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  • This Week in Web3 Issue #16— Is crypto overdosing on leverage?

This Week in Web3 Issue #16— Is crypto overdosing on leverage?

GM folks!

This Week In Web3 is back with web3 updates that matter, the prime focus of the community and opportunities for you to get working in web3!

Here’s what we cover in today’s issue:

  • Lido Finance warns against overdosing on leverage

  • 3AC and Celcius insolvency rumours

  • Work in web3

  • Wealth for web3

  • Interesting Reads

  • Sketchnote

  • Never Stop Crafting 🛠

Estimated reading time: 4:11 minutes

This week in crypto 📈

Web3 designers in a nutshell... 😋

Lido Finance warns against overdosing on leverage.

The current crisis engulfing firms like Celsius and Three Arrows Capital involves Lido's derivative products. Lido Finance, a DAO, allows supporters of Ethereum who pledged ETH ahead of the blockchain's merge to proof-of-stake (PoS) to use the assets they locked up.

It is the largest of the Ethereum staking services.

  • Lido provides those users with a derivative token called stETH which can be swapped back for ETH on a 1:1 basis, but only once the transition to PoS is complete.

  • In the meantime, stETH combines the initial staking deposit's value with staking rewards that accrue daily in a token that can earn further yield on decentralized finance (DeFi) platforms like Aave, Curve and SushiSwap.

Lido saw the writing on the wall and tried to "nudge" some big players to unwind their leveraged positions, but many didn't.

Where it all started…

The leverage concerns became most apparent after Lido integrated with DeFi giant Aave in March. He said that the situation raised fundamental questions about the extent to which a decentralized platform like Lido should intervene in its users' appetite for risk.

"When we saw the leverage issue was starting to really come to a head, we tried to take a few initiatives and ended up spending a few million dollars to allow some larger players to unwind," said Jacob Blish, head of business development and partnerships at Lido Finance. "But a lot of people still didn't unwind."

“We’re not your parents,” he said.

After the LUNA collapse, Celsius froze all withdrawals; it caused a domino effect in the market that saw a broad crypto selloff and numerous job cuts.

Folded leverage

Unfortunately, stETH has become a focus of heavy leverage. As crypto markets have quickly flipped from a risk-on to risk-off, firms chasing returns without having properly hedged – as is the case with Celsius – have ended up in a bind.

What adds to complexity and risk?

Users of Lido's liquid staking products started creating so-called "revolving loans," where stETH attained by staking ETH at Lido would be deposited in Aave and used as collateral to borrow additional ETH.

This process was continually repeated to ramp up your risk and reward," Blish said.

Despite the obvious risk, it's a complex issue. A worry for many crypto natives is that Celsius and the situation with Lido's liquid staking product will be viewed by the outside world, particularly by regulators, as somehow analogous to the recent blowup of the Terra Luna stablecoin and DeFi platform.

But Terra Luna was not collateralized, whereas every stETH token in existence is backed fully by 1 ETH. Indeed, the whole idea of stETH "depegging" is a common misnomer, Blish says.

"For us, we call it an exchange rate. Really what it comes down to is you're discounting future cash flows compared to your need for liquidity today."

What do others think?

Konstantin Richter, CEO of rival staking services firm Blockdaemon, has concluded that institutional-grade liquid staking should only be done in a tightly controlled environment, with full know-your-customer (KYC) and limits on the amount firms can borrow against the pool.

"We believe that you need pools that are fully insured and guaranteed," he said in an interview.

"Lido is a much larger player and really a consumer product and has a lot of different complexity to adhere to. And I think they're doing a good job. People talk about de-pegging, but that's really the wrong word. Nothing's pegging; everything's backed one to one."

Weekly web3 wrap 🗞

3AC and Celcius insolvency rumours shake the crypto community

The DeFi community has been flooded with rumours about Three Arrow Capital (3AC) and Celsius liquidations this past week.

What's going on with 3AC?

3AC is one of the largest Crypto-focused Venture Capital firms in the world. Here's a thread by The DeFi Edge talking about 3AC's insolvency, which could be catastrophic for Crypto.

The Celcius Insolvency Risk

Celsius Network is on the brink of insolvency, and bankruptcy is probably the only option. Here's what's been happening 👇

Both have seemed to bring about the tsunami of sell-off in DeFi and we're closely watching where it goes from here, and so should you. 👨‍💻

More Web3 news you should know about 👇

💸 Anna Sorokin wants to move away from her 'scammer' persona by selling NFTs

💰 'Stripe forNFTs' NFTPort Raises $26M Series A

🌐 OpenSea moves to Seaport protocol to cut Ethereum gas fees by 35%

Work in Web3 👩‍💻

✨ Opportunities at Daolens

👨‍💻 Work at CoinDesk

🛠 Join MetaMask

Wealth for Web3 💰

💰 Zeeve, a blockchain and Web3.0-based startup raised $2.65 million in a seed funding round.

💸 Web3 Payments startup Nume Crypto has raised $2 million in a pre-seed funding round led by Sequoia Capital India.

💵 DAOLens, a Bengaluru-based Web3 startup has secured pre-seed funding of $5 million (around Rs 38.5 crore) co-led by Nexus Venture Partners, Better Ventures and iSeed II.

Interesting reads from this week 🤓

“LIVE: Investor and entrepreneur @Balajis joins the Big Ideas stage to discuss the decentralized ledger of record.

https://t.co/tx1QYswtpd”

Read this guide to understand the differences between traditional venture capital and investment DAO models.

Sketchnote ✍️

Time to learn a web3 concept in a sketchnote! This week’s topic is "DAOs & Communities”.

Web3 is all about communities and networking is the key to it; let us help you understand Web3 Networking 101.

Never Stop Crafting 🛠

While we’re on the topic of Web3, Spacekayak announced a critical strategic step in the journey: Doubling down on web3 & its future.

A shift in behavioural changes takes time & in a bear market, Spacekayak intends to design to drive the adoption of new Web3 products. Take a look at Spacekayak’s core thesis for Web3 native design:

That’s a wrap for This Week in Web3, see you next week!

🚀 Check out The Product house to start your Web3 journey with live learning masterclasses & workshops by seasoned web3 builders!

💻 And if you’re an early-stage Web3 builder going from 0 to 1, holler at our creative-capital studio Spacekayak and let’s great something extraordinary, through design!

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