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Hackers keeping stolen crypto: What is the long-term solution?

In the long run, the industry needs to come together and step up its cybersecurity game in a big way rather than seek out such temporary fixes.

Even as the ongoing Binance-FTX saga continues to dominate the crypto airwaves, there has been a growing trend — an uneasy one at that — that has been garnering the attention of many digital currency enthusiasts in recent months, i.e., hackers returning partial funds for discovering exploits within a protocol. 

In this regard, just recently, the bad actors behind the $14.5 million Team Finance attack revealed that they would be allowed to stay in possession of 10% of the stolen funds as a bounty. Similarly, Mango Markets, a Solana-based decentralized finance (DeFi) network that was recently exploited to the tune of over $110 million, revealed that its community of backers was working toward reaching a consensus, one that would allow the hacker to be awarded $47 million as a reward for exposing the exploit.

As this trend continues to garner more and more traction, Cointelegraph reached out to several industry observers to examine whether such a practice is healthy for the continued growth of the digital asset market, especially in the long run.

A good practice, for now

Rachel Lin, co-founder and CEO of SynFutures — a decentralized crypto derivatives exchange — told Cointelegraph that on one hand, the habit of encouraging “black hatters” to turn “white hat” encourages the industry to raise its standards of best practices, but it’s still not uncommon for popular protocols to be forked or simply copied and pasted, leaving them replete with hidden bugs. She added:

“We’d be remiss to say that this is healthy where in an ideal world, there’d be only white hat hackers. But the transition we’re seeing in which hackers are returning some of the funds, which wasn’t previously the case, is a strong step forward, particularly in sensitive times like these where it’s becoming clearer that many projects and exchanges are connected and could impact the ecosystem as a whole.”

On a somewhat similar note, Brian Pasfield, chief technical officer for decentralized money market Fringe Finance, told Cointelegraph that while the idea of giving hackers a fraction of the money they cart away for discovering loopholes can be seen as unhealthy and almost unsustainable, the fact of the matter remains that ultimately the hacked projects have no choice but to utilize this approach. “This is a better alternative than resorting to law enforcement’s approach to nab the perpetrators and recover the funds, which takes a very long time, if successful at all,” he added.

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Speaking more technically, Slava Demchuk, co-founder of crypto compliance firm AMLBot, told Cointelegraph that since everything is on-chain, all of a hacker’s actions are traceable, so much so that the hacker has almost a 0% chance of using the illegally obtained digital assets. He added:

“When the hackers agree to return some of these stolen funds, not only does the project usually not prosecute the hacker, it even allows them to be able to use the remaining funds legally.” 

Lastly, Jasper Lee, audit tech lead at SOOHO.IO, a crypto auditing firm for several Fortune 500 companies, said that this kind of white hat behavior could be healthy for the blockchain industry in the long run since it provides the opportunity to identify vulnerabilities within DeFi protocols before they become too large. 

He further told Cointelegraph that out in non-blockchain industries, even if a hacker finds a vulnerability in a given code, it is difficult for them to go public with that information because it could cause severe legal issues. “In traditional hacking, it is very rare that a hacker returns the funds they have taken, as doing so would likely reveal their identity,” Lee said.

Not everyone agrees

David Carvalho, CEO at Naoris Protocol, a distributed cybersecurity ecosystem, stated in unequivocal terms that allowing hackers to keep funds in such a way not only undermines the entire ethos of a decentralized financial system but it promotes behavior that fosters distrust.

“It cannot continue to be seen as something to be tolerated on any level. The fundamentals of a safe and equitable financial system don't change,” he told Cointelegraph, adding, “The premise that the only way to solve the hacking issue is to make the problem part of the solution is fatally flawed. It may fix a small crack for a short period of time, but the crack will continue to grow under the weight of the flimsy fixes and result in a destabilized market.”

A similar sentiment is echoed by Tim Bos, co-founder and chairman of ShareRing — a blockchain-based ecosystem providing digital identity solutions — who believes that this is a terrible practice. “It’s akin to paying criminals who hold people hostage. All this does is makes the hackers realize that they can commit a huge crime, be rewarded for it, and then there are no repercussions,” he told Cointelegraph.

Carvalho noted that just because a hacker is nice enough to return part of the funds doesn’t make it a good practice since these episodes still result in people and DeFi platforms losing a lot of money.

