Image: Protocol

The flight to safety is fueling crypto’s crash

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Thursday: the staked ether crisis explained, Block joins the FTA and Kraken has a crack-up over diversity.

Off the chain

You take a couple of days off, and the crypto market sheds another $200 billion in value, taking it below $1 trillion for the first time in this crisis. Where’s the endpoint? Probably not zero, though there are crypto skeptics freshly eager to make that case. Just as it was hard to figure out what coins were really worth in the crypto bull market, the freeze of crypto winter is making it hard to see which will retain value now.

— Owen Thomas (email | twitter)

DeFi in a downturn

The theory of decentralized finance was that it would be resilient during market shocks. In practice, it’s been proving remarkably brittle. Three Arrows Capital, one of the biggest crypto hedge funds, is facing questions about its solvency amid a broader market meltdown. And DeFi lender Celsius has reportedly hired law firm Akin Gump Strauss Hauer & Feld to help keep the company afloat.

There are connections to the earlier meltdown of Terra’s UST stablecoin, and also echoes of it: A crypto asset perceived as safe proved anything but, upending once-profitable bets that didn’t account for the risk of a market downturn.

A crypto derivative is at the center of the current disaster. A dive into the mechanics of that token, known as staked ether or stETH, reveals how things can go wrong so quickly in crypto markets.

  • Staking is a common concept in DeFi — essentially pledging a token and tying it up with smart contracts so it can’t be spent or sold, usually in exchange for earning an interest-like yield. It’s become a big part of Ethereum’s upcoming move to proof of stake, known as the Merge. Part of that involves letting investors stake ether to earn rewards on the new Beacon Chain.
  • Staking on Beacon locks up an investor’s ether until the Merge is complete. It also requires 32 ETH, or nearly $40,000 at recent prices, to participate. Lido Finance, a DeFi protocol, created stETH to let smaller investors get in on staking rewards without the 32 ETH minimum and without locking it up as tightly.
  • This stETH token has become popular in DeFi, with the protocol grabbing 32% of all the ether staked on the Beacon Chain. Some crypto investors figured out ways to swap ETH for stETH and back again profitably.
  • That wasn’t a problem as long as investors believed that the Merge would happen soon, and that in the meantime they could trade back out to ETH if needed. But the Merge now looks like it may happen later than expected because of technical challenges, another development that may have spooked investors in addition to the general market downturn.

Once investors started to run for the exits, things spiraled. Now stETH has a liquidity problem.

  • The stETH token was supposed to be equal in value to ether. But that peg started to erode during the Terra collapse and was lately down about 6%. With investors looking for liquidity, selling pressure on stETH has increased.
  • Celsius halted trading and withdrawals earlier this week amid what it called “extreme market conditions.” The company is discussing multiple options with attorneys, ranging from seeking more investor capital to undergoing a complete financial restructuring. Though the company markets itself as similar to a bank, it operates more like a hedge fund, holding upwards of $11 billion in assets in May.
  • The company has not only suffered from the cryptocurrency bear market hitting all blockchain projects; it’s also dragged the value of ether down with it. The company held an undisclosed amount of UST, and so was exposed to the Terra collapse. But the stETH crisis hit it hardest.
  • It’s not alone: Three Arrows Capital, which had $10 billion in assets in March per crypto analytics firm Nansen, was liquidated by top lending firms for at least $400 million, according to The Block, throwing its solvency into question. One of the firm’s holdings was staked ether, which it recently sold at a discount. Co-founder Zhu Su tweeted a cryptic message Tuesday that the firm was “in the process of communicating with relevant parties and fully committed to working this out.”

Unwinding these bets could be difficult. Curve, another DeFi protocol, normally shows a balance between regular and staked ether in its liquidity pool, but the pool is now skewed 80/20 toward stETH. Alameda Research, the crypto trading firm founded by FTX CEO Sam Bankman-Fried, also reportedly recently sold 50,615 stETH, according to Coindesk. The value of all staked ether has dropped from more than $10 billion in April to about $4 billion. And it may be just one of many cautionary tales to come.

