🕺The Billionaire Shuffle

Badger DAO Hack Not Covered By Nexus Mutual Policy

On Wednesday, Badger DAO was hacked. It is believed that hackers exploited the Badger.com website, not the protocol. Badger website users reported their browser wallets made additional requests for permissions. Users who granted permission to these additional requests lost their Bitcoin and Ethereum in the hack. Blockchain analytics firm PeckShield estimates the total loss at $120 million in Bitcoin and Ethereum (2,100 BTC and 151 ETH).

Nexus Mutual is the largest DeFi insurance company providing smart contract coverage. Badger purchased coverage for hacks from Nexus Mutual, but this hack is not covered by their policy. Nexus Mutual doesn't cover "front end attacks," which refers to the user interface of a website or mobile app. DeFi insurance covers smart contract hacks and bank runs, but not attacks on the user interface. Hugh Karp explains: "In short, this is an uninsurable event. If it was covered, it would be trivial for anyone to create a fraudulent claim." Most Nexus policies cover smart contract bugs, oracle hacks, and governance attacks.

In response to the hack, Badger paused all smart contracts to prevent withdrawals Wednesday night. Badger tweeted on Friday that it is working with forensics firms Chainalysis and Mandiant to "understand the full scale of the incident and to work towards remedial action." There is still no timeline for reactivating smart contracts. Badger's website has a new banner that reads: "A recent exploit led some BadgerDAO users to approve a malicious contract that resulted in a loss of funds."

Badger investors' BTC and ETH that have not been stolen are now locked up until Badger can fix this issue. Other companies have also been affected by the hack. Celsius, a crypto lender, confirmed that it lost money in the Badger DAO hack. Celsius was quick to point out that this was a "Badger hack," and that Celsius will cover its users losses. Celsius is rumored to have lost 900 BTC ($50 million).

Terra (LUNA) Introduction

The Terra project is a decentralized Proof-of-Stake blockchain built on Cosmos that is used for making algorithmic stablecoins pegged to a fiat currency, such as UST, which is pegged to the US Dollar. LUNA is the utility token used for staking, governance, and paying transaction fees in the Terra ecosystem. Terra is based in South Korea, and Terra currencies are popular in e-commerce in several Asian markets.

Algorithmic stablecoins have a bad reputation in decentralized finance (DeFi) for “losing their peg” and spiraling to 0 value. Terra's algorithm is said to prevent death spirals by relying on its seigniorage mechanism. Here's how Terra's algorithm works:

Terra burns LUNA to mint stablecoins, and it burns stablecoins to mint LUNA. Terra pegs the value of a stablecoin to the value of LUNA in that stablecoin's fiat. Regardless of the actual value of stablecoin, when converting between the stablecoin and LUNA, the stablecoin is always treated as worth one unit of the fiat. So even if UST is worth $.99, when converting between LUNA and UST, the UST is treated as being worth $1.

Arbitrageurs profit from this situation by buying the undervalued stablecoin and converting it to LUNA, and the same process works in reverse. The difference between the price of minting the LUNA or stablecoin tokens and their actual value is known as seigniorage. This method of rebalancing is believed to prevent death spirals.

LUNA has a $26 billion market cap, and the Terra DeFi ecosystem has $13 billion total value locked (TVL). Terra's recent Columbus-5 upgrade improved LUNA's token economics, and now the LUNA token is expected to rise in value as more Terra stablecoins are minted. This relationship may explain the recent rise in LUNA's value during the market wide crypto correction over the last week.

FTX Expanding NFT Markets, Raising Billions

FTX, the third largest crypto exchange by volume (behind Binance and Coinbase), is expanding it’s NFT marketplace support to include Ethereum-based NFTs.  Previously, FTXs NFT marketplace only included Solana, a chain into which FTX founder Sam Bankman-Fried has invested heavily and with which his investment group Alameda Research has very deep ties.  

Ethereum has remained the top chain for NFTs, largely because most major NFT exchanges only support minting and selling of Ethereum based ERC-721 tokens.  The largest NFT marketplace, OpenSea, generated $6.9B in trading volume last quarter without accepting any fiat payments.  Even if FTX only takes a chunk of that volume, there is a substantial amount of money to be made in NFTs.

Closely timed with the NFT marketplace launch, FTX announced that it was seeking to raise $1.5B at a $32B valuation.  This would benchmark FTX.US at an $8B valuation.  This is coming just 6 weeks after FTX raised $420.69M Series B from 69 investors, which valued the company at $25B.  Bankman-Fried said this raise was going to be used for a number of acquisitions to get FTX into more countries and get more users.

Jack Dorsey leaves Twitter, rebrands Square to Block

Jack Dorsey has been a very busy man this week.  Early in the week, Dorsey left his role as Twitter’s CEO to the CTO Parag Agrawal, effective immediately. Dorsey took it a step further than do most outgoing Founder-CEOs in his decision to not to take a board seat.  Agrawal was quick to change things up, implementing a very controversial rule which limits pictures of people who have not consented to their likeness being posted on Twitter.  So far two executives have left the company as a result of the change: Twitter’s Head of Engineer and Chief Design Officer.

Twitter was in the midst of adopting blockchain innovations in a number of ways with Dorsey at the helm, including: tipping via crypto, talk of NFT validation natively on Twitter, and Twitter’s BlueSky project to decentralize the platform.  With Agrawal’s ascent to CTO and his divergence from the direction Twitter was on, all of that is up in the air once more.

Not long after announcing the move out of Twitter, Dorsey’s attention moved to his other billion dollar public company, Square.  This week, the fintech giant changed its name to Block and will be the parent company of its major holdings: Tidal, Cash App, TBD, Spiral, and Square.  Square has also been an outlet for Dorsey’s vision of a cryptocurrency-integrated future.  You can buy and sell cryptocurrencies in the Cash App, TBD is “an open developer platform with the sole goal of making it easy to create non-custodial, permissionless, and decentralized financial services” focusing on Bitcoin, and Spiral is working on “building and funding open-source projects aimed at making bitcoin the planet’s preferred currency.”  Square is even making a Bitcoin hardware wallet.