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Controversy as MakerDAO’s Spark Protocol blocks users with VPNs

August 7, 2023 Coin Telegraph

Chris Blec

Users attempting to access Spark Protocol with a virtual private network will not be able to, sparking criticism from supporters of privacy.

MakerDAO, one of the early pioneers of decentralized finance, has sparked criticism over its decision to block virtual private network (VPN) users from accessing its recently launched lending platform, Spark Protocol.

At the time of writing, VPN users that attempt to access the Spark Protocol website will be met with an error: “Accessing this website via VPN is not allowed.”

*Cointelegraph tested accessing the site with Australian and Singapore-based VPNs and was met with the warning. Source: Spark Protocol*

The measure appears to be linked to Maker’s attempt to restrict United States users from accessing the crypto lending platform, discussed in a May 9 update to Spark Protocol’s terms of service warns against the use of VPNs to circumvent the block.

*Spark Protocol’s terms of service prohibits U.S. users from using a VPN to conceal their U.S. residency. Source: Spark Protocol*

In an Aug. 6 tweet, DeFi analyst Chris Blec was among those saying he was “disgusted” with the decision, highlighting it effectively acts as a blanket ban on VPNs across the globe, not just in the U.S.

“It’s one thing to block US residents. It’s a whole other thing to block anyone in the entire world who is using a VPN for privacy,” said Blec, adding it is an “actual war on privacy.”

https://t.co/jQMBepF1j7
— Chris Blec (@ChrisBlec) August 6, 2023

Blec, a self-proclaimed decentralization and privacy advocate, also took shot at MakerDAO’s creator Rune Christensen and the firm’s other developers in a response tweet, stating that they have prioritized profits over user privacy:

“The root of the problem here is that these developers are putting profit over principle. They’re putting their bank account balance ahead of your privacy and your rights.”

Cointelegraph has reached out to MakerDAO for comment, but did not receive an immediate response.

Launched in May, the Spark Protocol supposedly offers users up to 8% in annual returns by lending DAI. The lending platform was created as a soft fork of Aave v3 by Phoenix Labs, a blockchain research and development firm launched by the Maker Foundation.

*Prior to lending cryptocurrencies in Spark Protocol, users must agree that they are not using a VPN. Source:* *Spark Protocol*

Spark Protocol is said to use TRM’s blockchain intelligence services to block wallets from Spark Protocol that engage in legally prohibited conduct.

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Alameda tried to redeem 3,000 wBTC days before bankruptcy: BitGo CEO

December 15, 2022 Coin Telegraph

Alameda Research

The CEO of Bitgo stated that the Alameda representative failed the security verification process required to convert Wrapped BTC into BTC.

Mike Belshe, the CEO of digital asset custodian BitGo has confirmed that Alameda Research attempted to redeem 3,000 Wrapped Bitcoin (wBTC) in the days before FTX’s bankruptcy filing on Nov. 11.

During a Dec. 14 Twitter Spaces hosted by decentralized finance (DeFi) researcher Chris Blec, Belshe confirmed the firm knocked back the redemption request because the unknown Alameda representative involved didn’t pass Bitgo’s security verification process and seemed unfamiliar with how the wrapped Bitcoin burning process worked.

Full convo here. This part starts at 1:09:30. https://t.co/0KQg6bzd8k
— Chris Blec (@ChrisBlec) December 14, 2022

“[The security details] didn't match the process. So we held it up and we said no, no, no, no. This is not what the burn looks like. And we need to know who this person was.”

“So we held it and while we were holding it, waiting for a response on those issues [Alameda] went bankrupt and of course, once they went bankrupt, everything halted,” Belshe added.

The Bitgo CEO also said that Alameda’s 3,000 BTC mint request remains “stuck” on the platform’s dashboard, adding that the firm would most likely leave the tokens where they are until they’re dealt with by the trustees taking on Alameda's bankruptcy case.