“We can’t afford to associate decentralized finance with nefarious security fixes. For mass adoption by both enterprises and individuals, we need the security systems across the Web2 and Web3 ecosystems to be trusted and hackproof. Having a cohort of hackers ostensibly calling the shots in the cybersecurity space is crazy, to say the least, and does nothing to promote the industry,” he said.

Setting a bad precedent for the industry?

Lin noted that even among traditional Web2 companies — like the FAANGs of this world — hackers are incentivized to discover bugs and zero-day exploits in exchange for certain incentives. However, this often comes with strict requirements and having white hat hackers discover these loopholes is viewed as being healthy for the ecosystem. She noted:

“Major exploits or discoveries typically put the industry as a whole and in-house security teams on alert. But it’s a slippery slope. I’d argue we’d need to define what a ‘white hat’ hacker is. For example, could you consider a hacker who’s cornered and reluctantly returns only 10% of the funds a white hat hacker?”

Lee believes that these fat paychecks can serve as a significant impetus for white hats to carry out more such ploys. However, he pointed out that instead of seeing 100% of a protocol’s funds being hacked or disappearing for good, it’s always better for the protocol’s users that a portion of the appropriated funds are recovered.

On a more optimistic note, Demchuk noted that the DeFi market is community-driven and, therefore, such actions could be viewed positively, as hackers themselves are often asked to work for the projects they exploited, making their activities real-life penetration tests.

What’s the solution?

It is no secret that a large portion of the Web3 ecosystem (and its associated cybersecurity solutions) still runs on yesterday’s Web2 architecture, making them highly centralized. This, in Carvalho’s opinion, is the elephant in the room that most Web3 platforms don’t want to talk about. He believes that if these pressing issues are not solved using decentralized solutions, the standards for smart contract execution and publishing will not be not fundamentally changed or improved, adding:

“These types of breaches will continue to happen because there is no accountability or criminalization of hacking activity. I believe a ‘just pay the hacker’ approach is going to increase the risk for DeFi and other centralized/decentralized platforms because the fundamental weaknesses are not resolved.”

Bos noted that the core problem here isn’t the hacking or the fake bounties that are rewarding the hackers but an apparent lack of audits, quality security processes and risk reviews, especially from those projects that have in their coffers millions of dollars worth of crypto assets. 

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“Established banks are virtually impossible to hack into because they spend a lot of money on security reviews, risk audits, etc. We need to see the same level of technical oversight in the crypto industry,” he concluded.

Therefore, as we head into a future driven increasingly by decentralized technologies, one can say that the hackers are simply demonstrating how much more work the crypto sector as a whole needs to put into its security practices.

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Fractional NFTs and what they mean for investing in real-world assets

Fractional NFTs enable users to divide an NFT into multiple fractions, reducing the barrier to entry for investing in real-world assets.

While nonfungible tokens (NFTs) are currently suffering in the bowels of a bear market, some are using this time to build and develop new concepts with the technology.

Once such new concept is fractional NFTs — an iteration of NFTs that enable multiple investors to own a piece of a single token.

These NFTs differ from regular NFTs in that they employ smart contracts to fractionalize the token into a number of parts predetermined by the owner or issuing organization, who then set the minimum price.

When applied to real-world assets, these NFTs provide an interesting use case for investors who plan on owning valuable real-world goods.

Fractional NFTs spread the cost of asset ownership over a wide range of users, making it possible for a group of investors to own a piece of a larger asset.

David Shin, head of global group at Klaytn Foundation — a metaverse-focused blockchain — told Cointelegraph that they “enable more people to reap the benefits of asset ownership while reducing the amount of upfront capital required per user, creating more inclusivity for users who would otherwise have been priced out.”

Tokenized ownership is not a new concept. Before the advent of NFTs, tokenization was a way for users to fractionalize real-world assets. However, fractional NFTs provide a new way for investors to divide the cost and transfer ownership of particular assets.

More accessible assets

Accessibility is one of the major benefits of NFT fractionalization since it’s more affordable for investors, thus reducing the barrier to entry for owning certain assets. 

The collective ownership that comes with fractional NFTs allows a group of investors to own assets with traditionally high barriers to entry. For example, owning real estate or art pieces requires investors to meet particular requirements, whether a certain level of net worth or certain legal requirements.

