Kronos $25M Exploit: Woo Exchange Suspicion

$15B BTC Option OI | DYDX $9M Loss

Marco Manoppo & Karon Pangestu
November 20, 2023

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Good Morning. The total crypto market cap remains at ~$1.45T while BTC and ETH have been staying flat or underperforming. Unsurprisingly, this means that capital has flown into smaller altcoins. At the same time, Deribit BTC options open interest is sitting at an ATH of $15 billion.

Hunt your alpha cautiously.

In Today's Email:

What Matters: Kronos $25M exploit 🛠️
Products: IntentX, OTC perp DEX 🤝
Charts: dYdX $9M loss, SOL NFT volume 📉

Narratives: Solana narrative continues with JUP and PYTH airdrop. We’re also seeing some trends in GPU/AI related microcap altcoins.

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WHAT MATTERS

Kronos Research $25M Exploit

ZachXBT

State of play: Kronos Research, a Taipei-based trading, and VC firm suffered unauthorized access to its API keys on Saturday, potentially leading to a $25M exploit, as reported by ZachXBT.

More than 12,800 ETH (~$25M) was transferred to 5 wallets.
Kronos announced that it paused all trading and said that “potential losses are not a significant portion” of its equity.
Kronos is the primary liquidity provider for WOO X’s spot markets and ~40% of its perpetual futures.
WOO X is an exchange that was incubated by Kronos.
WOO X temporarily paused trading to “protect users’ positions from a lack of liquidity” but it resumed trading on Sunday.

What’s next: All WOO X’s withdrawal has been 100% processed but the firm is still working to improve liquidity and help users who had liquidations or other issues caused by the exploit.

Our take: Woo handled the situation particularly well, but it was still extremely concerning that a market maker incident (Kronos Research), could cause such significant damage to an exchange.

An exchange should never be that dependent on one market-making firm.
It’s not surprising given that Kronos incubated Woo, but we believe that such an arrangement must be under a lot more scrutiny after the FTX-Alameda relationship fiasco.

uhh
woo is owned by kronos
also why would you pause an exchange due to lack of liquidity?
do you not have a backstop program or insurance fund in place or?
woos defi stuff seems well-built but the decision-making here is a bit questionable
— David Holt 🌴 (@IDrawCharts)
3:35 AM • Nov 19, 2023

For builders and investors: Don’t keep significant capital with a centralized party that isn’t extremely conservative or institutional in nature.

Either go for luxury brands, or for good value brands, don’t stay in the middle.
Meaning that you either do self-custody and trade on DEXs or hold your funds with a regulated custodian and trade with prime brokers.

Take a peek at our referral reward at the bottom of this issue. Share this newsletter and receive our list of 100 smart crypto investors' wallet addresses 👇

PRODUCTS OF THE WEEK

IntentX, an OTC Perpetuals DEX

IntentX

IntentX is a next-generation, intent-based decentralized derivatives exchange. IntentX’s mission is to provide traders and investors with the most performant and efficient platform to access decentralized derivatives.

IntentX's Intent-Based architecture boosts liquidity and efficiency, lowers fees, and protects against oracle manipulation, while securely connecting CEX liquidity to the blockchain.
IntentX represents a significant shift in on-chain derivatives trading by combining the liquidity of CEXs with the security of DEXs.
IntentX open beta is now live on Base.

Other cool products:

FishVerse, a W2E open-world fishing game.
KryptoGO, a friendly crypto wallet for web3.
WeMeta, a data and analytics layer of the metaverse.
KrownPay, a crypto payment solution for businesses.
Rainmaker, a self-custody and no seed phrases DeFi 3.0 wallet.

CHARTS OF THE WEEK

dYdX Lost $9M of Insurance Fund

dYdX Explorer

State of play: dYdX experienced a targeted attack manipulating the exchange’s YFI token market. The protocol utilized $9M from its v3 insurance fund to address liquidation-related shortfalls in the YFI market.

$9M represented around 40% of dYdX’s total insurance fund.
The attack was a market manipulation that wiped out over $300M in market capitalization from the YFI token.
YFI's price dropped nearly 40% on the attack resulting in a $50M loss of YFI’s open interest.
Before the incident, dYdX made up almost half of the total open interest on YFI.
dYdX confirmed that its insurance fund still holds $13.5M after the reduction, and has increased margin requirements for less liquid markets.

Our take: Oracle-based DEXs will always be subject to market manipulation risk.

There are different risk parameters that can be adjusted depending on how the DEX functions — such as setting up a max OI limit, incentivizing a balanced long-short exposure, maximum PnL on a trade, and many more.

Solana NFT Marketplaces Remains Flat

Messari

State of play: Despite Solana's recent growth, its NFT marketplaces have not yet mirrored the broader trend in the Solana ecosystem.

Trading volume peaked in early 2023 and continuously declined in the following months.
As of November 13, 2023, the weekly volume is substantially lower than earlier in the year.
Multiple marketplaces are represented, with Magic Eden and Tensor appearing to have the largest share of the volume.

Our take: NFTs tend to rally the last when onchain liquidity is at its local peak, it seems that we’re not there yet.

QUICK BITES

Fidelity files for spot Ethereum ETF.
Kronos Research hacked for ~$25M.
FTX claims soared to as high as 65 cents.
Jump Trading spins off Wormhole project.
dYdX lost $9M as its insurance fund got attacked.
Deribit BTC options OI reached an all-time high of $15B.
Sam Altman remains at Worldcoin amidst OpenAI drama.
SEC defers decisions on more spot Bitcoin ETF applications.
Republic selects Avalanche for its investment security token.
Binance counter-terrorism official left after two years in the role.
EigenLayer to enable staking with operators of DA layer in Q1 2024.

NOTEWORTHY READS & MEME

Decentralised’s read on the L2 paradox.
CoinShares’ read on US Bitcoin ETF launch price impact.
Carvas’ read on whether big TradFi products have to be big in crypto.

cobie wtf
— Alex Svanevik 🐧 (@ASvanevik)
10:53 PM • Nov 17, 2023

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