Notes 10/10: BNB Hack, MakerDAO Invests in Treasuries

A bridge connecting the Binance Beacon Smart Chain to the BNB smart chain, the blockchain for Binance’s native token BNB was hacked last Friday. The hacker did not steal funds; In fact, they minted $570 million worth of BNB and, reportedly, got away with $100 million worth of tokens.

BNB validators – systems responsible for approving transactions and creating new blocks – shut down in response to the attack to prevent further damage and Binance executives assured investors in the token that their funds were safe.

A Centralized Entity  

Unfortunately, what should have been a laudatory moment turned into an embarrassing one for the chain because the hacker exposed the centralized innards of a supposedly decentralized “smart chain.” There are 44 validators in the BNB chain. Twenty-six were active when the attack occurred. Their swift coordination and response proved that the BNB smart chain is a centralized entity.

That most blockchains and cryptocurrencies are not decentralized is an open secret. Research papers have been written on the topic and there have been plenty of discussions on it as well. But the industry persists in peddling this myth.

When asked about it on Coindesk’s morning show, Binance chief communication officer Patrick Hillman offered a meaningless word salad. He also said the company had plans to widen the validator pool. But adding new members requires approval from existing ones.

In its workings, the BNB token resembles ether, in that its numbers are expected to decline over time through ‘burning’ of BNB tokens. With a deterioration in quantity, BNB’s price should increase as it becomes a scarce asset. In fact, it has already appreciated by roughly 865% in the last two years. What are the incentives, then, for existing validators to approve new members who might dilute their stake in an asset whose price is appreciating?

Interestingly, Hillman told Coindesk that Binance plans to increase the rate at which it plans to burn BNB to get rid of the tokens that have been added to its pool.

MakerDAO Invests in Treasuries  

Last month, MakerDAO cofounder Rune Christensen unveiled a plan to convert its token DAI from a stablecoin to a free-standing asset through an aviary-inspired evolution from Pigeon phase to Phoenix phase. The first step to that transformation involved boosting profits for investors. But the current economic climate is not conducive to its stability, much less to profits.

The market capitalization for USDC, the dollar-backed stablecoin from Circle which comprises the biggest share of collateral used to back DAI, has fallen in the last three months. Other cryptocurrencies, including bitcoin, are also caught in the freeze of a crypto winter.

And so MakerDAO’s governance team has voted to invest $500 million into short-term Treasuries instruments and corporate bonds.

According to reports, forty percent of the total eighty percent invested into US Treasures will be put into US Treasury ETFs with a maturation date of between zero to one year while the remaining 60 percent will go into iShares ETFs that hold Treasuries maturing in one to three years. Both ETFs are from BlackRock – an investment firm that is increasingly forging relationships with major crypto players. The remaining 20 percent of the total $500 million will go towards zero to five-year corporate grade investment bonds.  

How Will the Move Affect DAI?

Short term Treasury assets have, in recent months, become a favorite amongst investors during a time when all major assets, including bitcoin, are witnessing hemorrhaging liquidity. For most of its short life, DAI has been backed by cryptocurrencies – that was the original intent behind its launch in 2017.

However, the stablecoin’s latest announcement means that it has joined a growing list of coins dependent on assets from mainstream finance for liquidity.

On a related note, it might be interesting to see the yields and peg performance for DAI after this announcement. Stablecoins are designed as fixed income instruments that throw off yield, when they shift from their 1:1 peg with the US dollar. DAI has wobbled from its peg many times due to price volatility in its underlying crypto assets. That same volatility, however, has also generated returns for investors who staked their coins. The move into treasuries will introduce relative stability into DAI’s peg. How it affects yields might be another matter.

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