*Alameda’s failed mint transaction request of 3,000 wBTC in exchange for 3000 BTC. Source: wBTC Network Dashboard.*

Alameda’s attempt to unwrap the 3,000 wBTC was also confirmed on the Ethereum transaction aggregator Etherscan.

While this would have ordinarily triggered the redemption of BTC, Bitgo has a security mechanism set in place before the conversion takes place, which is what Alameda failed.

It is not understood what the motive was for attempting to redeem the $50 million worth of wBTC, but it is understood that FTX executives were attempting to raise funds from a variety of sources to stave off bankruptcy up until the last minute.

Analysis from Arkham Intelligence on Nov. 25 found that Alameda pulled $204 million from eight different addresses from FTX.US five days before its parent firm eventually filed for Chapter 11.

wBTC is a tokenized version of BTC, which can be redeemed for BTC when it is sent to a burn address, triggeringthe release of BTC. The conversion is made at a 1:1 ratio.

The tokenization of wrapped Bitcoin enables Bitcoin holders to interact with Ethereum-based smart contracts and decentralized applications.

Bitgo co-developed wBTC in 2019 alongside blockchain interoperability protocol Ren and multi-chain liquidity platform Kyber. wBTC is also managed by the decentralized autonomous organization wBTC DAO, which comprises over 30 members.

The wBTC dashboard currently shows that BitGo now holds 202,255 BTC in custody against 199,238 wBTC in circulation, amounting to an overcollateralization rate of 101.51%.

Optimism loses 20M tokens after L1 and L2 confusion exploited

June 9, 2022 Coin Telegraph

Chris Blec

Although the airdrop took place less than two weeks ago, problems have already arisen for the vaunted layer-2 scaling solution’s team and market maker.

The honeymoon period for the Optimism layer-2 scaling solution has been cut short as an exploit in its market maker’s smart contract led to the loss of 20 million OP tokens.

The exploit took place May 26 but has only just been reported to the community. One million tokens valued at about $1.3 million were sold on June 5. An additional one million tokens valued at about $730,000 were transferred to Vitalik Buterin's Ethereum address on Optimism earlier today at 12:26am UTC. The remaining tokens are dormant for now but could be sold at any time or used to sway governance decisions.

Hey folks--in the interest of transparency, we'd like to share some details about an ongoing situation:https://t.co/915vIgRIJG

Summary below
— Optimism (✨_✨) (@optimismPBC) June 8, 2022

OP tokens are the native token for the Optimism Layer-2 (L2) and a portion of the supply was airdropped to network users on June 1. L2 solutions help alleviate congestion on a layer-1 blockchain such as Ethereum.

A summary of events from the Optimism team on Thursday detailed how the 20 million OP tokens were intended to be used by the Wintermute crypto market making firm. After sending two test transactions, the Optimism team sent the full amount of tokens.

However Wintermute discovered that it could not access the tokens because the smart contract it used to accept the tokens was still on L1 and had not been updated to be deployed on Optimism. This technical oversight opened the contract to an attack in which a bad actor took control of the contract on the L2 themselves.

As soon as Wintermute became aware of the problem, it “began a recovery operation with the goal to deploy the L1 multisig contract to the same address on L2,” but its attempt to remedy the situation was too late.

“An attacker was able to deploy the multisig to L2 with different initialization parameters before the recovery operation was completed and took control of the 20 million OP tokens.”

A multisig contract requires the approval of multiple key holders to execute a transaction.

In a June 9 message to the Optimism community, Wintermute took full responsibility for the exploit. The firm stated that it would perform OP buybacks equal to the amount the exploiter sells as a means of making “best efforts to smoothen the effects” of price volatility.

Wintermute has also offered to accept the incident as a white hat exploit if the hacker agreed to return 19 million tokens within one week. This offer was made before the hacker transferred another million tokens.

Replies to Wintermute’s message mostly applauded the firm for its transparency in revealing the issue and for accepting the blame for what happened.

