The latest face-saving communique from Seychelles-domiciled crypto exchange KuCoin – hacked almost two months ago for over $280 million – is that 84% of the affected assets have been recovered. Some victims will be glad the situation seems to be moving towards resolution. Others, not so much.
Leaving aside the conspiracy theories, death threats and alleged lack of communication on the part of the exchange, the KuCoin debacle raises troubling issues around blockchain decentralization and how token projects often rely on fallible intermediaries.
Following the hack, many projects whose tokens were stolen from the exchange were urged to react quickly and change their smart contracts – effectively replacing stolen tokens with new versions, known as a token swap. (A list of projects that speedily updated their tokens following the Sept. 26 hack can be found here.)
The majority of ERC-20 projects affected by the KuCoin hack (around 60%) have bowed to pressure and upgraded their tokens. While it goes against the principles of those projects to essentially cover KuCoin’s back by updating their smart contracts or replacing their tokens, they chose the easiest solution available to them. But in some cases, it’s not a straightforward process and would lead to a very messy fix.
“We consciously built our smart contract in a way that’s truly decentralized and we, as a team, can’t just halt transactions, blacklist, whitelist people and so on,” said Paul Claudius, co-founder of DIA, a crowd-driven Wikipedia for financial data and information. “As a team, we obviously trust ourselves, but we don’t think the world should have to trust us. And that’s the reason we build our smart contracts that way.”
KuCoin calls all remediating efforts “token swaps,” said Claudius, but the exchange is confusing two different things.
In some cases, it’s possible to upgrade the contract, reissue the token and create a blockchain state similar to that prior to the hack. That’s very different from a situation where reissuing the token would create two tokens.
“Then it’s like a fork,” said Claudius. “Which is the real token at the end? People would be trading the old token, not knowing this. It’s just not an option.”
In the case of DIA, some 3 million tokens were taken by the hacker, at a value of around $4 million; while this amount was not “life-threatening,” the team members had to watch powerless as the hacker sold their tokens.
“I can see why projects who had, say, 50% of their tokens affected by the hack, would choose the option to basically just pull the plug,” Claudius said. “Their backs were against the wall.”
The DMM Foundation, the organization behind Decentralized Money Market, said KuCoin’s strategy has been to switch the onus onto the decentralized governance communities behind these projects, pressuring them to swap tokens, effectively crediting KuCoin’s balance.
“This leaves the community in an uproar, asking why we are not upgrading our token, when in fact it shouldn’t be our responsibility; it’s actually KuCoin’s problem,” a member of DMM, who wanted to remain nameless, told CoinDesk, adding:
“We are a DeFi protocol. We can’t do that so easily without completely disrupting our user base and potentially exposing areas of weakness for our community.”
It’s one of the paradoxes at the heart of crypto, that decentralized projects list on centralized exchanges and must rely on centralized custody as a potential point of failure.
Of course, that’s why decentralized exchanges (DEXs) are becoming increasingly popular as technological advances bring speed (and, in turn, attract liquidity for prominent tokens). For some smaller projects, though, listing on KuCoin is a big deal. Perhaps it is their only trading venue with significant liquidity. So what are they going to do?
There are a number of projects that are holding out from doing a token swap, and KuCoin’s strategy seems to be to wait until they all eventually fold. During this waiting game, the exchange has employed some egregious tactics, said Jag Singh, CEO of Vid, a project that delisted from KuCoin before the hack took place.
“We delisted from KuCoin because we noticed a lot of suspicious stuff going on with our token price – pumps and dumps – that we concluded could only be [caused by] the exchange itself,” said Singh. “This [delisting] meant they had less leverage over us.”
Like many others affected by the hack, Singh claims KuCoin is selling phantom tokens. If the entire balance of a token was stolen by the hacker and that project has not done a token swap, KuCoin is “trading on thin air,” Singh said. He claims this is a deliberate tactic to induce token swaps and reduce the amount the exchange has to reimburse.
CoinDesk asked KuCoin for comment, to which the exchange asked for questions to be emailed. There has been no response to the questions but a KuCoin representative did share some comments from KuCoin CEO Johnny Lyu comparing the hack to events like the Ethereum DAO compromise of 2016.
“Actually, in the history of crypto, token swap or hard fork situations emerged several times among Bitcoin and Ethereum communities at critical timings,” Lyu said in a live-streamed update on Sept. 30. “With that, communities survived from serious crises, and everyone felt thankful to those teams that made contributions.”
