Was 2021 Just a Gigantic PONZI?

Bankless Nation, we've got another segment for you. Something special today, something different, something um I guess we need to talk about. We had a regular State of the Nation planned, but uh events overtook it once again. That's been the story the last three weeks. I think what people want to know in today's episode is

What's happening with Genesis? This large institutional crypto lender. Is this the next domino to fall? If that happens, what happens next? And then higher level, as David was pitching me this episode, I don't know if you guys have ever seen that picture of Charlie from Always Sunny in Philadelphia. And he's got like uh let me share the picture as I'm talking. He's like in front of uh some kind of a board, like a half crazed detective. Um, this is David coming into this episode. Yeah. All right. Because um, I think, David, you feel like this has linked this last series of events with Genesis, has linked a whole series of things in your mind and is helpful to explaining and you uh for for you to explain.

Um

what happened the last two years in crypto?

Everything.

I mean the question is like I'm coming to this episode and David's like, yo, I think the last two years solid, twelve to eighteen months at least, have been a ginor ginormous Ponzi game.

Dude, the whole 2021 bull market was a gigantic Ponzi scheme. And now

Charlie Face?

the whole thing, dude.

What's going on a thumbnail?

The whole thing.

The whole thing was a Ponzi scheme. And now we're at the end. It's completely unraveled. And now we're at the final conclusion. And so I was going to make a show about all right, is Genesis insolvent? What's going on with Grayscale? What's going on with Barry Silver and Digital Currency Group? Uh, and like answering that question, the what's going on in the last seven days has been the final puzzle piece that fits over the broad category of 2022 contagion, contagion, contagion. Why was there so much contagion? We now know.

We have all the answers.

Good news. I I think we have all of the answers in the today's episode. If you had any question coming to the today's episode, you'll leave with the answer to your question. But really, I think this is uh we're gonna walk through it. We're gonna end with the last domino. We hope we hope is one of the last dominoes to fall, which is Genesis, um digital currency group, what's going on with kind of it even ties into retail products like like Gemini Earn, people still have funds uh stuck on that, what's gonna happen and all that. We end with that, but in order to explain that, we're gonna take you through 2021, 2022, and the series of dominoes that led to this final domino falling. So this is gonna be an interesting episode. And guys, I just gotta like I looked over some of David's notes real quick coming into this, but at some level, I'm along for the ride with you too. All right, because I think David's gonna unpack his brain and uh I'm just here asking questions. All right, let's um

Let's talk about the high level of the episode that we're about to get into, kind of the daisy chain of events. And I'm going to bring up a tweet from Barry Silbert, who's kind of, I bet guess the first player in this story, but also uh one of the last players of this story. Why did you want us to look at this tweet? And this is from June 24th, 2021, a tweet from Barry Silbert, who of course will introduce the actors in a little bit, but he is the uh leader of Digital Currency Group, um, Genesis. Um, uh, what else, David? I guess I'm gonna bring up the GDBC and the ETH uh uh ETH trusts that people can buy in their retirement accounts. What is Barry saying here and why is this relevant to the story?

Yeah, so this was June 24th, 2021, which if you remember was this first big crash in crypto after a meteoric rise of basically all crypto asset prices. Ether hit $4,300, Bitcoin hit like $60,000. Uh, and then in one or two days, we lost like 50 to 60% of the crypto market cap. Uh, and then as the dust settled, we the bull market actually resumed. Again, this was in the middle of 2021, and Barry Silbert tweets out there is a daisy chain of borrowers and lenders in the crypto space, most well capitalized, but some are not. Lots of leverage still in the ecosystem, including in some non obvious places. Important to understand counterparty risk and where the weak links are in the chain. Now, this tweet.

was

like the most th was the indication of all things to come over the next

For

twelve to eighteen months.

in our Shakespeare Shakespearean tragedy story, this is a

This is foreshadowing. Uh, this was the tweet to pay attention to at this moment. No one really wanted to, no one really knew how to unpack these things because all of these were centralized lenders, so it's a black box, so we didn't have that information. But this tweet became true in fantastic fashion. And the irony, Ryan, is that Barry Silbert tweeted it, and we that that daisy chain of borrowers and lenders has come full circle back to his own his own trading desk, Genesis, which is part of his company, Digital Currency Group. Okay. The the full circle nature of this story is absolutely insane.

