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Quick Take

• This DeFi governance roundup covers recent proposals for Balancer, Curve, Frax, Gitcoin and SushiSwap.
• In general, most governance proposals focus on treasury management and maintaining protocol growth and sustainability through the current market conditions.
• Proposals associated with higher risks take a back seat as governance voters become more cautious.

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Cardinal, a Solana-based infrastructure protocol that aims to improve the utility of non-fungible tokens (NFTs), has raised $4.4 million in a seed funding round.

Sharing the news with The Block on Friday, Cardinal said newly launched crypto venture capital firm Protagonist and Solana Ventures co-led the seed round. Animoca Brands, Alameda Research, Delphi Digital and CMS Holdings also participated.

Founded eight months ago, Cardinal offers a Solana protocol with use cases such as rentals, staking and ticketing to help improve the utility of NFTs. Rentals, for example, allow rented NFTs to “physically sit in renters’ wallets while maintaining the impossibility of default,” Cardinal co-founder and CEO Spencer Rust told The Block.

Cardinal launched the first version of its rental marketplace earlier in the year and “several thousand rentals” have already been executed through the platform, said Rust. It expects to release the second version in the coming days with a redesigned user interface and experience.

The startup also offers “escrow-less” NFT staking, which allows stakers to continue benefiting from any utility their tokens offer, Rust said. “Among other verticals, we’ve seen this be especially beneficial to gaming projects that want to create staking initiatives for their users without compromising their ability to play the games.”

Cardinal says more than 65,000 NFTs have already been staked with its protocol.

There are currently four people working for Cardinal. With fresh capital in hand, the firm plans to hire at least three more in engineering and business development functions, said Rust.

While Cardinal is for now only focused on Solana, it plans to support other blockchains in the future. “We have cross-chain aspirations and plan to explore building on EVM [Ethereum virtual machine] chains and others like Near and Aptos at some point,” said Rust.

The seed funding round brings Cardinal’s total funding to date to $5.2 million. Last year, the firm raised $750,000 in pre-seed funding from Neo Ventures.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Lido DAO, the decentralized governance for Lido Finance, has begun voting on a proposed token sale to venture capital firm Dragonfly Capital, according to data from Snapshot.

This token sale is half of Lido’s proposed treasury diversification proposal. The complete plan is to sell 20 million Lido DAO (LDO) tokens at a flat rate of $1.45. Half of this allocation will go to Dragonfly if the vote passes.

The voting process for the proposal was split amid concerns over specific details of the VC deal. Lido’s original proposal stated that Dragonfly will not be required to lock up the tokens. This has led to considerable debate in the forum discussion about the proposal. The overwhelming majority of contributors to the debate have called for at least a one-year vesting period.

As for the Snapshot vote itself, DAO members have three choices: agree to the proposal as is, agree to the sale but with a one-year vesting period, or disagree with the proposal entirely.

The process began on Thursday with one address casting their 15 million LDO token power to back the proposal as is. This has created an 80% approval rate so far for the proposed token sale to Dragonfly without any lock-up.

Meanwhile, DAO members voting with a total of 3.4 million LDO are not in support of the proposal. This amounts to 18% of the votes cast as of the time of publishing.

Who’s the whale backing the vote?

It’s unclear if the tokens voting in favor of the sale have any connection to Dragonfly. According to Nansen CEO Alex Svanevik, the money that supported the vote originated from a wallet associated with trading firm Alameda Research. Yet he suggested that it could have come indirectly from any other firm via an over-the-counter trade.

Cobie, a well-known crypto investor and co-founder of Lido Finance, appeared to weigh in on the vote.

“VCs should be abstaining from any DAO votes to sell themselves tokens,” he said on Twitter, “If the vote is ‘Should we sell Misc Capital 10,000,000 tokens for $1?’ Then Misc Capital should abstain from voting on this proposal. … Right?“

He added that doing so would amount to “cronyism and pillaging.”

We have reached out to Dragonfly and will update this story should we hear back.

The vote will end on July 25 and then the DAO will consider the other half of the treasury diversification plan. Lido’s plan is to liquidate 20 million LDO tokens to DAI stablecoin to secure two years of operating runway for the DAO.

Lido also has another treasury diversification proposal introduced in June. This proposal called for the sale of about half of the DAO’s ether (ETH) holdings. Lido’s treasury is currently worth $307 million. The reserve holds 157 million LDO ($266 million) as well as 20,940 ETH ($33.5 million) and 5,304 staked ETH ($7.9 million).

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

California campaigns can soon accept donations in cryptocurrency after the state’s campaign regulator ended a four-year ban on crypto contributions on Thursday.

The California Fair Political Practices Commission voted unanimously to repeal the state’s ban on cryptocurrency donations and adopt new rules for how to accept the funds. The new regulation will take effect within the next 60 days.

