The impact of the Wintermute hack could have been worse than 3AC, Voyager and Celsius — Here is why



Most crypto investors probably never heard of Wintermute Trading before the Sept. 20 $160 million hack, but that does not reduce their significance within the cryptocurrency ecosystem. The London-based algorithmic trading and crypto lending firm also provides liquidity to some of the largest exchanges and blockchain projects.

As a crypto-native trading firm, meaning digital assets have been its core since its inception in July 2017, Wintermute’s expertise in the sector is attested by $25 million in funding from global venture capital investors like Fidelity Investments, Pantera Capital and Blockchain.com Ventures.

Lending and venture capital firms have limited impact on day-to-day operations

An important distinction sets a market maker apart from bankrupt crypto venture capital firms like 3 Arrows Capital or insolvent lending and yield platforms like Voyager Digital and Celsius Network. Wintermute’s $160 million hack could have a much more profound impact on the crypto industry, considering how essential liquidity is.

The very nature of these businesses is vastly different. For example, a venture capitalist typically invests in pre-seed or seed capital by funding the projects ahead of their launch. There is a need for early-stage funding for tokens, nonfungible token (NFT) projects, decentralized applications (DApps) and infrastructure, but the money will eventually come up when a good team, idea and community are assembled.

Furthermore, the failure of a certain venture capitalist, whether it is or is not relevant to the industry, does not damage its competitors’ reputation. In fact, the opposite sentiment emerges because it proves that picking the right projects pays off, if the firm has been correctly managing its risk exposure. The same can be said for the yield and lending platforms, which basically compete for client deposits and scramble to offer the best returns.

When market markers fail, liquidity dries up and there is nothing worse for tradable assets than spreads growing wider. Most DApps users and exchanges aren’t aware of these intermediaries because their work is hidden within the order books and price arbitrage across intermediaries whether or not they are centralized. The real secret lies in algorithmic trading.

By applying sophisticated modeling and trading software, algorithmic firms like Wintermute resort to diverse strategies to find a competitive advantage over regular traders, including arbitrage, derivatives and colocation servers for high-frequency market access.

In addition to traditional proprietary desk trading, Wintermute provides market-making services by facilitating transactions on intermediaries using their own resources. These services can be hired by exchanges, brokers, token issuers or third-party entities such as foundations and supporting companies.

Specialized trading firms usually handle this process, but the activity can also be carried out independently. Currently, Wintermute, Alameda Research, DRW, Jump Trading and Cumberland are some of the leading prop trading firms that provide liquidity for centralized exchanges and decentralized finance (DeFi) platforms.

This week’s hack was not Wintermute’s first million-dollar mistake

Wintermute was hired by the Optimism Foundation to provide liquidity for its token listing in June 2022 but completely messed up by losing 20 million OP tokens. Wintermute’s team disclosed the incident to the Optimism community and posted 50 million USD Coin (USDC) as collateral to ensure the protocol was fully reimbursed.

Think about that for a moment. Exchanges, blockchain projects, venture capitalists and DApps all need some form of liquidity to ensure that the secondary market works seamlessly for end users. Without thin spreads and some depth to the order book, there is barely a chance for any project to succeed.

Whether one considers liquidity providers to be villains or heroes, their importance to the crypto industry cannot be underestimated. The current hack could have been due to mistakes exclusive to Wintermute, and for this reason, they haven’t turned manifest as an additional risk for other market makers.

Traders should not compare the failure of 3AC, Voyager and Celsus to the threat of a liquidity vacuum that is driven by the exodus of the remaining arbitrage desks. There is no indication that widespread risk has emerged at the moment, but until a detailed post-mortem is issued and similar risks eliminated, traders should keep a close eye on the markets.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *

