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More from @lex_node

_gabrielShapir0

@lex_node

Dec 27, 2024

crypto tax broker rules finalized; not sure what it's in it yet, but it's likely very very bad:

stay tuned, also check @CryptoTaxGuyETH and @DumbApe69420 posts

public-inspection.federalregister.gov/2024-30496.pdf

@CryptoTaxGuyETH @DumbApe69420 at a quick glance, looks like nearly all DeFi web app providers will be covered--some wallets will as well (e.g. if they have an integrated swaps feature, but not otherwise)

@CryptoTaxGuyETH @DumbApe69420 they reject categorically the idea that any sort of custody of users' assets is required to qualify one as a reporting broker, and argue that if you provide a technology that the user himself uses to effectuate transactions, then you are still a broker . . .

Read 12 tweets

_gabrielShapir0

@lex_node

Dec 21, 2024

good article, but like most it misses an entire category of risks, which depend on an understanding of law

first, what is the legal analysis of Ethena?

(1) what entity(ies) own(s) all the 'backing assets'? no one knows this, there is no official position on this afaict

(2) almost certainly it is some Ethena-owned entities that legally own all of the backing assets (deposits). why? because custodians and CEXs need a counterparty they can KYC, and can only hold assets owned by that counterparty--the fact that custodians and CEXs are willing to hold these deposits strongly suggests that one or more Ethena entities is the legal owner of all deposits, perp positions, etc. Furthermore, the USDe terms and conditions themselves state "We do not ever have custody, possession, or control of your digital assets at any time," which means depositors do not own these assets--an Ethena entity (presumably Ethena GmbH, the named counterparty of the USDe Tos) does.

(3) in other words, when you make a deposit into Ethena to mint USDe, it is not like making a deposit into a bank--you are *selling* those assets to Ethena GmbH, and getting USDe in return (BTW, are you reporting that as a capital disposition on your taxes, anon?)

(4) USDe also has no express legal rights--i.e., there is no right of redemption per se (maybe one could argue some rights are implied by Ethena's communications, but this is always tricky). The terms of service only state that a USDe holder may *request* a redemption, and then provide a long list of subjective criteria (KYC etc.) that must be satisfied to be even *eligible* to make this *request*.

(5) an entity can lend against or rehypothecate assets that it owns--*note*, this can even happen *involuntarily*...for example, if the entity incurs legal liabilities (to other entities, humans, or governments), then the holders of those liabilities can claim all or a portion of the entity's assets

Now, when you add all these things up (assuming my analysis is correct, which is impossible to know for sure due to Ethena's legal-security-by-obscurity), what are the unsurfaced/undiscussed risks?

(a) one or more Ethena entities (presumably at least Ethena GmbH) can borrow against any or all of the deposits, offchain, and no one (potentially not even the CEXs nor custodians) would know about this until it is too late--if the creditors have security interests in the collateral, they would be clearly and obviously 'ahead' of every other claimant (including USDe holds) in an insolvency scenario; if not, then at minimum they would be pari passu and you have a race condition. Note that Ethena is not audited--like Tether in its early more sussy days, Ethena only gets attestations of asset holdings, which means the liability side of Ethena's balance sheet is not audited/attested to. Moreover, the attestations do not state what entities own what assets, instead they speak of "assets held in off-exchange custody solutions...for Ethena-related accounts"; the term "Ethena" is also not defined and so it is unclear whether this refers to the 'project' in some sense or to one or more specific business entities

(b) alternatively, one or more Ethena entities can get into liabilities involuntarily (class action lawyers sue them successfully, a government sues them successfully, an employee dies due to overwork and their estate sues them, a competitor sues them for antitrust violation, a stockholder of Ethena sues them for breach of fiduciary duties, a protocol DAO gets bad debt from them due to the liquidity issues mentioned in the article and sues them, whatever) and a similar result can occur

(c) finally, Ethena can simply, for whatever reason, decide not to redeem USDe or to haircut USDe claimants--since USDe have no rights, this would not *clearly* be illegal, and could result in protracted court battles on gray-area issues....this could happen, for example, if there is indeed a significant market downturn and depeg event as noted in the article, and Ethena governance (whether ENA holders or just the companies themselves) decide, well, for the future of the Ethena project it is much better if USDe holders are haircutted...similar things have happened in the past with Bitfinex, Tether, etc....Note that this becomes much more likely as Ethena expands into an actual blockchain where there are applications built on top of it and lots of governance processes and dependent applications etc. that care about the value of ENA (consider how when UST depegged, instead of truly having Luna absorb all losses, the recovery fork also made UST holders bear some pain so that the chain had a chance of surviving by giving value to LUNA holders)

All of these, like the other risks mentioned in the article, sort of *feel* unlikely (as I do believe the Ethena team are well-intentioned operators, and even if you don't agree with that, their main incentive should be to be honorable as if trust in the project is lost, it will be less valuable). But the risks are nonzero and how much above nonzero is currently unknowable and unquantifiable to the public.

