Cryptonary Portfolio Update Pt. 1


It has been a volatile few months in the crypto market. However, one of the constants in crypto is the rate at which projects move forward in their development – there’s always something going on. There have been a few changes and developments, both good and bad, to the projects that we have invested in over this period.

Disclaimer: THIS IS NOT FINANCIAL OR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.


Bitcoin (BTC)

It is rare to have an update on BTC, and in fact, the last time that Bitcoin was updated was the 2017 SegWit upgrades. That period for Bitcoin was called “the Civil War” because the community was divided over whether the upgrades should be implemented or not. This is not the case now, as the Taproot upgrade set for implementation later this year has universal support amongst the miners and the community.

With massive consensus from miners, Taproot is a soft fork, or upgrade, that will improve the privacy and efficiency of complex transactions executed on the Bitcoin blockchain:

  • Currently, complex transactions such as timelock and multi sigs require multiple transactions to execute. This makes them traceable on the Bitcoin network, and anyone can monitor them.
  • Taproot will allow for these complex transactions to be executed, recorded, and appear as a single peer-to-peer transaction to an outside observer.
  • The upgrade will also change how signatures are handled. Bitcoin currently uses the ECDSA signature scheme; however, the upgrade will switch over to SDSS (Schorr signatures).
  • What this means is that multiple signatures can be aggregated into a single unique signature, reducing the number of transactions required to execute a multi sig operation.

The anticipated upgrades not only increase privacy but also substantially reduce the number of transactions required for complex operations. The consequence of this is a reduced load on the Bitcoin network – lower fees and higher throughput. Think of Taproot as a way of making better use of what resources the Bitcoin network has without changing fundamental aspects such as block size, for example.


Ethereum (ETH)

We have recently covered Ethereum in a full fundamental report. However, with the EIP-1559 changes on the 4th of August, we feel like it would be beneficial to discuss these changes in a little more detail.


This chart by CoinMetrics is an estimation of what daily issuance would have looked like if EIP-1559 had been in effect from 2018. The data assumes a fee burn rate of 70%. Looking at the chart, we can see that there are periods where the ETH issuance is negative, which means that the burned ETH would have been more than the ETH supply increase through mining. This is what we mean by deflation.

Now obviously, it will not make ETH completely deflationary. However, looking at the chart above, which shows the annual inflation we are currently witnessing of around 4-4.3%, the projected inflation rate would be essentially halved to around 1-2%, which is a considerable amount of ETH – at the current supply that is a difference of over 2 million ETH per year at current supply.


As you’ll likely be aware, THORChain has been steadily raising the self-imposed ‘caps’, or restrictions, on the amount of liquidity that can be provided by LPs (Liquidity Providers). The purpose of this is to slowly and carefully scale the protocol up and prevent bugs or attacks from causing a huge amount of damage. This has been a steady process over the last few months, and with each successive cap raise, more and more capital has been flowing into the THORChain ecosystem, with the new limit filled within hours. The current cap is 10,000,000 RUNE.

The protocol is currently in chaosnet, which is a ‘battleground’ for testing the integrity and reliability of the protocol, but with real liquidity rather than just testnet. Consider chaosnet a sort of hybrid between a testnet and mainnet. THORChain has set out several critical parameters for the launch of mainnet:

  • More than 40 active validator nodes (currently 38 active).
  • At least 30 million bonded RUNE (currently ~23,700,000).
  • At least 15 million RUNE pooled (currently ~10,800,000).
  • 5 stable chains, with zero major bugs over the previous 30 days.
  • Single-chain chaosnet (BEPSwap) is phased out – this is currently happening, with the expected retirement around the 21st of July 2021.
  • Hardware wallet support – integration with Ledger is close to completion.
  • Validator nodes are given Mimir control. Mimir is a feature that provides the admins with specific controls over the protocol; delegating these controls to the nodes is a step towards fully decentralising the network. It is not yet known when this will occur.

Many of these goals have been accomplished or are close to completion. Additionally, THORChain synthetic assets have been in testnet for the last month or so.

Synthetic assets will be huge for the protocol – THOR Synthetics enable secured base layer (L1) synths. THORChain synths are unique; they are 50% backed by their own asset and 50% backed by RUNE using the liquidity pools to collateralise the synth. This ultimately leads to more locked up RUNE.

There has been a couple of setbacks in the form of exploits over the last few weeks that will likely delay the projected launch of mainnet.


