (EIP) 4844, which is the code change designed to improve network scalability, in a separate upgrade. The main motivation for splitting up the preparations for these changes instead of bundling them in one large upgrade is to prevent delays to staked ETH withdrawals, represented by EIP 4895. Preparations for EIP 4895 are significantly farther along than EIP 4844, said several Ethereum core developers on Ethereum All Core Developers Call #150. As such, if EIP 4895 is the only major code change in Shanghai, developers said Shanghai could be implemented as early as March 2023. Adding EIP 4844 to Shanghai, however, will “inevitably delay” the upgrade, said Ethereum core developer Ben Edgington on the latest ACD call.

Ethereum core developers were divided on whether to exclude other code changes outside of EIP 4844 from Shanghai for the same reason as prioritizing staked ETH withdrawals. The Ethereum Virtual Object Format (EOF) is a long-awaited upgrade to the EVM that would introduce significant gas savings for contract deployment and other benefits to the application developer experience on Ethereum. When Ethereum core developer Andrew Ashikhmin proposed delaying EOF implementation to a separate upgrade after Shanghai, an Etheruem core developer that goes by the pseudonym of “lightclient” pushed back, saying, “If [EOF implementation] doesn’t go in Shanghai, it’s increasingly unlikely it goes into a future fork. I think we have big upgrades that we want to do in many of the next forks and it’s always going to be this [constant] debate of this is the important thing, we want to make the fork small, we want that thing to go in because it’s important for the roadmap, whatever.”

Lightclient wasn’t the only developer who expressed disappointment at the idea of excluding other major EIPs from Shanghai so that staked ETH withdrawals can be implemented on Ethereum as soon as possible. Diederik Loerakker, more popularly known as “Protolambda,” who is a developer for OP Labs, the company building Ethereum Layer-2 rollup Optimism, said on Thursday’s call, “By basically creating a zero-sum game between EIP 4844 and EOF EIPs, we basically ruin the roadmap of Ethereum by not listening enough to outsiders of this call and by setting priorities based on development, rather than based on the pressures of the Ethereum network.” It is unclear at this time the full scope of Shanghai and therefore the expected timeline for its activation on Ethereum. However, the majority of developers have expressed a stronger inclination in recent weeks to isolate staked ETH withdrawals in Shanghai and thereby be able to implement the upgrade in late Q1 2023, as opposed to Q2 or Q3 2023.

Our Take

Recent sentiment by Ethereum core developers to simplify the Shanghai upgrade is a change from a month ago when developers were first discussing Shanghai planning in earnest. During the first ACD call after the Merge, developers expressed a strong inclination to bundle several EIPs into one large upgrade for Shanghai rather than splitting up the EIPs into multiple smaller upgrades. What likely caused a noticeable shift in sentiment over the last few weeks is the uproar from the Ethereum community about potential delays to staked ETH withdrawals as a result of other EIPs being included in Shanghai until 2024. In part, the concern was exaggerated by Bitcoin maximalists on Twitter trolling the Ethereum community about the lack of a timeline for staked ETH withdrawals, and even likening the activation of staked ETH withdrawals as akin to a difficulty bomb mechanism that developers were using to control and exercise authority over validators. Ethereum core developers refuted these claims publicly on Twitter and over the last two calls have vehemently reaffirmed their commitment to shipping withdrawals as soon as possible.

It is clear that Ethereum core developers are not immune to social pressures as much as their role in the Ethereum ecosystem should in theory be based on objective judgements about code maintenance and network security. What often ends up politicizing the decision-making process of Ethereum protocol development are competing interests around a never-ending list of EIPs and new expectations. When Ethereum first launched, developers envisioned the final phase of Ethereum development to be the network’s transition to proof-of-stake (PoS). However, now that Ethereum has successfully achieved its goal of migrating to a PoS consensus protocol seven years later, the development roadmap of Ethereum is far from complete and, as Lightclient points out, it is still burdened with several competing priorities. All of the major EIPs that are being discussed for Shanghai – staked ETH withdrawals, proto-danksharding, EOF implementation, BLS signatures, and disabling self-destruct – are long-awaited and highly anticipated code changes that no matter how they are prioritized will result in some subset of disgruntled application developers, infrastructure providers, stakers, and end-users. This is the inevitable outcome of pursuing an ambitious and amorphous development roadmap by a group of loosely organized entities and individuals.