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By using fractional NFTs, these hurdles could potentially be bypassed by the average person. Alexei Kulevets, co-founder and CEO of Walken — a move-to-earn blockchain game — told Cointelegraph:

“No matter whether you are a builder, a collector, or a consumer, with fractional NFTs, you can co-own any fragment of an art piece or an NFT project you work on. Or, it could be something entirely different, where ownership is verified by an NFT (e.g., real estate). Think of it as an exchange-traded fund, only without intermediaries and management fees. I think it’s a beautiful concept, fully worthy of being called the new era of the internet. The era of co-creating and co-owning.”

Joel Dietz, CEO of MetaMetaverse — a metaverse creation platform — echoed the sentiment, telling Cointelegraph, “It makes it easier and, more importantly, accessible. Asset fractionalization isn’t new, but it entered the NFT space not that long ago — one aspect is to make expensive tokens more accessible to different investors with different appetites — it makes it easier to set the price for NFTs and even unlocks monetization opportunities via DeFi platforms.”

This accessibility could also bring additional investors into the blockchain space, Asif Kamal, founder of Web3 fine art investing platform Artfi, told Cointelegraph.

“Fractional ownership is the way forward to enhance the size of the market massively and helps adoption and accessibility to a much wider audience to invest in the asset class more simply and in a much easier way,” he said.

What are the use cases?

Real estate is a popular use case for fractional NFTs, and the underlying blockchain technology provides an additional layer of transparency. For example, users can view previous buyers and investment activity via the blockchain explorer.

Dietz said, “The usual case that everyone’s quite keen on right now regarding Fractional NFTs is the potential for an individual to transfer ownership of real estate (an IRL asset) — storing the information on the blockchain and it transferring seamlessly and immutably.”

“Owning a fraction of an NFT that represents a real-world asset, investors can cash out of their crypto holdings without ever leaving the decentralized finance ecosystem entirely. Now, the hype focuses on real estate, but these fractionalized high-involvement goods could be very interesting in the manner of watches, paintings, boats, planes and more,” he continued.

Play-to-earn gaming is another use case for fractional NFTs, enabling multiple players to purchase expensive in-game assets collectively. In-game NFTs can become very expensive due to demand, and enabling players to split the cost can make it easier for them to use those same assets. For example, the P2E NFT game Axie Infinity is currently testing the idea of fractionalized NFTs by selling fractions of the rarest Axie NFTs.

Barriers to adoption

While fractional NFTs may make it easier for people to invest in certain assets, market conditions could potentially interfere with their adoption.

Dietz said, “Given the market right now, though, we’re either going to see more creators and marketplaces utilizing these fractional NFTs and gain popularity through those mediums, but if things don’t change, I doubt fractional NFTs will evolve much further, for now at least. Who knows what the market will look like in the next three months, let alone three years?”

Regulators and lawmakers could also slow down adoption. Since fractional NFTs let people own a fraction of an asset, they could be classed as stocks by the United States Securities and Exchange Commission (SEC).

Yaroslav Shakula, CEO at YARD Hub — a Web3 venture studio — told Cointelegraph, “As an idea, fractional NFTs sound promising, but on a practical level owning them implies certain difficulties, with regulation being the most significant one. Fractional NFTs might be likened to stocks as they also confirm ownership of a share of an asset (NFT, in this case).”

Shakula also says that current legislation is not clear on the legal status of fractional NFTs being used to own a share of physical assets. “In many cases, this type of NFT ownership is not clearly outlined in the legislation, and projects and users have a hard time figuring out how SEC or other authorities will deal with this ownership. So for now, fractional ownership is only valid in certain territories where relevant legislation is in place.”

Shin similarly stated, “The success of fractional NFTs in allowing investors to reap benefits from real-world assets also depends on whether regulations operate in tandem. For example, dissonance will occur if fractional NFTs and traditional title deeds pose competing legal claims to real-world assets.”

Due to the uncertainty behind the taxation and the legal status behind fractional NFTs, temporary ownership could be a safer bet for the short term.

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Shakula expanded on this, saying, “At the current point, a much more viable and doable approach is to transfer timeshare/temporary ownership through NFTs. Examples of use cases are the rights to rent a car or stay in a hotel. This way, NFT owners don't have to decide who pays taxes or who's handling damage costs. However, until these issues are solved, fractional NFTs look better on paper rather than have common use cases.”