On the 28th of June 2021, THORChain was subjected to a malicious attack that stole ~$140k worth of assets. We have already covered that attack in this article.

However, another attack occurred on the 15th of July – this time, the damage was substantial. A THORChain community dev spotted a problem with some ETH transactions that were highly abnormal.

To halt the entire network, there must be at least 33% of node operator consensus. The developers requested that node operators halt their nodes and Bifrost 20 minutes after the attack was identified. Bifrost is the protocol within THORChain that bridges the various chains supported by THORChain.


But what happened?


The attacker exploited a bug within the ETH Bifrost (bridge) where they were able to trick the protocol due to an error in an override loop. It seems like the developer that coded the loop also knew that the code should never have been inside the loop, as can be seen from the comment.

Initial reports stated that 13,000 ETH had been stolen; however, this number was inflated due to the fact that THORChain believed the imaginary ETH generated by the exploit to be real ETH in the vaults.

  • The hacker created their own contract that manipulated the override loop into changing a deposit transaction with a value of 0 ETH into a tx.value of 200 ETH. The protocol had registered the attacker as having deposited ETH when in reality, there was nothing there.
  • This transaction was looped to execute repeatedly, and tokens were simultaneously refunded by the protocol.
  • This ultimately allowed the hackers to withdraw as much as they could before the network was halted.
  • In addition to the hack, arbitrage traders (mostly bots) acting on their own initiative took advantage of the price discrepancy caused by the artificially inflated ETH supply, which caused an imbalance in the pools – at one point, ETH was valued at $350. This added to the total cost of the attack.

The true value extracted by the hacker was around $4.9 million, mostly Ether (~2500 ETH), but a few other tokens in various quantities as well (SUSHI, YFI, DODO, ALCX, KYL and AAVE), adding up to an additional ~$1.3-1.6 million for a total of $6.2-6.5 million. The damage from users and arbitrage traders withdrawing and swapping ETH at the reduced prices caused by the artificial inflation of the supply resulted in a further $4 million in lost ETH. In total, the estimated total cost is around $10-10.5 million.

At this point, the ETH pool is essentially drained completely. The treasury currently sits at around $100 million, so the loss, although substantial, is covered by the protocol. THORChain has taken immediate steps to resolve the situation. Several updates are lined up over the next few days (the 17th of July onwards) that aim to get the protocol back online, and trading resumed.

  • Stage 1 will stop the ETH bridge from signing any outbound transactions – this is necessary as there is not enough ETH in the pools to cover the queued withdrawals until ETH is accumulated and the pool replenished by the treasury. The admin (Mimir) controls will be used to restore the state of the protocol.
  • Stage 2 will halt the ETH chain for both inbound and outbound transactions, and the queue for withdrawals currently in backlog will be purged. Withdrawal requests will be put back into the pools for the time being to stabilise the ETH pool. Additionally, trading will be restored for the other pools, and reserves will be used to fix any price discrepancies that exist.
  • Stage 3 will implement the auto-solvency checker that would have halted the protocol automatically if it had been in place at the time of the attack. THORChain estimate that the attack would have been limited to 200-300 ETH if this mechanism had been in place beforehand.

Over and above the plan outlined, THORChain has onboarded Halborn security to check (try to break) any future updates. Additionally, the entire protocol is set to be audited over the coming weeks to further enhance security.

Overall, the series of events that have hit THORChain has been detrimental to the project. However, having followed the discussion between the THOR community and the developers as well as some node operators, it is clear to us that team is here for the long haul, and we are still confident in the project going forward.

Synthetix (SNX)

If you haven’t already, we highly recommend you read the journal we published about the Synthetix developments that were outlined at the end of June. It appears that Layer 2 Synthetix is on the horizon, which likely contributed to the SNX price action we witnessed towards the end of June. We cannot stress this enough – positive development reflects positively on price.

The market being in a correction does not stop development. Development adds value to a protocol. This value stacks, and when the market eventually turns around, that is when the true value of all these developments will become clear. At that point, though, the early investors are tagged as “lucky” – they are not lucky. They saw the potential when everyone else was screaming bear market.

The launch of L2 derivatives trading is scheduled for the week beginning the 26th of July. The exact date has yet to be confirmed by the Spartan Council. This is huge for Synthetix and will open the protocol to more users due to increased throughput and substantially lower fees. The synths that will initially be available for trading will be sBTC, sETH and sLINK. Ultimately the goal is to attract more traders to Kwenta because the rewards for staking SNX are largely generated from trading fees.



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