This week in the newsletter, we write about Stripe’s acquisition of stablecoin company Bridge, Kraken launching its own Layer 2 rollup, and the US government losing $20m of crypto in an apparent hack.

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Stablecoins Are Just Getting Started

Stripe to acquire stablecoin platform Bridge in $1.1bn deal. On Monday, Stripe confirmed its plans to acquire Bridge to build "the world's best stablecoin infrastructure." The reported $1.1bn price point would be if completed, the largest crypto acquisition by a major payments company to date. The companies noted that the acquisition is expected to close in the coming months (subject to regulatory approvals and other closing conditions).

Background info on the companies:

• Stripe's payment APIs enable businesses to accept online payments and manage finances (e.g., billing/invoicing, fraud prevention, etc.). Per its Annual Letter, the company reportedly crossed over $1 trillion in payment volume in 2023.

• Founded in 2022, Bridge is an API-based stablecoin payment platform that enables businesses to accept stablecoin payments with payouts in fiat. Bridge has provided efficient cross-border fund distribution and treasury management services for customers including Coinbase, SpaceX, governments, and aid agencies. As of August 2024, Bridge's payment volume reached an annualized run rate of over $5 billion.

Stripe CEO Patrick Collison posted on X: "Stablecoins are room-temperature superconductors for financial services. Thanks to stablecoins, businesses worldwide will benefit from significant speed, coverage, and cost improvements in the coming years. Stripe is going to build the world’s best stablecoin infrastructure, and, to that end, we are delighted to welcome @stablecoin to @stripe." Bridge's announcement post highlighted an aligned vision with Stripe on stablecoins as core global money movement infrastructure, adding that "Stripe operates all across the world and understands better than almost anyone the problems created by our existing localized payment systems."

OUR TAKE:

After shutting down its bitcoin payments business in 2018 due to scaling issues and volatile prices, Stripe's re-entry into crypto serves as a strong testament to the improvements of blockchain tech in recent years and validates the feasibility of stablecoins to challenge traditional payment systems. Stripe built its business on enabling robust, seamless payment experiences and is betting that stablecoins can unlock greater efficiencies and capabilities for its customers. News of the acquisition follows other stablecoin developments at Stripe including: (i) a partnership with Coinbase in June to enable fiat-to-USDC onramps to Coinbase Wallet and USDC payouts on Base, and (ii) added ability for businesses to accept USDC payments on Ethereum or Solana that settle in fiat at a 1.5% fee, announced just earlier this month. With the acquisition of Bridge, Stripe expands its geographical reach, particularly in emerging markets where individuals stand to benefit the most from more efficient remittances using stablecoins.

The price tag for Bridge certainly was not cheap, so Stripe's decision to acquire rather than integrate/partner with the platform or even build its solution in-house is notable. In our view, it signals a sense of urgency from Stripe to get ahead of increased competition from other non-crypto firms in stablecoins initiatives (e.g., Visa's stablecoin settlement capabilities with Worldpay and Nuvei, PayPal's PYUSD launch with cross-border payments using Xoom or its recent offering for business accounts to accept/transfer crypto, and reports that Revolut and Robinhood are exploring their own stablecoins). It will be interesting to see whether Stripe plans to go beyond just on/off-ramps and expanding crypto acceptance to verticalizing the crypto payment stack or expanding on-chain services. In any case, the proliferation of stablecoins is underway and showing no signs of slowing. - Charles Yu

The US Government Falls Victim to an Exploit

In the early afternoon this Thursday, the United States Government was exploited for approximately $20 million in crypto. One of the Ethereum wallets operated by the US Marshals, associated with the Bitfinex Hack recovery, started moving assets onchain and interacting with DeFi. Initially, the market assumed that this was preparation for moving the remainder of the Bitfinex hack recovery funds, as the US government recently opined that Bitfinex is likely the sole victim of the hack and is due to receive ~$5bn in recovered bitcoin. It became clear something was fishy when the tokens moved to a new wallet (0x3486), and began swapping out the assets via the Coinbase DeFi wallet and 1inch. The 1% spread charged by the Coinbase DeFi wallet raised our eyebrows and the subsequent moves after the fact confirmed our suspicions. After swapping into more censorship-resistant assets in the form of ETH, they smurfed (layered many small deposits to avoid automated AML controls) much of the funds to Binance, N exchange, and Switchain, in small $40k chunks through ~20+ wallets. Shortly after the smurfed deposits, fellow sleuths started looking and came to the same conclusion and ZachXBT put a stake in the ground saying this was an exploit.

OUR TAKE:

It’s not unheard of for a US Federal agency to be exploited. The FBI and DHS have had their systems infiltrated before, leading to the release of hundreds of thousands of emails and records. A key detail of this story is that the wallet that was drained was not one of the originally seized key pairs; the funds were moved and consolidated in (0xc9E) a fresh government wallet, meaning no one outside of the Marshals should have access to the private keys. That leaves us with only one conclusion: US Marshals in this have either had the secret key for the EVM wallet stolen by an employee, or more likely, an employee involved in their on-chain activities got phished or fell victim to malware.

It is unclear what this means for future sales of bitcoin by the Marshals. They have approximately $5bn BTC available to sell from the Individual X wallet now that the last claim on that bitcoin has been denied (see Battleborn v United States). I can’t see this accelerating the timeframe for sales, as the Marshals will likely need to review their security measures to ensure they are not at risk of losing more funds under their stewardship.