“This is a new and ever-changing area,” said legal division general counsel David Bainbridge said during the commission’s July meeting.

“We may need to adjust this as the industry develops, this is a fairly new industry,” Bainbridge added. “But I feel pretty confident this regulation at this point does a good job of allowing contributions to be made in crypto but then ensuring it’s not going to become an easy avenue to violate the law.”

Donations are required to be facilitated by a third-party payment processor that is based in the United States and registered with the Treasury’s Financial Crimes Enforcement Network, and must not exceed contribution limits. Additionally, the contributor’s identity should be verified and the donation should be immediately converted into US dollars and transferred to the campaign’s bank account. 

The commission prohibited crypto donations in 2018, citing concerns that crypto could be used to circumvent contribution limits and rules against accepting cash from foreign donors, according to a commission memo. California was one of nine states that banned crypto donations, while a dozen states expressly allow some form of crypto donations.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Bitcoin’s mining difficulty fell by 5.01% due to a July 22 adjustment — the most it has dropped since July 2021.

The data was published by BTC.com, which tracks network mining difficulty and posts an update roughly every two weeks when the adjustments take place. 

The network’s hash rate has fallen by about 8.9% from July 6, the date of the last update, according to data compiled by The Block Research.

Mining difficulty refers to the complexity of the mathematical process behind mining, during which miners are repeatedly trying to find a hash below a set level. Miners that “discover” this hash win the reward for the next transaction block. 

Mining difficulty adjusts every 2,016 blocks (roughly every two weeks) in sync with the network’s hash rate.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Zipmex announced it has resumed withdrawals from its Trade Wallets, two days after the platform paused the feature. 

Zipmex uses two types of wallets to manage their assets. The first is called a Trade Wallet, which is where users can deposit fiat and other crypto assets if they wish to trade on the platform. Z Wallet is the second type of wallet, where the exchange users can deposit funds to receive rewards and bonuses.

In its update, Zipmex said users can withdraw funds from Trade Wallets starting Friday 7 a.m. ET. However, the firm added that Z wallets will remain closed, which means normal operations have not been restored.

Earlier this week, the exchange froze all client funds, citing “financial difficulties” of its key financial partners. It’s evident that the exchange likely suffered from the cascading effects of a financial crisis in the crypto sector.

The Block reported that Zipmex had a $48 million exposure to Babel Finance and $5 million to Celsius, two other embattled firms that have kept clients funds on hold due to insolvency issues.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Episode 67 of Season 4 of The Scoop was recorded remotely with The Block’s Frank Chaparro and Bill Barhydt, CEO of Abra.

Listen below, and subscribe to The Scoop on Apple, Spotify, Google Podcasts, Stitcher or wherever you listen to podcasts. Email feedback and revision requests to podcast@theblockcrypto.com.

As head of a retail crypto platform with lending exposure to Three Arrows Capital (‘3AC’), Abra CEO Bill Barhydt has personal insight into what led similar platforms to go bust in the wake of 3AC defaulting on $3.5 billion in loans across 27 different counterparties.

In this episode of The Scoop, Barhydt reveals how Abra has been able to remain operational despite 3AC exposure, and where other lenders who incurred severe losses from 3AC went wrong.

Adequately accounting for ‘concentration risk’ for example, which Barhydt describes simply as not putting “all your eggs in one basket,” has been key to Abra’s survival. This meant Abra was able to write-off a relatively small loss resulting from the collapse of 3AC without it having an impact on their broader operations.

Yet, while Barhydt believes concentration risk is “by far the easiest thing to manage for in lending,” firms like Voyager have been forced into bankruptcy from over-exposure to 3AC, with court documents suggesting Voyager has claims of over $650 million against 3AC compared to the $1.3 billion in crypto assets the broker currently has on its platform.

When lenders take a hit from failing to adequately account for concentration risk, Barhydt believes it is usually out of complacency:

“Usually it’s a function of laziness because: hey, the rates are good, nobody’s asking any questions, markets going up and to the right… It is pure laziness. And unfortunately, there were a couple of firms that were in that situation for different reasons.”

During this episode, Chaparro and Barhydt also discuss:

• The extent to which leverage still exists in the crypto market
• The potential synergy between CeFi and DeFi
• Abra’s plans to become a licensed bank

This episode is brought to you by our sponsors Chainalysis & IWC Schauffhausen

About Chainalysis
Chainalysis is the leading blockchain data platform. We provide data, software, services, and research to government agencies, exchanges, financial institutions, and insurance and cybersecurity companies in over 60 countries. Backed by Accel, Addition, Benchmark, Coatue, Paradigm, Ribbit, and other leading firms in venture capital, Chainalysis builds trust in blockchains to promote more financial freedom with less risk. For more information, visit www.chainalysis.com.

