Crypto Ecosystem

Could the Curve hack become a black swan event for DeFi?

, August 3, 2023

In this week’s crypto highlights, we explore the price movements of ETH, DYDX, SHIB, and SAND. Additionally, this recap includes other notable industry news items that occurred over the last seven days. Without further ado, let’s dive into the latest market developments.

Noteworthy market events

Curve Finance experienced a $50 million hack that affected the rest of the DeFi space

On July 30, attackers exploited a vulnerability in the Vyper compiler to hack several liquidity pools on the Curve Finance exchange, withdrawing more than $50 million in various tokens. Due to a bug, more than 450 DeFi pools were at risk at the time of the incident. 

What happened?

According to a Llama Risk report, the Curve Finance hack was caused by a malfunctioning reentrancy lock in certain versions of Vyper. The vulnerability allowed attackers to create smart contracts that could make transactions without user authorization.

Notably, in the first minutes after the hack, analysts from BlockSec and PeckShield published excerpts from the open-source code of the Vyper compiler on X (Twitter), providing details of the vulnerability. Such actions were strongly condemned by the community, after which the original posts were deleted. 

Some stated that publishing the excerpts allowed third-party hackers to “join the hack,” and made things worse. However, a group of white hackers helped Curve reclaim part of the lost funds. Amid the backlash, BlockSec responded that this move was motivated by the need to alert the community as soon as possible, as the Curve Finance team was out of touch at that time.

Effect on DeFi

The incident affected Alchemix, JPEG’d, MetronomeDAO, Ellipsis, and deBridge projects. The Aave stablecoin, GHO, temporarily depegged due to a Curve hack. Aave Ethereum v2 even disabled its CRV borrowing function amid the panic. The Curve Finance team also warned of a potential exploit on Arbitrum’s TriCrypto liquidity pool. Shortly after the hack, Curve’s TVL dropped by 44%, while the total DeFi TVL decreased in a moment by over $2 billion.

The exploit raised concerns about the collateralized loans taken out by Curve founder Michael Egorov. He borrowed over $100 million on various DeFi platforms, against approximately 460 million CRV tokens, representing 47% of the total supply. A sufficient CRV price drop would lead to liquidation, risking the triggering of a cascading crisis and contagion across multiple DeFi protocols that use CRV as collateral.

Egorov has taken some steps to reduce the liquidation risks facing his loans, including several repayments of loans, and the deployment of a new CRV pool. In addition, some OTC trades to buy CRV were performed to potentially avoid a bad debt situation. 

Perspective

According to the Curve Finance team, the issue with the compiler has been resolved. Considering that more than 450 liquidity pools used Vyper compiler versions with a vulnerability, the potential amount of losses could have been much higher. However, at the moment of this writing, the risk of liquidation of Egorov’s loans still exists, and the crypto community is actively following his balancing actions. 

The Curve hack has become the cherry atop the recent crypto hacking season. In total, there were almost $500 million in losses due to various hacks in July. Notably, Glassnode reported several positive developments in DeFi during the same period, including increased decentralized exchange (DEX) volumes and liquidity. 

However, some analysts stated that the Curve hack could potentially shake confidence in DeFi services and their institutional adoption. Others say that the Curve Finance exploit could become the equivalent of “Black Thursday” in DeFi — a crush before a massive rally. There is also an opinion that the consequences of the event are exaggerated, as the general crypto market cap quickly recovered after the incident. The ultimate answer may depend on how the potential liquidation situation with Egorov’s debt evolves.

SEC charged Quantstamp for raising funds through ICO

The U.S. Securities and Exchange Commission (SEC) accused blockchain security company Quantstamp of conducting an unregistered initial coin offering (ICO) involving “crypto asset securities.” According to the SEC’s ruling, Quantstamp failed to register the offering and sale of its QSP tokens, which the agency classifies as securities, thus violating federal securities laws.

In 2017, Quantstamp launched the sale of its QSP tokens to over 5,000 investors, raising approximately $28 million in ETH and stablecoins. In response to the SEC’s allegations, Quantstamp neither admitted nor denied guilt, but chose to settle the matter by agreeing to pay a total of $3.4 million. As part of the settlement, the SEC established a fair fund to compensate users for any losses incurred due to payments made to Quantstamp during the ICO.

Singapore court recognized crypto assets as property

Singapore’s High Court ruled that cryptocurrencies should be treated as property, similar to money owed on a bond, or a bank’s cash balance. The decision was made in a legal dispute between the Bybit crypto exchange and a contractor, who allegedly breached her employment contract, and secretly transferred Tether (USDT) to her own accounts.

According to the court’s documents, Tether can be “held in trust” or held by someone like a trustee, who is not the owner. The court noted that USDT could be transferred between holders without involving the legal system. Additionally, the Singaporean court clarified that in previous cases, it had acknowledged the possibility of holding crypto assets in trust when granting injunctions. However, this particular case focused on the fundamental question of whether USDT qualifies as a form of property.