Regulatory concerns aside, some believe that fractional NFTs represent the values of a decentralized internet. Kulevets sees fractional NFTs as a catalyst for Web3 adoption, stating: 

“If you look at it closely, fractional NFTs represent the very essence of the Web3 concept. We call Web3 the next era of the internet for a reason: decentralization, security, ownership and creation without intermediaries are among its fundamentals. Everyone who shares the vision, skills and expertise can co-create and co-own the new reality and be a part of many projects.”

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Alameda on the radar of BitDAO community for alleged dump of BIT tokens

Bybit co-founder Ben Zhou stated that while no wrong-doing is confirmed, the BitDAO community would like to see proof of fund from Alameda.

The recent concerns related to the volatility of FTX Token (FTT) seeped into FTX CEO Sam Bankman-Fried’s other business operation, Alameda Research, as the BitDAO community requested information about Alameda’s BitDao (BIT) holding commitment.

On Nov. 2, 2021, BitDAO swapped 100 million BIT tokens with Alameda in exchange for 3,362,315 FTT tokens with a public commitment to hold each other’s tokens for three years, so until Nov. 2, 2024. Given the rising uncertainties and speculations, the BitDAO community was quick to react to the sudden fall of BIT prices on Nov. 8, 2022, suspecting Alameda of dumping the BIT tokens and breaching the three-year mutual no-sale public commitment.

BIT market price chart (1 day). Source: CoinMarketCap

To narrow down the reasons for BIT’s price drop, the BitDAO community requested an allowance for monitoring and verifying Alameda’s commitment to holding BIT tokens. BitDAO provided proof of honoring its side of the commitment by sharing an address that shows BitDAO Treasury holding all 3,362,315 FTT tokens.

In return, the community gave Alameda a deadline of 24 hours to prove its commitment, requesting that:

“The preferred method is for Alameda to transfer the 100 million $BIT tokens to an on-chain (non-exchange) address for the BitDAO community to verify, and hold until the end of the agreement.”

Ben Zhou, the co-founder of crypto exchange Bybit, summed up the matter by stating that while nothing is confirmed, the BitDAO community wants to confirm proof of funds from Alameda.

Standing up against the accusation, Caroline Ellison, the CEO at Alameda Research, confirmed no wrongdoing from the company’s end and promised to share the proof of funds, telling Zhou that:

“Busy at the moment but that wasn’t us, will get you proof of funds when things calm down.”

BitDAO’s proposal to request for Alameda’s funds proof was accompanied by vague warning:

“If this request is not fulfilled, and if sufficient alternative proof or response is not provided, it will be up to the BitDAO community to decide (vote, or any other emergency action) how to deal with the $FTT in the BitDAO Treasury.”

Alex Svanevik, the CEO of blockchain analytics platform Nansen, investigated the on-chain data to find that Mirana Ventures — Bybit’s venture capital arm — withdrew 100 million BIT from FTX. However, he advised the crypto community not to fall for speculations, as withdrawing funds doesn’t mean Alameda is selling.

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From Nov. 6, numerous FTX users faced problems while withdrawing their funds from the exchanges, such as delays and failures.

FTX addressed the concerns raised by investors by highlighting the smooth operation of the matching engine. However, the exchange agreed on delays with Bitcoin (BTC) withdrawals due to limited node throughput.

In addition, users facing delays in stablecoin withdrawals were told that withdrawal speeds would get back to normal after banks resumed operations during the weekdays.

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What Musk’s Twitter acquisition could mean for social media crypto adoption

A growing number of social media platforms have been integrating crypto and Web3 support, but opinions are divided on whether they are in it for the ethos or profit.

The emergence of Web3 technologies has brought Web2-based companies to consider amendments to their current products and services. Many leading brands are using Web3 technologies such as nonfungible tokens (NFTs) to promote their brand as well as show their affiliation with emerging tech. 

Social media is another domain where Web3 seems to have the biggest impact. Facebook rebranded to Meta and has shifted its whole focus from being a social media platform to becoming the future gateway of the metaverse. Meta-owned Instagram announced it would add NFT minting and trading services within the app. Reddit, another prominent social media platform, became a hub for NFT trading with 3 million wallet holders on the platform.

Apart from NFTs, social media giants like Twitter and Reddit have added support for users to tip content creators in cryptocurrency. However, the majority of social media platforms lack inherent crypto integration.