Back to Barry. This is where the story starts. This is where it's actually going to end when we get into it. I'm going to pull out a few phrases here. Daisy chain of borrowers and lenders, he says. Most well capitalized. Some aren't. Lots of leverage, he says. Important to understand counterparty part uh counterparty risk and where the weak links are in the chain.

Uh what do we have here, David? This is a diagram I think you put together for this uh for this episode, and maybe is um kind of the different sections. All of these layers maybe represent dominoes. Explain this for us.

Okay, so the I I stayed up like late last night because I was going down this rabbit hole. So I made this pyramid, Brian.

Happy Thanksgiving by the

This was this was the 2021 bull market. What was so like the 2017 bull market was determined by ICOs printing tokens out of out of thin air to fundraise and they would buy Ether and USEC and that and it was a bunch of printing tokens out of thin air, and that's what the ICO mania was. I regret to inform you, Ryan, that the 2021 bull market was the same damn thing. We had these yield farming, DeFi yield farming, pool twos. Remember pool twos with like 500% APYs if you were like willing to take the risk of like other yield farmers to dump on you? So like pool twos with incentivized APYs and farmers would play chicken after they uh after like everyone would want it to farm. And then and that was like you know crazy 100 to 1000% APYs. That rested on top of the pool ones, uh, where it was lower risk, you weren't providing liquidity, you were just incentivized to stake your tokens, whether it's like a you know, whatever DeFi yield farm, you would just stake your tokens uh and you get a yield. You didn't really have to have as much risk, moderate 10 to 90 percent APYs. That was the top of the pyramid. That was where.

summer.

Most DeFi Summer and also like that and then Sol uh Solana, Avalanche, Phantom, that was their game as well after Ethereum took it over.

Okay, hold on, hold on. You're saying top of the pyramid, but I actually the way you're describing it, I almost think that this pyramid should be flipped on its head. Do you know what I mean? Like so the top should be kind of the like the weakest part, and but that's where it really starts, right? It's like uh pool two twos and pool ones, the DeFi summer is actually kind of like the start of the pyramid and what the full 2021 bull market builds into. Is that right?

Sure, it depends on your perspective. Uh what we are looking at here is a risk spectrum as well, where you if you are at the top of the pyramid, you are on the highest end of the risk curve. Uh you are the things with the most APYs, with the most risk, and then the risk actually gets lower as you go down, which is why

No, no, the real risk. Like th it's just like this is why people are concerned about Genesis and Digital Currency Group, because they are the foundation of all yield. All that yield, all that crazy speculation,

all fell down at the end of the day to Genesis. And that's why we are talking about Genesis today and why we feel or I I feel confident that this is like the last big domino to f

Okay, so pool twos, pool twos, and defy yield farms were supported by pool ones. Uh pool ones, which were the basic yield farm. That's where Alameda and Three Ear's Capital got a lot of their money in the second half of the bull market. Hedge funds maxed out lines of credit from anyone that would allow them to borrow from them. This is what Alameda and Three Eros Capital did, and this is where so much contagion came from. Because Three Eros Capital and Alameda borrowed from as many different lending desks as possible. BlockFi, Voyager, Celsius. And and then when Three Eros Capital and Alameda went under, they took all the lending desks with them, except for Alameda and FTX, found a way to print a bunch of FTT to support all the lending desks. But ultimately, all of that money, all the capital to BlockFi, Voyager, Celsius, where were they getting their yield? They were getting their yield from Genesis, the GBTC arbitrage, and ultimately the whole entire digitally digital currency group system. And that, Ryan, was the 2021 bull market. All of these high, high risk yield farms ultimately was supported by the largest player in the game, which was Genesis, and also the arbitrage for the grayscale premium.

So you're telling me everything that happened in 2021, all of the price appreciation that we've now, by the way, walked back and reset was just smoke and mirrors, was almost like a Ponzi scheme of uh stacking risk and stacking like interest that wasn't really real.