FTX released its restructuring plan

On July 31, the defunct crypto exchange FTX published its initial plan for reorganization, which calls for the “reboot” of an offshore exchange. U.S. customers reportedly will not have access to the potential “FTX 2.0” exchange. As an alternative, the platform might engage in a merger or comparable transaction. In addition, FTX categorized claimants of the bankrupt exchange into specific classes, with settlement details. 

One of the sections of the proposed plan covers the intent to liquidate the estates of FTX, to payout distributions to customers and creditors in cash. However, there is also a note that other solutions may be offered “with a restart of an offshore exchange.” 

Jesse Powell, Kraken co-founder, questioned the viability of plans to revive the collapsed FTX trading platform. He stated that “it’s worse than starting from scratch.” However, this position was criticized by the FTX 2.0 Coalition, claiming that the main idea of the platform’s restructuring is to “put it into the hands of a competent operator with the necessary experience, resources, and creditor alignment.”

One sentence news

  • The U.S. Internal Revenue Service (IRS) classified crypto staking rewards as gross income, stating that stakers will have to pay taxes accordingly.
  • Canadian regulators unveiled capital plans for banks and insurers who hold crypto assets.
  • Italy’s central bank picked Polygon and FireBlocks to help Italian banks, asset managers, and financial institutions experiment with decentralized finance and security tokens.
  • Chainalysis and Deloitte are partnering to enhance blockchain tracking and offer specialized risk and compliance services.

New Ethereum ETFs amid project’s birthday

While Bitcoin is flirting with the $30,000 level, Ethereum celebrated its eighth anniversary. At the same time, six asset managers, including VanEck and Grayscale, filed fresh applications for futures Ethereum exchange-traded funds (ETF) in the U.S. The previous wave of Ethereum ETF filings was in May 2023, before BlackRock and other asset managers joined the race for spot Bitcoin ETF. 

Although Bitcoin continues to outperform Ethereum, there are signs that this trend may soon change. On a weekly chart, the ETH/BTC pair is moving inside a downtrend, forming a falling wedge, which is considered a bullish pattern. In addition, the market formed a bullish divergence with RSI, hinting at a potential pattern breakout. Considering the pattern’s height, the asset may outperform Bitcoin by over 20% in the following months, if it works out as intended. 

Among catalysts that may support Ethereum’s positive performance are the next major network update, called Dencun. It is scheduled to roll out in late 2023. 

DYDX may see slower token issuance

The DYDX price dropped below the 20-day EMA amid the Curve hack and increased negative sentiment around DeFi. The move was accompanied by increased volume. Daily RSI slid to negative territory, while daily Awesome Oscillator (AO) crossed the zero line. This suggests that the path of least resistance could be downward.

However, the dYdX community is currently voting on a proposal to slash rewards to liquidity providers, slowing the issuance of DYDX. Voting will end on August 8, and the vast majority of participants support the initiative. If passed, this will cut overall DYDX emissions by roughly 25%. As a result, if demand remains the same, this could potentially boost the DYDX price.

If breaking the 50-day SMA, the asset may retest the $1.96 support area. At the same time, in the case of reclaiming the 20-day EMA, the price may try to move to $2.25.

SHIB is anticipating the Shibarium release

On July 26, a SHIB marketing team member, LucieSHIB, announced that a bridge between the Shiba Inu-based layer 2 solution Shibarium and Ethereum went live for public testing. Initially, the bridge will let users transfer testnet Ether tokens to Shibarium. After the layer 2 network release, which is scheduled for mid-August, it will utilize BONE, TREAT, SHIB, and LEASH tokens for deploying applications.

Soon after this news, SHIB and other tokens associated with its ecosystem experienced a price increase. BONE token even entered the top 100 digital assets by market cap, becoming one of the top gainers, with its over 20% price surge. According to Santiment, Shiba Inu whales have become more active recently, increasing token accumulation.

This helped the SHIB price to temporarily break the $0.00000848 resistance level, but bulls failed to sustain above this area. The daily RSI remains in positive territory, but MACD lines are on the verge of a bearish crossover. Lower timeframes also hint at bearish divergence. This suggests that the asset may experience a correction shortly before the Shibarium release.

SAND is about to unlock 17% of its supply

According to TokenUnlocks, 332 million SAND tokens, worth over $140 million, will be released into circulation on August 14, 2023. This consists of more than 17% of the total token supply. The previous two major SAND unlocks took place on August 14, 2022, and February 14, 2023 (white lines).

Token unlocks are typically considered bearish factors as they can increase selling pressure on the market, and Sandbox is a notable example of such behavior. The asset typically experiences reestablished downward movement soon after a token unlock. However, this time there was no bullish move preceding the unlock, due to a lack of fundamental factors. This means bears are likely to continue dominating the market.

Tune in next week, and every week, for the latest CEX.IO crypto highlights. For more information, head over to the Exchange to check current prices, or stop by CEX.IO University to continue expanding your crypto knowledge.

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Disclaimer: For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research

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