Twitter was reportedly working on developing its own crypto wallet, and with Elon Musk’s recent $44-billion acquisition, many believed that the social media platform could very well integrate a crypto wallet soon. However, recent reports suggested that Musk has halted crypto wallet plans for the time being.

Despite the current setback in the crypto wallet integration, market pundits are hopeful of seeing more Web3-focused services on the social media platform. Martin Hiesboeck, head of blockchain and crypto research at cryptocurrency trading platform Uphold, told Cointelegraph that Twitter already supports crypto tipping, thus adding crypto wallet support is the next logical step:

“Many in the crypto space are bracing themselves for how Elon Musk will impact the industry, and the response has been surprisingly optimistic. It’s clear Musk will drive the digital asset integration with the platform along. For instance, many platforms will offer their own crypto wallets in order to keep transactions close to their ecosystem. Twitter doing this is a logical step for a social network that already enables users to send tips in crypto.”

Musk’s acquisition of Twitter made headlines not just because of the controversies leading up to the finalization of the deal but also because he took the social media platform private nearly 13 years after it went public. With Twitter being a private company now, Musk has a bigger say in the decision-making process, and many believe this will help him push for more crypto and Web3-related services on the platform.

Jack Jia, head of GateFi at fintech firm Unlimint, told Cointelegraph that over the course of the past 18 months, a significant chunk of Web2 platforms have integrated Web3 support, and he hopes Twitter will move in a similar direction with Musk at the helm:

“You can connect noncustodial wallets like MetaMask to your Instagram or Twitter and display your NFT as a profile picture. Google launched a fully managed Ethereum node service much like Infura and Alchemy. Then Coinbase and Revolut look more similar today than different in terms of crypto features and functionality. So, Musk’s Twitter will have a great impact on crypto, probably by launching something similar to Aave’s Lens Protocol, decentralizing Twitter to make it more censorship-resistant.”

Web3 onboarding is still lagging behind and needs to be made simpler and faster, and social media platforms can help to onboard billions of people to Web3, practically overnight. This was evident from the success of the Reddit NFTs. 

Max Kordek, CEO of blockchain infrastructure platform Lisk, told Cointelegraph that Web3 is not an independent internet ecosystem but rather a transition, and these platforms are best suited for onboarding.

“I think what people often misunderstand is that Web3 is not an exclusive new internet. Inside Web3 we also find Web2, the same way we found the former World Wide Web within Web2. In the case of social media integrating crypto, we are talking about a merge of Web2 and Web3. At the end of the day, a social media platform is just a distribution channel; Web3 doesn’t make them irrelevant. They will be ever more important in a more connected future,” he said.

Social media’s past hinders crypto and Web3 aspirations

Social media platforms started out as a medium to connect with people across the world, and in the Web2 ecosystem, they became an integral part of the internet. However, with time, these social media platforms also became a centralized host of data for millions of users, which major brands and companies rely on to advertise their products.

Social media platforms’ reliance on advertisers has led to malpractice at several social media platforms. These platforms were found to be selling users’ sensitive data to advertisers, and poor security measures have also led to data leaks and violations of privacy rights. This is the reason Kayla Kroot, co-founder and director of design at decentralized publishing protocol Koii Network, believes these social media companies’ crypto aspirations can damage the industry in the long term.

Kroot cited the example of the recent controversy around Musk’s plans to introduce an $8-per-month fee for the infamous “blue tick,” telling Cointelegraph:

“While any major mainstream technology platform’s integration of cryptocurrency may be seen as a positive step for adoption, the deep-rooted capitalistic tendencies of social media companies indicate that it would damage the industry in the long term. If mishandled, these integrations will push millions of potential users away. One recent example of this is Twitter’s controversial move towards requiring verified members to pay $8+ monthly for Twitter Blue.”

She further noted growing awareness around data autonomy and user privacy — areas especially valued within the blockchain community — and said that a move to integrate cryptocurrency “into networks that actively violate the core beliefs of the community will be seen by crypto natives for what it is: a cash grab. The perception by the larger population could be much worse, damaging the perception of cryptocurrency altogether.”

Meta is a prime example of this as the firm is struggling to transition from its Web2-based origins into a fully decentralized, Web3 ecosystem. Crypto integrations that are driven by profit and that don’t align with the ethos of the crypto community will not only alienate crypto-native users but could add fuel to the anti-crypto fire. At its core, blockchain technology promotes distributed governance and ownership for users, but the larger social media platforms are still very centralized, actively exploiting their users’ content for traffic and revenue.