More to the point though, unlike the risks noted in the article (which are intrinsic emergent properties of the overall design), these risks are *unnecessary*. The assets should not belong to random privately owned Ethena entities with arbitrary operating freedom, they should be held in a bankrupty-remote SPV with USDe holders as direct beneficiaries, and USDe holders should have direct clear rights of redemption without a million weasel words and conditions and broad limitations of liability that undercut any such right. There is no real reason *not* to do this other than that no one is *forcing* Ethena to do this and it's better for them if they own the assets, as then they have more flexibility with them. Furthermore, attestations are insuffiicient--full audits are necessary, so that the liability side of the solvency equation is known.

@leptokurtic_ please feel free to correct me if I'm wrong about anything

I also realized the list of potential legal claims by third parties isn't super compelling. I'm trying to think of what are the riskiest/most plausible...to me, the biggest and most plausible one is a tax claim, which, given the broad distribution of USDe, sUSDe, and ENA, could even come from the U.S. Patent claims? Claims by investors or other commercial counterparties (a CEX who feels they were betrayed in some way by Ethena and wants a bigger piece of the pie?) And of course, the SEC/CFTC, etc.--as we saw with SEC vs. TFL, the SEC has no compunction against driving a major entity into bankruptcy and screwing over the actual asset users in the process. Again, these are "black swans", I don't *expect* them, and I def think anything catastrophic with Ethena has a minority (if not minor) probability, but I feel people should understand these risks and I also feel that since they preventable, Ethena should just take these risks off the table with proper structuring.

Another risk I just thought of is that some of Ethena's counterparties could have side-deals with Ethena entities to get special privileges. For example, a CEX could have a deal with Ethena that says "you must redeem us first". This is another form of 'liability' for Ethena that could adversely affect particular types of USDe holders (eg onchain ones) more than others--basically an undisclosed lien-like system that makes CEX USDe quasi-non-fungible with onchain USDe. Do they have such deals? IDK, it is pure speculation, but without proper audits and disclosures, it is impossible to know, therefore you should assume that such deals exist until disproved.

Read 4 tweets

_gabrielShapir0

@lex_node

May 15, 2024

https://twitter.com/lex_node/status/1790550776391110909

26 / (continuing thread)

https://twitter.com/lex_node/status/1790550776391110909

29/ Rebuttable Presumptions - This flexible judicial test could be applied with some rebuttable presumptions--for example, that if some person or affiliated group owns more than 20% of tokens or controls more than 50% of validating nodes, the system is presumptively centralized.

Read 14 tweets

_gabrielShapir0

@lex_node

May 15, 2024

1/ **Thread** 🚨 We need to get back to decentralization and autonomy in crypto law and policy arguments. I'm against ETH and XRP being regulated the same. One is equity in a decentralized autonomous system (Ethereum), the other is a shadow-equity-style bet on one corporation (Ripple).

2/ Crypto policy people and the SEC have completely lost the lesson of Bill Hinman's speech on why ETH is not a security--because its value drivers are sufficiently decentralized. Reviving and refining this approach is more important than ever now that the SEC is attacking ETH.

3/ This gives me an excuse to revisit my old articles on decentralization and autonomy--as there is still widespread misunderstanding and denial of the importance of these concepts to law. They are more relevant now than ever, especially because they allow us to leverage the SEC's own words against them.

Read 25 tweets

_gabrielShapir0

@lex_node

Dec 3, 2023

hard to explain this well on X, but yes, code must be law for DeFi to work

these systems would need to be designed completely differently if they are meant to be subservient to offchain understandings

you can't reference that offchain understanding only in the case of 'hacks'

For example, if Aave is meant to merely implement an offchain loan agreement, and thus the code of Aave may differ in performance from that agreement, then Aave needs to code jurisdictional usury limits on the interest rates or else that offchain agreement is itself void

But if the agreement is void/unenforfceable, then that also means you could not use it to say 'this hacker breached this agreement and therefore we can recover funds'

Read 13 tweets

_gabrielShapir0

@lex_node

Dec 2, 2023

ETH vs SOL the real issues, a thread

https://twitter.com/lex_node/status/1601956819315957761

I've been wanting to write this for a while and have been thinking about these issues ever since digging into Solana (and its sources of centralization at the DApp level) a year ago

https://twitter.com/lex_node/status/1601956819315957761

https://twitter.com/lex_node/status/1601966276125016065

generally speaking it seems to me Solana seeks to achieve better scaling and composability by shifting costs onto DApp teams and infra providers instead of users...and that this is also where the SOL value flywheel comes from

Read 25 tweets

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