Yes. And it was all in the whole reason why this whole thing worked was because we were able to print tokens out of thin air, which is the way that every single crypto bull run has gone since its genesis. So like you want to go to then click on that tweet. Yeah, you remember remember this tweet that that caused a bunch of like uh uh uh like qu crypto Twitter murmurings because this was the one that like Richard Hart responded to. And Richard Hart, like I I tweeted out, okay, three hours capital is insolvent, Alameda's liquidated, FTX is insolvent. If all these people are insolvent, I ask, then who made all the money? Richard Hart comes in like, hello there, it was me. Well, it wasn't him, Ryan. Uh the actual answer is the next tweet. The actual answer is this guy who uh used this illustration of a neighborhood with a hundred houses and has one sale for a million dollars, therefore the collective houses are worth a hundred million dollars. But then the remaining 99 houses only sell for uh like 10% of that. So actually, like $91 million of equity is actually gone. This is what happens when all these e-liquid chit coins, all the DeFi yield farming, all of the degeneracy high APY pool one and pool twos, when all of those tokens go down in price, the entire system gets wiped out because of all of the systemic risk that got built up by players like Three Airs Capital and Alameda. And so that's what happened, Ryan. That's where the money went. We printed all these bitcoins.

The money, the money, the money was just not real. It was just

Money.

fabrication. It was just numbers on a page. And there there may have been some people, by the way, that cashed out close to the top based on those valuations. Some few people walked away with with some amount of of money. But what you're saying is the price.

So they walked away with Bitcoin, Ether, USD Clah.

Yeah.

Yeah.

The real monies, like hard monies.

Yes.

Uh and left everyone else kind of holding the bag. And that's where we are. Yep. Um, so now here we are. Genesis has what's reported to be like a $1 billion hole. People are now worried about the solvency of Grayscale and digital currency group Empire. We're going to talk about that. And uh when we get back, David, I want you to walk us through this whole story, if you could. I think we just we just saw the the preamble, if you will. Uh and I think what we're gonna go through is uh show you domino by domino, how these pieces were stacked, and what caused to to um what caused their fall and what's gonna happen next. So, guys, stick with us. We'll be right back. But first we want to tell you about the fantastic sponsors that made this episode possible.

Was the 2021 bull market just a gigantic Ponzi scheme in crypto? That is the uh the central question we're raising in today's episode. And David has brought some of the receipts uh going to take us through the timeline here. All the way back in January 2021, when this uh Shakespearean tragedy started to first unfold. Um, I think in order to set this story up, David, and do it justice, we should do a couple of things. Um, first, we should set the stage where we were in January 2021. Um, the feeling of the market, uh, the prices, that sort of thing. And then we should talk about the key players. As any good uh, I guess tragedy does. We have to lay out the background and the actors and the players, the characters that are going to be in this uh that are somewhat reoccurring as well. So let's talk about where we were, and I remember it actually, coming out of December 2020. Um, ETH.

was low uh in December twenty twenty. Or we had a uh show.

Four to seven hundred dollars. We we had a show that was kind of like the bull case for ETH. And what was really interesting is um DeFi had had its moment back the previous summer. This was a summer that came to be known as DeFi summer. This is summer of 2021, where people realized that DeFi tokens were real things. Previous to that, all tokens were kind of dead. There was Bitcoin and there was a little bit of ETH, but then all of the other tokens, nothing mattered.

Uh

DeFi summer 2020 showed people that no tokens did matter and talk about yield farming, that sort of thing. But ETH was still kind of lingering in the 400s. Bitcoin had seen a moment, and there was this move of to say, um, all we need is Bitcoin and DeFi tokens, and there's no real use case for ETH. So ETH had not yet popped at the end of December 2020. Um, so take us back to that feeling as as we start this story in December, uh, in January 2021.

What had the market done with DeFi? What was the price of Bitcoin? What was the price of ETH?

Yeah, so at the time, DeFi Summer compound really announced the governance token. And that was the new primitive that everyone was super stoked about. This is how we're gonna decentralize ownership and control over these systems to as many people as possible. And that was the shiny new object that really incurred DeFi Summer and the the concept of yield farming to begin with. And like I said at the beginning, yield, yield farming, liquidity mining was this era's ICO. And before the ICO era, there was the proof of work fork and fair launch phenomenon, which like almost zero tokens made it through. So like we had the 2013 bull market was the proof of work fork and fair launch, we just made a bunch of tokens. 2017 bull market was the ICO Mania, where we just made a bunch of tokens.