Currently, most popular creators on traditional social media platforms are driving platform traction, but the platforms themselves are benefiting from that traction with ad revenue, not the creators. Thus, a majority of these crypto integrations seem to bank on the trend rather than truly work within the ethos of the emerging technology.

Tom McArdle, chief operating officer of decentralized messaging services Satellite.im, called Twitter’s Web3 aspirations a “classic wolf-in-sheep’s-clothing moment for Web3.”

He told Cointelegraph, “It is likely that crypto will be integrated into the Twitter platform post-acquisition. Just adding the ability to pay in Bitcoin or Dogecoin on top of an existing Web2 technology stack is not a step forward for the Web3 movement. Twitter will continue to operate in a centralized nature and will more aggressively monetize platform participants since Musk has levered up the company to prosecute the acquisition and now needs $1 billion a year just to cover interest expenses.”

“The integration of crypto payments is just another revenue stream and has nothing to do with the social and ethical priorities that come with the Web3 frontier — transparency, user privacy and data ownership.”

On one hand, the growing interest in Web2 social media platforms in integrating Web3 technologies has been lauded as a step toward greater adoption. On the other hand, Web3 experts believe that social media platforms are only banking on the trend and not the ethos of Web3, which could eventually drive away true crypto adoption, citing the example of Meta and its recent failure to rebrand itself as a Web3 brand.

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How low liquidity led to Mango Markets losing over $116 million

An attacker took advantage of low liquidity to steal over $116 million from Mango Markets.

It would seem that the hackers used an “oracle price manipulation” tactic in the exploit on the Solana-based DeFi network, as indicated by a tweet sent by the official account for the Mango cryptocurrency exchange.

In mid-October, traders took advantage of a vulnerability in the decentralized finance (DeFi) trading platform Mango Markets and stole more than $110 million worth of cryptocurrencies off the network. 

A further thread on Twitter provided a detailed breakdown of how the incident transpired. The attacker began their mission by funding an account on the site with USD Coin (USDC) for $5 million, which were used to purchase 483 unites of perpetual contracts in Mango (MNGO) token, the platform’s native cryptocurrency.

The attacker used this technique to drive up the price of MNGO from $0.03 to $0.91, increasing the value of their MNGO holdings to $423 million.

The funds were then used to acquire a loan for $116 million using several tokens on the platform, such as Bitcoin (BTC), Solana (SOL) and Serum (SRM). Unfortunately, the loan eliminated all of the liquidity in Mango Markets, which resulted in a steep drop in the price of MNGO to $0.02.

The development team for Mango Markets subsequently said that it is looking into what occurred and has initiated an inquiry into it. The protocol made the news available to its users over its different social media outlets, stating that it has temporarily halted deposits while it conducts more research. Additionally, the team informed users that they should refrain from depositing cash into the site before they disable the ability to do so.

How Mango Markets was exploited

The attacker was able to manipulate the MNGO token price, driving it up 30 times in such a short amount of time, by taking out enormous perpetual contracts. An attacker can pull this off by taking advantage of limited market liquidity to artificially inflate a token’s price by making huge purchase orders to push the price and then use new investors as exit liquidity to cash out. This is the same strategy that is employed in pump-and-dump scams.

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However, this kind of exploit is difficult to carry out when there is a very large quantity of liquidity since the amount of cash required to manipulate the price would be much higher. Since new or relatively unknown tokens often have extremely little liquidity, pump-and-dump schemes are more common with such tokens.

Mango Markets would have been able to protect itself from this exploit if it had enough liquidity. The use of an automated market maker (AMM) is one strategy that Mango Markets may have utilized to boost its level of liquidity. Automated market makers are computer programs that decide the price of a token by collecting liquidity from users and employing various mathematical formulas.

Ben Roth, co-founder and chief information officer of Auros — an algorithmic market-making firm — told Cointelegraph:

“Adverse trading behavior is a by-product of illiquid market conditions. Therefore, when ‘bad actors’ are able to construct an attack vector that has a high degree of certainty due to low liquidity, the incentive to undertake these sorts of ‘exploits’ rises.” 