The irony and hypocrisy of such comparisons is stunning, said Richard Sanders, founder of blockchain analytics company CipherBlade.
“The important thing is that we’re dealing with decentralized tech,” said Sanders. “So setting a precedent every single time an exchange is hacked or somebody is negligent for some centralized action goes against the very foundation of what this technology is supposed to be about. Everything KuCoin is doing really boils down to them trying to save face.”
Dalio Says Governments Will Kill Bitcoin. Is He Right?
In an otherwise extremely bullish week, famed investor Ray Dalio reiterated his skepticism of bitcoin and digital assets.
On this edition of the weekly recap, NLW looks at bitcoin’s surge past $16,000. Additionally, he explores some recent FUD from Ray Dalio, which NLW argues seems strangely locked in years-old narratives.
Roger Ver: Bitcoin Cash Hard Forks Could Have Thwarted PayPal Support
There are still a lot of uncertainties around the scheduled Bitcoin Cash fork event on Nov. 15, but one thing is for sure: The cryptocurrency’s biggest advocate, Roger Ver, executive chairman of Bitcoin.com, is not a fan of the scheduled upgrades on the network, which take place every six months.
“If PayPal knew that this sort of contentious hard fork was likely to happen, maybe they wouldn’t have added bitcoin cash at all to their roadmap,” Ver told CoinDesk in an interview, referring to PayPal’s recent announcement to add cryptocurrencies – bitcoin cash included – to its system. “So it is really a big problem to have these contentious hard forks. I’d like to see that come to an end.”
As of press time, PayPal hasn’t responded to CoinDesk’s request for comment on the upcoming fork event. Paxos, the company that provides crypto service for PayPal, rejected CoinDesk’s request to comment on the topic.
A Bitcoin fork known for forks
Unlike a “soft fork” that allows non-upgraded and upgraded nodes to still transact with each other, a hard fork is a software upgrade that implements a new rule to the blockchain that is not compatible with the older software. Thus, developers tend to be extremely conservative about introducing hard forks and usually try to ensure there will be community consensus around these sorts of changes to the code. However, some hard forks have been contentious. In these instances, if some nodes on a network adopt a hard fork and others don’t, then the blockchain will split into two different versions: one with the old software and one with the new software.
Bitcoin Cash itself is a result of a hard fork from Bitcoin, after a group from the Bitcoin community, advocating the literal interpretation of Satoshi Nakamoto’s Bitcoin white paper, insisted on increasing block sizes. They pushed for a hard fork of the original Bitcoin blockchain, as they view low-cost, peer-to-peer transactions as the blockchain’s core value.
Today, as the most well-known fork of Bitcoin, the Bitcoin Cash network undergoes an upgrade every six months, and a chain split can occur when the community is unable to meet consensus requirements. An example is when Bitcoin Satoshi Vision (BSV) forked away from Bitcoin Cash on Nov. 15, 2018.
The Bitcoin Cash hard fork expected this coming Nov. 15 is the result of a blockchain update proposal from a group known as Bitcoin Cash ABC (BCH ABC), led by developer Amaury Sechet. The update has included a controversial new “Coinbase Rule,” which requires 8% of mined bitcoin cash to be redistributed to Bitcoin ABC as a means of financing protocol development.
Developers with ‘too much money’
This funding approach has triggered a debate within the BCH community regarding the governance and the development of the software that runs the Bitcoin Cash blockchain.
The group led by developers from BCH ABC holds there should be an organized and consistent effort in order for bitcoin cash to become a universal digital payment. Therefore, developers should be funded by the Bitcoin Cash network, according to Chris Troutner, a developer who formerly worked at Ver’s bitcoin.com and is close to Sechet’s BCH ABC group.
However, an opposing group against this funding mechanism, Ver included, said that because the software is an open-source protocol, developers should help improve the protocol on a voluntary basis and look for financial resources elsewhere.
Ver went a step further by saying the Bitcoin Cash network’s problem is developers have “too much money.”
“I think the way [Bitcoin] went off the rails from Bitcoin Cash is developers had too much money and then they started developing and tinkering with too many different things, which caused a problem in the network.”
Troutner, who told CoinDesk that he will support both chains after the fork, said the real issue behind the dispute is a collective hatred toward Sechet. Sechet’s BCH ABC has been leading the scheduled Bitcoin Cash updates for the past few years, Troutner said. And Sechet’s team has always wanted to implement this funding mechanism.
“[BCH ABC’s opponents] want Amaury Sechet to leave the ecosystem,” he said.