What will be key to watch moving forward as Ethereum core developers continue to wrestle with competing priorities is the impact a highly politicized governance process has on network adoption. By prioritizing staked ETH withdrawals, other initiatives to improve network scalability like EIP 4844 and usability like EIP 3540 naturally become delayed, which may leave room for alternative Layer-1 blockchain to gain a greater competitive edge over Ethereum by catering to the frustrations of disgruntled Ethereum stakeholders. Ultimately, the tension will not be resolved until the development roadmap of Ethereum becomes ossified, which may never happen. Ethereum’s diverse and thriving community is both the network’s biggest asset and sometimes its greatest curse. -CK

Fidelity Launches Bitcoin and Ether for Retail Users

Fidelity Investments launches bitcoin and ether trading for retail users. The pro-crypto investment powerhouse officially opened retail crypto trading accounts for its customers this week, although there is still a waitlist to have the feature enabled on your retail brokerage account. Investors with Fidelity brokerage accounts can fund a separate crypto trading account to purchase BTC and ETH in spot markets. In comparison to other popular retail trading platforms such as Coinbase, Fidelity crypto trading accounts currently have no crypto wallet features—therefore, the purchased assets cannot be moved off Fidelity’s platform at this time. According to Fidelity, the company services more than 40m individual investors, has $9.6tn under administration ($3.6tn of which are under discretionary management), and processes 3.1m daily trades on average.

Our Take

This is a huge milestone for the Boston-based firm that has been working on Bitcoin one way or another for the last 6 years. After spending several years investigating the technology through an incubator at Fidelity Center for Applied Technology, Fidelity launched Fidelity Digital Asset Services (FDAS), an institutional bitcoin custodian, in 2018. Over the last year, however, Fidelity has significantly accelerated their integration of FDAS services into its broad distribution network. In April of this year, Fidelity announced that its retirement administrator business, the largest in the US by number of plans, would begin allowing plan sponsors (employers) to add a bitcoin investment option to their plans. Fidelity is now pushing the option to buy and sell bitcoin and ether through onto their brokerage platform (Fidelity Brokerage Services), primarily known through its website Fidelity.com and 1-800-FIDELITY. Still one of the largest asset managers in the world through Fidelity Management & Research Company (FMR Co.), Fidelity’s distribution businesses—retirement, brokerage, advisor platform, and more—have become huge businesses in their own rights. By offering crypto products through their own large customer-facing platforms, Fidelity leverages a distribution scale that is unmatched in crypto today and positions the firm as the global leader in crypto brokerage services.

This is still early days for Fidelity’s rollout. At the moment, there is a waitlist to receive access to the product, and crucially there is not yet the ability to transfer bitcoin or ether in or out of the account. We have every expectation, though, that Fidelity will enable native deposits and withdrawals in the future, much the way both Robinhood and Paypal launched their crypto offerings without transfers but later added wallet functionality.

The team at Fidelity are not bitcoin tourists—they've looked into every aspect of the space, from mining to data, blockchain use cases, asset management, venture, and more. To launch this product, and the 401k product, in the heart of a painful bear market and in the face of significant agitation against cryptoassets, including from Washington, speaks to the conviction of Fidelity’s leadership in the future of digital assets. It’s extremely likely that Fidelity will be a pivotal player in digital assets for years to come. (Disclaimer: Alex worked at Fidelity for 12 years, including as Dir. Blockchain Research @ Fidelity Center for Applied Technology and as an investor at Avon Venture, a crypto-focused venture fund affiliated with FMR LLC, the parent company of Fidelity Investments.) -AT

Other News

• Uniswap launches NFT aggregator

• Apple blocked the latest update to Coinbase Wallet until it disallows users to send NFTs due to Coinbase not passing a percentage of network gas fees back to the In-App Purchase system.

• Phantom wallet is expanding from Solana-only to add Ethereum + Polygon

• Casa, a multisig custody wallet, is expanding from Bitcoin-only to add support for Ethereum

• OpenSea launches on BNB chain

• Trader Joe, Avalanche's leading DEX, to deploy on Arbitrum One

• Coinbase to increase rewards rate paid to Maker on USDC from 1.5% to 2.36%

• MakerDAO votes to increase DAI Savings Rate from 0.1% to 1%

• Votes against investing $100-500M in corporate debt securities & government-backed bonds

• Telegram to build non-custodial wallet and DEX

• Kraken lays off 1,100 employees (30% of workforce)

• Animoca to form $2bn metaverse fund