— Tomio Geron (email | twitter) and Veronica Irwin (email | twitter)


Convert Digital Assets & Cash Globally. On the Stellar network, cashing in and out of digital assets has never been easier. Grow your business with new payment services, greater customer reach, and easy implementation. Say hello to your new digital wallet solution.

Learn more

On the money

On Protocol: PayPal is expanding its “buy now, pay later” offerings. The new Pay Monthly feature allows users to spread purchases over six weeks, with interest rates up to 29.99%.

Block is joining the Financial Technology Association. The payments giant is the newest member of the D.C.-based fintech advocacy group, joining its most recent acquisition, Afterpay, which was a founding member of the association.

Also on Protocol: New York City Mayor Eric Adams is suddenly OK with crypto mining, and is asking Gov. Kathy Hochul to veto the two-year bitcoin mining moratorium that passed the state legislature earlier this month.

Mastercard launched its Start Path Open Banking initiative. An initiative designed for open banking startups to scale and expand consumer choice, the three-month program has already selected five startups globally.

Russia might still ban crypto payments. After a back and forth between various government agencies on whether crypto should be banned, a bill that proposes a ban on using crypto as a payment method passed the State Duma on first reading.

Cracks in Kraken

A new blog post from Kraken titled “Kraken Culture Explained” has sparked heated discussions on diversity in the workplace. CEO Jesse Powell just doubled down in a Twitter thread claiming that the arguments over culture were stifling Kraken's productivity. "Most people don't care and just want to work," Powell tweeted as part of a long thread, "but they can't be productive while triggered people keep dragging them into debates and therapy sessions."

The post references Kraken’s “Mission” to “accelerate the worldwide adoption of cryptocurrency.” It’s not big on internal consistency: One of Kraken's 10 “Tentaclemandments” delineated in the post claims that “bitcoin removes politics from money,” while another says that Kraken will “engage in lobbying, as a single-issue donor, supporting controversial politicians and legislation that furthers The Mission, possibly to the detriment of other civil rights causes.”

The seventh “Tentaclemandment” stated that diversity would not exist without diversity of thought and tolerance of diverse thoughts, which then led to an outline of basic principles for communicating, one of which demanded that employees “not call someone’s words toxic, hateful, racist, x-phobic, unhelpful, etc.”

This isn't the first time Powell has been the center of a controversy regarding his views on diversity. In April, he tweeted, "Do you have to be Asian to leave reviews on @Yelp?" He also reportedly added his views on women's intelligence in an internal discussion on Slack, where he said that the debate was still unsettled. "Most American ladies have been brainwashed in modern times," he said.

Read the full story on Protocol.com.

— Lindsey Choo (email | twitter)

Moves and hires

Benjamin Melnicki, Robinhood's chief compliance officer for cryptocurrency, has left for a similar role at Cross River Bank,Bloomberg reported. Christine Brown, Robinhood Crypto’s COO, announced her departure from the company in March and is now co-founder of NFT startup Floor.

Stacey Cunningham is becoming an adviser to Uniswap Labs. Cunningham was previously president of the NYSE and is a member of its board of directors.

Asheesh Birla is stepping down from his role as general manager of Ripple’s RippleNet. Birla wrote in a Twitter thread that he will remain on Ripple's board of directors. Birla's announcement featured the juicy detail that Stripe considered buying Ripple in 2013.

Melio has hired Yoav Schwartzberg as vice president of Product. Schwartzberg spent a decade with Google, most recently as director of Product Management.

Prometheum has hired Deanna Sheward as chief marketing officer. Sheward was previously vice president of Growth at Domain Money, a stock and cryptocurrency investing platform, and director of Marketing at BlockFi.

Bhumika Srivastava has been appointed global head of HR for Polygon. Srivastava was formerly head of HR and director for Employee Experience at Airbnb.


On Stellar, wallets and fintechs can enable their users to easily convert digital assets to cash or cash to digital assets across thousands of participating locations in a growing list of countries around the world. Get started.

Learn more

Thanks for reading — see you tomorrow!

Recent Issues