In the short-term, the Optimism team has granted Wintermute an additional 20 million OP grant “so that they can continue with their work as things unfold.” But the team also pointed out that such market making efforts are temporary.

“The community should not expect or rely on the Optimism Foundation to support liquidity provisioning efforts in the future.”

Some $OP tokens got hijacked.

Optimism is grappling with the idea of whether it should use its multisig to take the tokens back from the thief.

In this tweet, they're saying "we coullllld do it.. but then you'd all hate us.. so we won't.. for now."

DANGEROUSLY CENTRALIZED. https://t.co/p7JiPY2TzU
— Chris Blec (@ChrisBlec) June 8, 2022

Host of the Proof of Decentralization podcast Chris Blec said the team had considered (but rejected) regaining control of the stolen funds by performing a network upgrade. This meant that in his view, Optimism (like most DeFi projects with admin keys) is “DANGEROUSLY CENTRALIZED”.

Blec also suggested that the most obvious explanation for exploits involve those most closely involved, meaning someone involved with Wintermute may have performed the attack themselves. He asked, “Why is everyone in this space always so opposed to vetting the most obvious possibilities?” There is no evidence at this stage to support this theory.

OP investors have responded negatively to the update as the token price is down 31.2% trading at $0.76 over the past 24 hours according to CoinGecko.

Crypto Mom: True decentralization is the only thing that will save DeFi projects

August 6, 2021 Coin Telegraph

Chris Blec

SEC Commissioner Pierce believes that DeFi founders’ only hope to bypass financial regulation is to ensure full decentralization from launch.

Hester Pierce of the U.S. Securities and Exchange Commission — colloquially known as 'Crypto Mom,' has warned of rampant “shadow-centralization” within the decentralized finance (DeFi) sector.

Speaking to outspoken DeFiWatch founder Chris Blec in an August 4 discussion streamed by The Defiant, the SEC commissioner noted that decentralized organizations and DeFi are new concepts for regulators and that: “having a peer-to-peer system that doesn’t have central intermediaries is very different from what we’re normally dealing with.”

“If you want to be decentralized, you really need to be decentralized, and that is going to then put you in a different category from the perspective of regulators because that’s just not something that we’ve dealt with before.”

“If regulators can find a centralized part or group of people that they can grab hold of, they will grab hold of them. So I think it’s just good to be cautious about how you build things because, down the road, it could have regulatory implications,” she added.

Blec asked for Pierce’s opinion on the best route for developing decentralized protocols, asking if founders should strive to reach the same level of decentralization as Bitcoin, or start to build “really cautiously and then running towards regulation” to avoid running afoul of the law.

The commissioner said that existing regulations have been designed so that “any entity or person that is involved in the financial industry is probably going to come under at least one regulatory framework.”

Pierce urged DeFi founders who believe they are engaged in new activities that do not fall under the framework of existing legislation to engage regulators and “figure out if there’s an alternative way [...] to comply.”

“If you want to make a case that you’re something different than the CeFi or TradFi system, then you have to show that you’re doing something radically different, which from my perspective, requires decentralization.”

“If the trust is really coming from the code, that’s something very different than if the trust is coming from one company or a group of people,” she added.

The commissioner also noted the prevalence of “shadow-centralization” within the DeFi sector, where opaque governance structures can lead to a protocol being subject to centralized control despite wearing the banner of decentralization in its marketing.

However, Pierce urged regulators to adapt to decentralized innovation, stating: “regulators need to do a better job of figuring out how to work with innovators.”

“That’s part of the reason our financial system is so concentrated,” she continued. “Because the only people who can afford to wait to get the approvals are people who have a lot of money already and who can have really good lawyers already.”

On the question of what Satoshi Nakamoto’s experience would look like should they have engaged the SEC before launching Bitcoin, Pierce stated:

“It’s 2021, it would be very likely that Satoshi would still be [...] trying to get a no-action letter.”

Chris Blec

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