“When working with an algorithmic market-maker, token issuers simultaneously disincentivize this adverse behavior while building confidence in the consistency of liquidity during a variety of market conditions,” he added.

Large tokenholders, also known as liquidity providers (LPs), are responsible for the operation of AMMs. LPs are responsible for introducing equal quantities of token pairings (such as MNGO/USDC) into pools. This makes it possible for decentralized exchanges to outsource their liquidity while still providing the LPs with compensation in the form of a share of the trading fees collected on the platform.

After the exploit

One day after the exploit on Mango Markets, the perpetrator made a suggestion via the decentralized autonomous organization (DAO) that was part of the platform. The attacker suggested that the Mango DAO pay off any outstanding debts with its $70 million treasury instead of using the attacker’s funds.

The deal stated that the Mango DAO team should use the funds from their treasury to make up for any outstanding financial obligations. After that, the cybercriminal would send the stolen tokens to an address provided by the group responsible for the Mango DAO.

By voting with millions of tokens taken during the exploit, the hacker appeared to support this idea, which is another kind of manipulation. Additionally, the perpetrator of the incident asked that no criminal proceedings be opened against them if the petition was approved.

Eventually, the Mango Markets community agreed to let the attacker keep a large portion of the tokens as a “bug bounty.” The terms are part of a deal that will see the return of $67 million worth of stolen tokens, with the attacker keeping the remaining $47 million out of the $117 million taken.

The deal was reached via a vote in the Mango DAO, with 98% of voters (or 291 million tokens) voting in favor. The proposal included Mango Markets not pursuing legal charges against the hacker.

Attacker reveals their identity

The attacker behind the exploit later came forward to reveal their identity. Avraham Eisenberg announced on Twitter that he was “involved with a team that operated a highly profitable trading strategy last week,” i.e., those responsible for the $100 million attack perpetrated on Mango Markets. 

Eisenberg continued to say, “I believe all of our actions were legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are.”

He pointed out that as a consequence of the exploit, Mango Markets fell bankrupt, and he also said that the insurance money was not enough to pay all the liquidations that occurred. Because of this, more than one hundred million dollars worth of user cash was lost.

However, Eisenberg claimed that he “helped negotiate a settlement agreement with the insurance fund,” to make all users whole again while recapitalizing the exchange. Eisenberg finished his Twitter thread by saying, “As a result of this agreement, once the Mango team finishes processing, all users will be able to access their deposits in full with no loss of funds.”

Eisenberg continues to claim that his actions were legal, being similar to automatic deleveraging on cryptocurrency exchanges. Automatic deleveraging is a process where exchanges use a portion of the profits earned from successful traders to cover losses due to other traders that have been liquidated.

However, Michael Bacina, partner at Australian law firm Piper Alderman, previously told Cointelegraph, “If this had occurred in a regulated financial market, it would be likely seen as market manipulation.”

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While users could still theoretically pursue legal action against Eisenberg, Bacina said it is not commercially viable, stating:

“Assuming claims survive the proposal, any claims would still need to be reduced by any amounts which had been received by a member as a result of the proposal, which may mean many members have limited commercial incentive to sue Mr. Eisenberg.”

Going ahead, it will be interesting to see how DeFi protocols can better secure their protocols, either with AMMs to stop these types of exploits in the first place or through subsequent legal action. 

Fidelity Predicts 2025 as Bitcoin’s Breakout Year, Led by Nation-State Adoption

Crypto adoption via regulation: Setting rules for centralized exchanges

While some security issues do exist, major internet outages like the one witnessed across the EU recently cannot really threaten cryptocurrencies or their associated networks.

Centralized cryptocurrency exchanges have become the backbone of the nascent crypto ecosystem, making way for retail and institutional traders to trade cryptocurrencies despite a constant fear of government crackdowns and lack of support from policymakers. 

These crypto exchanges over the years have managed to put self-regulatory checks and implemented policies in line with the local financial regulations to grow despite the looming uncertainty.

Cryptocurrency regulation continues to occupy mainstream debates and experts’ opinions, but despite public demand and requests from stakeholders of the nascent ecosystem, policymakers continue to overlook the rapidly growing sector that reached a market capitalization of $3 trillion at the peak of the bull run in 2021.