bitcoin
Bitcoin (BTC) $ 19,411.49
ethereum
Ethereum (ETH) $ 1,325.73
tether
Tether (USDT) $ 0.999059
usd-coin
USD Coin (USDC) $ 0.999587
bnb
BNB (BNB) $ 276.77
xrp
XRP (XRP) $ 0.434962
binance-usd
Binance USD (BUSD) $ 1.00
cardano
Cardano (ADA) $ 0.435120
solana
Solana (SOL) $ 32.84
dogecoin
Dogecoin (DOGE) $ 0.060490
polkadot
Polkadot (DOT) $ 6.38
shiba-inu
Shiba Inu (SHIB) $ 0.000011
dai
Dai (DAI) $ 0.998334
staked-ether
Lido Staked Ether (STETH) $ 1,320.06
matic-network
Polygon (MATIC) $ 0.741084
tron
TRON (TRX) $ 0.059132
avalanche-2
Avalanche (AVAX) $ 17.14
uniswap
Uniswap (UNI) $ 6.34
wrapped-bitcoin
Wrapped Bitcoin (WBTC) $ 19,414.01
chainlink
Chainlink (LINK) $ 8.23
leo-token
LEO Token (LEO) $ 4.18
okb
OKB (OKB) $ 15.36
cosmos
Cosmos Hub (ATOM) $ 13.03
litecoin
Litecoin (LTC) $ 53.18
ethereum-classic
Ethereum Classic (ETC) $ 27.48
ftx-token
FTX (FTT) $ 23.80
crypto-com-chain
Cronos (CRO) $ 0.111499
near
NEAR Protocol (NEAR) $ 3.56
stellar
Stellar (XLM) $ 0.109152
monero
Monero (XMR) $ 146.95
algorand
Algorand (ALGO) $ 0.346031
bitcoin-cash
Bitcoin Cash (BCH) $ 113.26
terra-luna
Terra Luna Classic (LUNC) $ 0.000276
quant-network
Quant (QNT) $ 136.07
flow
Flow (FLOW) $ 1.63
apecoin
ApeCoin (APE) $ 5.36
filecoin
Filecoin (FIL) $ 5.75
vechain
VeChain (VET) $ 0.022554
internet-computer
Internet Computer (ICP) $ 6.04
chain-2
Chain (XCN) $ 0.072164
hedera-hashgraph
Hedera (HBAR) $ 0.057887
frax
Frax (FRAX) $ 0.999662
chiliz
Chiliz (CHZ) $ 0.242649
tezos
Tezos (XTZ) $ 1.42
decentraland
Decentraland (MANA) $ 0.699326
the-sandbox
The Sandbox (SAND) $ 0.844085
eos
EOS (EOS) $ 1.14
axie-infinity
Axie Infinity (AXS) $ 12.33
theta-token
Theta Network (THETA) $ 1.09
aave
Aave (AAVE) $ 76.20
elrond-erd-2
Elrond (EGLD) $ 46.53
lido-dao
Lido DAO (LDO) $ 1.60
true-usd
TrueUSD (TUSD) $ 1.00
bitcoin-sv
Bitcoin SV (BSV) $ 49.64
paxos-standard
Pax Dollar (USDP) $ 1.00
compound-usd-coin
cUSDC (CUSDC) $ 0.022694
kucoin-shares
KuCoin (KCS) $ 9.20
iota
IOTA (MIOTA) $ 0.295379
ecash
eCash (XEC) $ 0.000041
usdd
USDD (USDD) $ 0.997747
cdai
cDAI (CDAI) $ 0.022122
bittorrent
BitTorrent (BTT) $ 0.000001
the-graph
The Graph (GRT) $ 0.098431
zcash
Zcash (ZEC) $ 55.44
huobi-token
Huobi (HT) $ 4.41
pancakeswap-token
PancakeSwap (CAKE) $ 4.77
helium
Helium (HNT) $ 5.08
celsius-degree-token
Celsius Network (CEL) $ 1.51
maker
Maker (MKR) $ 708.26
radix
Radix (XRD) $ 0.062248
gatechain-token
Gate (GT) $ 4.24
tokenize-xchange
Tokenize Xchange (TKX) $ 7.55
neo
NEO (NEO) $ 8.54
klay-token
Klaytn (KLAY) $ 0.195589
fantom
Fantom (FTM) $ 0.225966
havven
Synthetix Network (SNX) $ 2.40
evmos
Evmos (EVMOS) $ 1.80
compound-ether
cETH (CETH) $ 26.77
osmosis
Osmosis (OSMO) $ 1.13
bitdao
BitDAO (BIT) $ 0.476796
pax-gold
PAX Gold (PAXG) $ 1,644.92
nexo
NEXO (NEXO) $ 0.901509
thorchain
THORChain (RUNE) $ 1.55
zilliqa
Zilliqa (ZIL) $ 0.031128
arweave
Arweave (AR) $ 9.24
enjincoin
Enjin Coin (ENJ) $ 0.458726
rocket-pool
Rocket Pool (RPL) $ 24.45
dash
Dash (DASH) $ 41.11
basic-attention-token
Basic Attention (BAT) $ 0.297337
kava
Kava (KAVA) $ 1.57
blockstack
Stacks (STX) $ 0.324674
defichain
DeFiChain (DFI) $ 0.727495
compound-governance-token
Compound (COMP) $ 62.50
ravencoin
Ravencoin (RVN) $ 0.036176
tether-gold
Tether Gold (XAUT) $ 1,676.70
terra-luna-2
Terra (LUNA) $ 2.49
stepn
STEPN (GMT) $ 0.676855
ethereum-name-service
Ethereum Name Service (ENS) $ 15.79
mina-protocol
Mina Protocol (MINA) $ 0.587362
xdce-crowd-sale
XDC Network (XDC) $ 0.029074
Shares