About IWC Schaffhausen
IWC Schaffhausen is a Swiss luxury watch manufacturer based in Schaffhausen, Switzerland. Known for its unique engineering approach to watchmaking, IWC combines the best of human craftsmanship and creativity with cutting-edge technology and processes. With collections like the Portugieser and the Pilot’s Watches, the brand covers the whole spectrum from elegant timepieces to sports watches. For more information, visit IWC.com

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Three Arrows Capital had positioned itself for a market that “didn’t end up happening” and “the whole situation is regrettable,” co-founders Zhu Su and Kyle Davies told Bloomberg in an interview published today — while also explaining that they’re en route to Dubai. 

“The whole situation is regrettable,” Davies told Bloomberg. “Many people lost a lot of money.”

Zhu added: “We positioned ourselves for a kind of market that didn’t end up happening.” 

3AC had grown to manage billions of dollars as one of the highest profile hedge funds in crypto, before imploding following May’s collapse of the Terra ecosystem and its related luna token. The fund filed for bankruptcy earlier this month. Court documents published on Monday by 3AC’s liquidators — and later deleted — show that 3AC owed 27 crypto companies $3.5 billion. 

The founders explained in the interview how bets on luna, the Grayscale Bitcoin Trust and staked ether all went sour.

“What we failed to realize was that luna was capable of falling to effective zero in a matter of days,” Zhu said. 

The pair declined to give their location but said they say were en route to Dubai, from where the hope to manage 3AC’s liquidation.

“For Kyle and I, there’s so many crazy people in crypto that kind of made death threats or all this kind of noise,” Zhu said. “We feel that it’s just the interest for everyone if we can be physically secured and keep a low profile.”

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Members of the Commodity Futures Trading Commission (CFTC) stressed the need for more regulatory collaboration after the Securities and Exchange Commission (SEC) lodged a digital assets insider trading case today against a former Coinbase employee and his associates.

CFTC commissioners were unusually public in calling for more collaboration. Commissioner Caroline Pham called the action a “striking example of regulation by enforcement” in a statement.

The Justice Department (DOJ) brought a criminal complaint against Ishan Wahi, a former Coinbase product manager, and his associates for allegedly running an insider trading scheme today, and the SEC followed with an announcement of a civil case shortly after.

The DOJ charged the men with wire fraud. The broad statute allows the DOJ to pursue any fraud that utilizes the “wires,” or internet and telecommunications. It doesn’t implicate insider trading laws, which are securities laws, or allege that this fraud dealt with securities.

The SEC, on the other hand, has brought a securities violation case in a parallel action to the DOJ’s criminal complaint. The regulator argues the alleged front-running centered on the trading of securities. In its filing, the SEC made arguments that nine tokens constituted securities — tokens the regulator had not previously clarified or called out as securities.

If the SEC hadn’t stepped in and said it believes those tokens to be securities, regulation of the trading of those tokens likely would have fallen under the CFTC’s purview. 

“The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together,” Phan said. “Major questions are best addressed through a transparent process that engages the public to develop appropriate policy with expert input — through notice-and-comment rulemaking pursuant to the Administrative Procedure Act. Regulatory clarity comes from being out in the open, not in the dark.”

Her colleague Commissioner Kristin Johnson didn’t specifically call out the SEC, and she even said that “financial market regulators and law enforcement stand united” in their fight against fraudulent conduct in the crypto markets. Still, her statement did call for collaboration among regulators in order to take insider trading to task.

“We must continue to work collaboratively to adopt a whole-of-government approach to prevent bad actors from taking advantage of important policy and regulatory debates and to ensure the protection of retail investors and preservation of the safety and soundness of our financial system,” Johnson said.

Jason Gottlieb, partner and chair of Morrison Cohen’s White Collar and Regulatory Enforcement group, pointed out that the CFTC has clear authority to regulate insider trading in commodities, while the SEC has built a case here that is reaching — without considerable groundwork — to assert that these tokens are securities. Whether the tokens were securities at the time of issuance has yet to be determined, Gottlieb said, but the fact that the tokens are out there trading makes them commodities and puts them under the CFTC’s purview.

“The CFTC has clear authority here,” Gottlieb said. “The SEC is sort of helping itself to authority by making these assertions. If the CFTC wanted to bring these cases, they could. It’s squarely in their corner.”

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Quick Take

• In this weekly series, we dive into some of the most interesting data and developments across the Layer 1 blockchain landscape, from DeFi and bridges to network activity and funding
• Modern blockchains are becoming progressively more modular over time, with the Ethereum merge representing one of the largest efforts to change the architecture of a blockchain to date
• Major upgrades that are beginning to roll out stand to change the way users interact with the Solana and Cosmos ecosystems

This research piece is available exclusively to
members of The Block Research.
You can continue reading
this Research content on The Block Research.