The 2021 bull market, Ryan, was the DeFi yield summing era where we made a bunch of tokens, this time with yield. This was the thing. Yield was the thing that identified the 2021 bull market, not just at the very high risk end of the spectrum, but down all the way into how regular institutions got involved in crypto and why they got involved, is because there was demand to borrow assets. And this is the story of how everything got built up and how everything fell apart. So if we're injecting ourselves into this story in January of 2021, which is kind of when the start uh story starts, Ether began January at about $900. It ended January at $1,700. Bitcoin's Bitcoin started January around $2,500, $25,000. It ended that January somewhere around $35,000 to $40,000. And so it's on. The bull market is on.

2021 uh peop people felt like the bull market was fully on. And uh they were also hungry, I feel like maybe maybe like we could start to inject terms like greedy, and they were certainly hungry for more yield, right? Things were frothy, like, oh, let's do that 2020 uh DeFi summer thing again. That felt great. Let's start all over again. Yeah. Uh and this starts to inject, I think, this idea that we've seen in in many cycles, David, is uh the concept of a metaphor we call it the euthanasia roller coaster. This is a picture of the euthanasia roller coaster, and it's a it's a a theoretical construct, but would the physics of it would actually work. And basically, you start the roller coaster, and by the end of it, after all of the loops, you're kind of dead. Yeah, like it's just been a one way ride. Um, there's no life left in you. Uh, but each of these loops, like describe this in some more detail. And what's how where's the analogy fit? Because we've seen this in pre um previous cycles as well.

Yeah, so again, proof of work fork and fair launch. What happened? Uh somebody, Charlie Charlie Lee made Litecoin uh by forking Bitcoin, and that created like a like a billion dollars in market cap. People saw that and they did that on repeat. They did that over again. And all of a sudden. Another loop. Another loop. Like, oh, that worked for Charlie with Litecoin. Let's make 17 other forks and then let's make 17 forks of that fork. Eventually, it it created a mania, and then eventually people got fatigued. Uh and people just got done. And so they left, they left the the bull market. Same thing with ICOs. What was the great big ICO that that triggered the 2015 uh ICO mania? It was the 2015 Ethereum ICO, followed by the very successful 2016 Augur ICO. And all of a sudden, people realized that they could do ICOs to mint tokens, and that would generate a bunch of hype, and that's how you could do things. So it started off legit, it ended in tragedy. Uh, and so as the ICO mania went on, uh, ICOs got the loops, got faster and faster and faster until people just got fatigued. These things were just way too scammy, retail investors just lost all their money, and no new inflows of money came into the system, and then we had a bear market. This was, of course, DeFi summer. The first OG yield farm, the first the first liquidity mining event was compound, followed by every other DeFi app that had yet to issue a token, followed by copycats on Ethereum. Think about SushiSwap, which I mean allegedly was Sam Bankman Freed. And then we had Avalanche, Solana, Phantom, all these Ethereum uh Ethereum killers show up and then start doing yield farms on their chains. And eventually

People got fatigued, uh, people stopped making money, uh, and the energy ran out of the system. Um, but this is this is the pattern of every single bull market so far.

The f the first few loops in the euthanasia or la coaster are fun, and the last uh couple actually kill you.

Yep.

And that's how all bull cycles end, including this one. So we're gonna talk about some of those loops. But um as we get into this, the other thing to introduce is I think the players here, the reoccurring actors that are important. Uh I want to talk about a few of them. First is the house of Barry Silbert. Okay, this is like the Monagues and the Capulets, right? Uh in their Shakespearean tragedy. The house of Barry Silbert. So um Barry has been a crypto OG from the very beginning of crypto. I don't know, he might be have been in crypto as long as like Eric Voorhees and some people like this, uh, early Bitcoin holder for sure. Um, but he decided to go the institutional route behind things. So he formed this company called Digital Currency Group. There's a group within that called Genesis, which maybe you can explain some uh details. Also, Grayscale, which is a trust type product, maybe you can explain that to us. And there are some other um uh products he owned, including media. So like Coindesk is actually owned by Digital Currency Group. So talk about the House of Silbert and who who is Grayscale and who is Genesis?

So Grayscale is this trust that what allowed people to have Bitcoin exposure on the traditional stock market. Uh, if you didn't want to go and set up uh an exchange that maybe you didn't trust, maybe coin coinbase is too sketchy for you because you are an institutional investor, you could just buy access, buy exposure to Bitcoin via the Grayscale Bitcoin trust. The thing is, it doesn't trade one for one. Uh and so the GBTC share on the on the traditional stock markets are