🦄 The last unicorn • letter 143

The last eagle is flying over the last crumbling mountain, and this is Colton from Hedgehog, the app that helps you buy baskets of cryptocurrency and automate your digital asset exposure wherever you custody funds. Don’t forget we also now support an on-chain TBILL token for those of you who want highly liquid, Aaa-rated US government debt, and you can reply here for more details!

At last it’s happened, the SEC has issued an enforcement action against one of the most widely used decentralized exchanges in the world, Uniswap. It is only to be expected after they chased down Coinbase, Kraken, Binance, and Kucoin–it was time for DEXs to take their turn in the limelight. As said so eloquently in The Last Unicorn, “Great heroes need great sorrows and burdens, or half their greatness goes unnoticed. It is all part of the fairy tale.”

Not always what we seem

This enforcement action comes hot on the tails of the launch of EigenLayer’s mainnet, which solves a multi-sided market problem that connects developers who need access to on-chain data, with validators who have at least 32 ETH on hand to participate in blockchain validation, with consumers who don’t have enough ETH to meet the validator minimums but want to participate in protocol yield. Essentially they act as a clearinghouse for people who want to exit their staking requirements early, much like traditional bond markets that offer varying yield curves based on the current rates offered by the Fed and the existing rates in any lender’s book of bonds.

As we’ve talked about previously though, this leads to perverse incentives for people packaging together these rehypothecated coins into more and more complex financial products. If you remember the collateralized debt obligations from the 2008 financial crisis, it’s sorta like that: people can package and repackage mixed tranches of token debt, and it can become difficult to calculate the liquidation risk or insolvency risk of any individual borrowed coin. Once enough of these coins are trading at a discount to the underlying token, ie ETH, then it creates significant risk for downstream lenders who are expecting to be able to recoup the full value of their ETH in a reasonable time. If they can’t get the full face value in a reasonable time, it could lead to industry-wide contagion.

And it doesn’t stop there. Many other chains are replicating the success of EigenLayer by issuing their own alternatives like Jito on Solana, or Celestia on Cosmos. We just have to hope that the house of cards doesn’t have a reason to come crashing down.

Weekly feature

This week we’re featuring XRP for being one of the first tokens to semi-successfuly defend against the SEC, and because they’re releasing a new stablecoin. Largely notable for being a classic byzantine fault-tolerance protocol, that elects leaders and passes messages to get finality relatively quickly for a decentralized protocol. The Stellar protocol, XLM, forked XRP and added flexible node lists and trust quora to enable more flexible participation in the protocol.

Similar to the tendermint chains like Cosmos, these currencies are largely notable for having high adoption among international banks as an alternative payment rail to SWIFT or RAPID. Consider pair trading them if you have a thesis around traditional finance adoption of cryptocurrencies for settlement.

When was your last vacation? You should take a break and treat yo’self, if you haven’t recently.

Keep hedging,
— Colton