Ver said he didn’t think the fork will take place as planned, saying only about 0.2% of the blocks mined on Bitcoin Cash have signaled support for Bitcoin ABC.
As of press time, of the last 1,000 blocks mined on Bitcoin Cash, about 80% have signaled support for the Bitcoin Cash Node (BCHN) and only 0.3% for Bitcoin ABC, according to data from Coin Dance.
What the data may indicate is that a fork will take place because the software upgrade by BCH ABC is not supported by the majority of the miners, as more blocks are signaling support to BCHN. That will force BCH ABC to fork away from the old chain, said Aidan Mott, analyst at Messari.
On the other hand, Troutner posits that the data may have hindered the actual support of BCH ABC.
“If you think about it in terms of a game theory, some miners are probably legitimately signaling for BCH but other miners who are planning to mine on ABC probably are also signaling for BCHN because they want their competitors to mine on that chain,” Troutner explained. “That makes it easier for them to mine blocks on the ABC chain.”
Exchanges and ‘fork fatigue’
Ver’s early argument is service providers like PayPal can be frustrated by a cryptocurrency blockchain that’s constantly going through forking events. This sort of frustration is already happening at crypto exchanges. Even though it is unclear which chain will become the dominant chain after the fork, a few major crypto exchanges have already announced their support for BCHN, which will inherit the Bitcoin Cash name, assuming the BCH ABC would get the minority of nodes.
In a Nov. 6 post by Kraken, the exchange said it will support BCHN, “regardless of the outcome of the fork.”
“Bitcoin Cash Node tokens will be called ‘Bitcoin Cash’ on our platform and represented by the ticker symbol ‘BCH,’” Kraken said in the post. “We will support Bitcoin Cash ABC ONLY IF the hash power on the ABC network is at least 10% of the hash power on the Bitcoin Cash Node network.”
“Exchanges have to put themselves in a position where they can know what their customers want, which means they understand the kind of the consensus of the miners but also they understand the positions of the development teams,” said Mott. “In this sense, it would be a pretty easy decision to just keep their support and only run Bitcoin Cash Node network software.”
Since prices of the two newly split cryptocurrencies will be decided by market supply and demand, exchanges play a significant role because they are the ones that allocate the new tokens to their customers.
Another important implication from Kraken’s post is that exchanges also get to decide which new chain will take the Bitcoin Cash name.
Ver claimed the reason Bitcoin Cash is less popular than Bitcoin is because the latter took the “Bitcoin” name after the hard fork. Ever since then, marketing has been one of the biggest obstacles for the mass adoption of Bitcoin Cash, according to Ver.
“When the split happened, the Bitcoin Cash version had all the characteristics that made Bitcoin popular to begin with, but the other version that didn’t have those characteristics got the Bitcoin name and the infrastructure to go with it,” Ver said. “Bitcoin Cash has been rebuilding all of that infrastructure and its brand recognition basically from scratch.”
If that’s the case, BCHN will find itself ahead of BCH ABC, as evidenced by exchanges’ support, if it takes the name of Bitcoin Cash.
Payza Founders Sentenced in $250M Money Laundering Case
The founders of digital payments processor Payza will serve year-plus prison terms and forfeit $4.5 million in seized assets for breaking federal money transmission laws, the U.S. Department of Justice said.
Brothers Firoz and Ferhan Patel, both Canadian, had pleaded guilty in July to a lineup of financial crimes stemming from Payza, their international payments startup. Prosecutors said the unlicensed firm processed more than $250 million, including funds known to be associated with crime, an allegation the brothers ultimately admitted to.
On Tuesday, Firoz received a 36-month sentence and Ferhan an 18-month sentence from U.S. District Court in Washington, D.C. Their company Payza (aka MH Pillars) will be in corporate probation for the next three years.
Blockchain Bites: Bankrupted Cred’s Missing Millions, Bitcoin Miners’ Quarterly Losses and More
Crypto lender Cred’s bankruptcy is more than it appears. Two publicly traded bitcoin mining firms reported this week: Neither are profitable. ECB President Christine Lagarde has a “hunch” about the digital euro.
Cred’s Chapter 11 bankruptcy filing doesn’t tell the whole story. With $67.8 million in assets and $136 million in liabilities, the crypto lender called it quits last weekend, leaving hundreds of depositors worrying about their collected $100 million loaned to the company. Cred has officially blamed malfeasance on the part of an outside investor entrusted with 800 BTC, although corporate insiders also say a $39 million line of credit to a Chinese lender went south. “There’s a lot else going on,” Daniyal Inamullah, former head of capital markets at Cred, said. CoinDesk’s Nathan DiCamillo investigates.
