What happens when you attack DeFi? (Market Monday - Lite)
Market Monday for February 17, 2020
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Dear Crypto Natives,
This weekend a DeFi pirate snapped together some DeFi money legos to exploit a low liquidity Uniswap market and take $350k in profits in a single transaction.
Here’s what he did:
Borrowed $2.7m of ETH for 15 seconds from DyDx
Then used that ETH to simultaneously:
Short wBTC using 5x margin on Fulcrum
Profit on the short by manipulating the wBTC price
(Above: how a DeFi pirate made $350k by Kerman Kohli)
He lowered price by market selling wBTC on Uniswap—easy to do given wBTC’s low liquidity. All this was done in one transaction using these money legos:
ETH as a reserve asset
Compound as a collateral loan
wBTC as a low-liquidity asset
Uniswap and Kyber for liquidity and price manipulation
bZx on Fulcrum for shorting
A flash loan from DyDx to execute all this a few thousand dollars 🤯
In the aftermath there’s been upset on the degree of decentralization of DeFi—it was a surprise to some (not Bankless subscribers) that Fulcrum could take actions to pause its protocol and even use its admin access to liquidate the attacker and make Fulcrum users whole. Probably worth an article.
But let’s zoom out. Because you know what I saw this weekend?
DeFi leveling up.
We have to appreciate something first. The fact that it’s possible to do a transaction like this means DeFi has already won—it’s just a matter of time. I don’t say this lightly. People have no idea the power we’ve unlocked in permissionless money protocols. This power compounds every day and with every new money lego we make.
Second, did you feel the level-ups? We saw…
The strength of our immune system. Social media sprang into action & studied all facets of the transaction in 24 hrs—we learn 100x faster because it’s all open
That liquidity is security. Attacks are easy on low-liquidity assets like wBTC—having high economic bandwidth assets is vital to reduce risk
That a new money lego—like a flash loan—can impact the security assumptions of all other protocols—DeFi is an interconnected organism
We also learned more about the pros and cons of granting developer access to the pause, restart, and withdraw buttons of a protocol. Standard disclosures about access are the thing to focus on as we simultaneously work to design protocols w/o buttons.
Lop off the head of a hydra—what happens? It absorbs the attack and gets stronger. Every attack of this kind:
Makes the DeFi immune system stronger (+20 social)
Makes DeFi protocols better (+20 oracles, +30 protocols)
Strengthens the system (+70 DeFi)
To the critics: last weekend wasn’t DeFi failing. It was DeFi leveling up. This is exactly what we expect it to look like.
What happens when you attack DeFi?
DeFi wins.
- RSA
A Grayscale report said ETH is a store of value—that’s the largest institutional crypto investment firm & a former Ethereum critic now saying ETH is money—join the club!
MARKET MONDAY:
Scan this section and dig into anything interesting
Market numbers
ETH rockets to $260 from $222 last Monday
BTC down to $9,628 from $9,850 last Monday
DAI stability fee steady at 8% with savings rate steady at 7.75%
Market opportunities
(Earn) 7.75% on DAI using the Dai Savings Rate (best ways to do it here)
(Insure) Your DAI on Compound using Opyn (See “What I’m doing” for details)
(Pay) Send ETH or a token to an email address using Torus (just out of beta)
(Lend) 7.3% on DAI with new Dharma iOS app—easy! (deposit via debit card!)
(Earn) 8% on USDC at crypto.com w/ a one month term (get $50 MCO w/ Visa card)
(Earn) on Curve (super risky! new protocol, hack recently discovered, I’d wait!)
13.60% on USDC/DAI on Curve(see above risk)
27% on USDT/DAI/USDC on Curve(see above risk)
New stuff
This site helps your model DeFi lending returns(overview here)
Swap out collateral in an ETH loan w/ BAT in one transaction (beware alpha!)
Coinbase commerce now accepts DAI (you can buy Bankless w/ DAI now!)
What’s hot
Etherscan now serves 5m monthly users
Curve has instant product-market fit with $1.5m in Uniswap already
Mstable is introducing a new stablecoin that’s a basket of other stablecoins
This Uniswap ROI tool looks pretty cool (Note—I have not tried)
Money reads
Report on Ethereum stats in 2019 from a block explorer - Etherscan
I completely agree—memes are central to everything in crypto - Linda Xie
What valuation models have people tried on crypto? 🔥- CoinMetrics
How Ethereum works in China behind the great firewall - Decrypt
US equities dominate & it’s due to trust in the US base layer - Nic Carter
WHAT I’M DOING
Check out a few opportunities I’m capturing right now with my crypto money
WEEKLY ASSIGNMENT:
Make time to complete this assignment before next week
Extra Credit Learning
TAKES:
Read my takes but draw your own conclusions
TWEET-A-QUESTION
Tweet me your question—I reply to one per week
Question from Twitter:
Any tips on where to start exploring ethereum defi?
Some recent tweets…
Actions
Execute any good market opportunities you saw
Complete weekly assignment: hide garbage tokens in Etherscan
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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.
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