It was a bold move by the thieves, stealing from the U.S. Government, and we will see what additional tools the U.S. Government employs in their attempt to recover the assets and identify the culprits. Can the U.S. Government obtain phone IMEI information from Coinbase Wallet? Can they query global node providers to find the IP address that sent the initial transaction? Time will tell, but in the interim, the supply overhang has been pushed back, brightening the skies for Bitcoin holders. - Thaddeus Pinakiewicz

Centralized Exchange Kraken Launches OP Stack Layer 2

Kraken, a centralized exchange, unveiled its new Layer (L2), Ink, with an expected launch date in early 2025. The announcement comes nearly a full year after initial reports of the exchange’s intention to launch an L2 surfaced in November 2023. Previously, Kraken was said to have mulled the idea of partnering with Polygon (Polygon PoS and Polygon zkEVM), Matter Labs (zkSync Era), and Nil Foundation (=nil;), predominantly zero-knowledge-based (ZK) tech stacks. However, Kraken ultimately ended up building on Optimism’s OP stack through the rollup as a service (RaaS) provider Gelato and will launch as part of the Superchain collective. The L2 will use Ethereum Layer 1 (L1) for data availability (DA) after considering both Celestia and EigenDA, two of the better-known single-purpose data availability chains. It will also leverage the exchange’s self-custodial Kraken Wallet as the primary portal into the chain.

Many major crypto exchanges have now launched their blockchains, including Coinbase with Base, Binance with Binance Chain, OKX with X Layer, Crypto.com with Cronos, and most recently Kraken with Ink—all of which use the Ethereum Virtual Machine (EVM).

OUR TAKE:

The key facets of Kraken’s move to launch an L2 revolve around legal and business operations and the technological significance of launching via an RaaS provider as an EVM chain.

Kraken has a history of feuding with regulators, as it was sued by and ultimately settled with the Securities and Exchange Commission (SEC) over allegedly operating an unregistered exchange, broker, dealer, and clearing agency. The move to launch its chain and utilize its self-custodial wallet might be motivated by legal and business hedging purposes to sidestep some of its previous legal troubles and launch future products. In March of this year, U.S. District Judge Katherine Failla determined in the SEC’s suit against Coinbase that merely helping users discover onchain prices does not invoke routing or making recommendations, even if an entity provides the means of “arranging” them in the market (i.e. exchange offered self-custodial wallets). Coinbase Wallet, the exchange’s non-custodial wallet that makes it easy for users to access DeFi and onchain applications, was determined to not be an unregistered exchange, broker, dealer, or clearing agency. If other centralized exchange activities were to become illegal or impractical, it’s not hard to see a future where exchanges like Coinbase or Kraken focus their energy on operating primarily as an access point to DeFi, and operating your rollup can be seen as a step in that direction.

Another one of Kraken’s intentions with launching Ink is to move its centralized order books onchain. The central limit order book (CLOB) model was a design pillar of Solana, which was built to build “something like the Nasdaq, but on a public permissionless blockchain.” CLOBs possess the qualities of rewarding market participants for displaying more competitive prices, preventing trade-throughs, and ensuring traders get the best price execution, among other features and benefits. Putting them on blockchains could add additional operational efficiencies and transparency.

However, order books on Solana have gained little relative traction. The largest CLOB on Solana, Phoenix, has only accounted for $747 million of the $25.7 billion in trade volume on the network over the seven days ending October 24. This is due in part to the prominence of automated market makers (AMMs) and heightened amounts of speculation on memecoins on the chain, in addition to the infancy of its DeFi ecosystem. As a centralized exchange, Kraken has guardrails on the quality of assets it makes tradable and has existing markets and market makers that can bootstrap the onchain CLOBs, mitigating some of the headwinds faced by Solana and allowing cryptocurrency markets to benefit from the joint qualities of CLOBs and blockchains.

Lastly, Kraken’s choice of launching through a RaaS provider, which simplifies the chain development process and effectively outsources some of the development talent needed to do so, highlights what the future of corporate blockchain launches might look like. It is becoming increasingly clear that most finance-centric companies will move parts of their businesses onto blockchains (perhaps their own), as evidenced by the laundry list of crypto exchanges with their chains and the rise of real-world assets (RWAs) from TradFi.It will not be feasible for every company that will move onchain to have the in-house capability to build their protocol, however. Kraken leaning on a RaaS provider can be a window into how offchain companies today ultimately end up on their chain. Additionally, Kraken’s decision to launch an EVM chain that uses Ethereum L1 for DA highlights the dominance of Ethereum in corporate-backed blockchains and the adoption struggles of alternative virtual machines and DA layers in this setting. - Zack Pokorny

Charts of the Week

The combined Polymarket open interest for the front runners of the Presidential Election, former President Donald Trump, and Vice President Kamala Harris, reached fresh highs of $123.03 million. Open interest in the two candidates has grown parabolically since the beginning of October, expanding more than two and a half times and $75 million over the last three weeks. The chart below tracks the historical trends in their combined open interest with notable events throughout their campaigns overlaid.

The expansion in open interest has been accompanied by increasingly favorable odds, in the market’s view, for Donald Trump to win the 2024 Presidential Election. At the beginning of the month, the market implied odds of Donald Trump and Kamala Harris winning the election were 48.7% and 49.9% respectively. As of October 24, however, the odds have shifted to 60.6% and 39.4% respectively.

Other News

• Microsoft urges shareholders to vote against a proposal to assess bitcoin as a diversification investment: Filing

• GnosisDAO approves $40M venture fund for RWA, decentralized infrastructure

• TeraWulf to raise $350M in convertible notes for share repurchase

• Coinbase-backed Base to improve decentralization with fault proofs

• Radiant Capital hacker moves $52M in stolen funds

• Citibank debanked Ripple's Brad Garlinghouse due to crypto, exec says

• Government lawyers defend Nishad Singh saying he provided ‘substantial assistance’ in the FTX investigation