Two publicly traded bitcoin mining companies are nearing profitability. Marathon and Hut 8, prominent within the sector, both narrowed quarterly losses, according to quarterly financial statements. Marathon bumped revenues to $835,184 in Q3, a 160% increase from the same period last year, while also recording a net loss of nearly $2 million. The company’s loss per share, however, dropped from 12 cents to 6 cents a share year over year. Meanwhile, Hut 8 saw C$5.3 million (about US$4 million) in Q3 mining revenue, down 43% from the previous quarter, but also managed to trim its losses of C$0.07 a share in Q3 2019 to C$0.01 this quarter. Both facilities plan to deploy additional ASIC mining machines.
European Central Bank President Christine Lagarde has a “hunch” there will be a digital euro in two to four years. At a virtual panel yesterday, Lagarde said an European Union-wide central bank digital currency should be explored, “If it is going to facilitate cross-border payments.” The ECB previously said it is researching a CBDC. The latest statements are another indicator of what to expect and when: “A digital euro will not be a substitute for cash,” Lagarde said. “It will be a complement.” Separately, Benoit Coeure, head of the Innovation Hub at the Bank for International Settlements (BIS), said any potential CBDC for the supranational bank could involve blockchain. “Everything is possible,” he said.
Audited and attacked
Decentralized finance (DeFi) platform Akropolis suffered a $2 million loss following a sophisticated “flash loan” attack. According to the platform’s founder Ana Andrianova, the attacker pulled out tranches of $50,000 in DAI from the project’s yCurve and sUSD pools, leveraging derivatives platform dYdX. While much is said about the audit trails of novel DeFi protocols, especially after hacks, Akropolis’ code was in fact audited twice: once by CertiK and also by firms SmartDec and Pessimistic.
Bitcoin flows to Binance from Huobi have reached an all-time high. According to data provided by CryptoQuant, some 18,652 bitcoins, worth nearly $300 million, were transferred from Huobi to Binance from Nov. 2 to Nov. 11. The bustling trade spiked ever since the Huobi chief operating officer, Robin Zhu, went missing at the beginning of the month. For months, Chinese regulators have been clamping down on crypto trading platforms, as part of a broader sweep of the fintech industry.
- Ant Group’s suspended IPO was the work of slighted CCP officials – but it also links back to China’s digital yuan experiments. (CoinDesk)
- Uniswap farming ends in four days, potentially freeing up $1.1 billion in ETH (Cointelegraph)
- Sythentix now has a Brent Crude oil future trading pool. (CoinDesk)
- “Severe” bug found in core library for Ethereum and Ethereum Classic has been fixed. (Decrypt)
Dignity and bitcoin
“The systems don’t always work,” Robby Gutmann, co-founder of Stone Ridge Holdings Group, told NLW in his first public interview since the company made waves by investing heavily in bitcoin. That’s why the $10 billion alternative asset manager has placed its “primary treasury reserve” in bitcoin.
In short, bitcoin is an exit from an inflating monetary base that has failed to serve the public. Last month, Stone announced it would stash more than 10,000 BTC with its crypto subsidiary NYDIG. This follows other corporate firms like MicroStrategy and Square moving some of their cash treasuries into bitcoin, also citing monetary debasement.
“The expansion of the money supply in the U.S. hasn’t shown up in growth of CPI in a measurable way, but in other measurements of inflation,” Gutmann said. Notably, Gutmann considers the prospect of living a “dignified” retirement as an ideal marker for inflation.
“The idea of financial security is much broader in bitcoin,” he said, when claiming that only a “single-digit number” of fiat monetary systems are functional or scale. “Can I save my day’s labor in something I can spend tomorrow next week,” isn’t a question most U.S. workers are confronted with, but it may be a legitimate concern elsewhere.
That’s why a bitcoin-based world economy could better serve nations that weren’t part of the industrializing processes of the 19th and 20th centuries.
Gutmann further explained NYDIG’s thesis is in fostering the “long-term development of an open source monetary system.” This includes opening some of its in-house bitcoin infrastructure up to other companies – “we won’t be the last people that have this challenge” – and applying for New York State’s “BitLicense ” and a limited trust charter.
“To the extent we can move the bitcoin project forward, it feels like we can do something measurable in society today around this idea of financial security for people outside the first world,” he said.
The full, hour-long interview can be found here.
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