Over the past five years, many local and national governments have shown interest in regulating the crypto market but often got perplexed by the vast ecosystem and complexities involved in regulating certain decentralized aspects of the market. As a result, most of the governments that have issued some guidelines or rules related to crypto have done so based on the existing financial regulations, but the evolving market has proven too fast-paced.

Some countries have moved to recognize crypto trading as a legal activity, while others have approved Bitcoin (BTC)-based exchange-traded funds. Many countries have also made way for crypto platforms to operate with a license, but the strict requirements often deter certain small platforms to stay away. As a result, there is no universal blueprint for regulators to adhere to, and experts believe leading centralized crypto exchanges can change that.

In traditional markets, it is perfectly normal for regulators to work closely with industry participants, including exchanges, to ensure that regulations and guidance work well and keep pace with fast-changing technological advances. However, the same can’t be said for the crypto market, as regulators have maintained a safe distance from the nascent industry.

Oliver Linch, CEO of global crypto exchange Bittrex Global, said that the regulators must interact with service providers of the crypto ecosystem to get a better grasp of the industry. He cited the example of Bermuda and Liechtenstein, where the crypto exchange has been working with local lawmakers to make way for positive regulations.

He noted that even though decentralized exchanges continue to remain the flag bearer of crypto’s decentralized ethos, which are thus more complex to regulate, centralized exchanges will be key to major adoption:

“Centralized exchanges have perhaps the most important role to play here. While decentralized exchanges tend to be the ‘poster boys’ for the industry’s cutting edge, they are naturally hesitant to get involved in regulatory matters. In any event, the majority of activity, especially for ordinary retail users (who are front of mind for regulators) happens on centralized exchanges.”

He added that regulating the entire crypto market will follow, but the approach of “Liechtenstein, Bermuda and now the European Union, of regulating service providers, including centralized exchanges, is a good starting place. By properly regulating centralized exchanges, regulators and legislators create a legitimate path for users — from individuals to giant corporates — to get involved in crypto in a safe and regulated manner.”

A Binance spokesperson told Cointelegraph that being a centralized exchange, it needs a centralized entity to work well with regulators.

“Binance believes it has a fundamental responsibility to work with regulators and believes that a well-regulated crypto market provides greater protection for everyday users. We strongly believe that a stable regulatory environment can support innovation and is essential to establishing trust in the industry that will lead to long-term growth,” the spokesperson added.

Centralized exchanges prove to be regulators’ allies

In major economies and developed countries, regulators have not been very keen on involving industry players, but those nations that see the future in the nascent tech have actively partnered and on-boarded leading centralized crypto exchanges to not only help them build the infrastructure but also assist them with formulating right policies for the crypto market.

Binance recently signed a memorandum of understanding with Kazakhstan to help fight financial crimes. The program further aims to identify and block digital assets obtained illegally and used to launder criminal proceeds and finance terrorism. Similarly, Busan onboarded Huobi to develop blockchain infrastructure in the region.

Many countries already regulate centralized exchanges, but there is still a lot of uncertainty about what regimes apply and how they will be enforced. For example, United States-based exchanges operate under licenses from the Financial Crimes Enforcement Network but have been alleged to list tokens and offer financial products (like derivatives, staking and interest-bearing deposits) that fall under the purview of the Securities and Exchange Commission or the Commodity Futures Trading Commission.

The Lummis–Gillibrand bill is considered one of the most comprehensive pieces of legislation proposed on crypto in the United States. South Africa recently classified crypto as a financial product and will be regulating it accordingly. South Korea implemented strict regulations last year that require exchanges to track all transfers to and from their platform, including identifying the owners of wallets. As a result, exchanges there restricted transfers to and from unverified private wallets.

Thus, it is evident from existing regulations that centralized exchanges have become the main point of interaction for not just traders but regulators as well.

Mohammed AlKaff AlHashmi, co-founder of Islamic Coin, told Cointelegraph that regulating centralized exchanges will help in regulating the broader crypto market, explaining:

“Firstly, it’s Know Your Customer and Anti-Money Laundering. I see that most of the exchanges will outsource it to very famous and authentic KYC/AML entities, as it will bring more reliability and trust rather than doing these procedures by exchanges themselves. Secondly, taxation is an important theme when we talk about regulation. Many countries will regulate crypto if they can do the taxation, and I suggest that exchanges will develop the taxation on the crypto transactions and be the one who collects this data and hand it over to the government.”

Habeeb Syed, senior associate attorney at Vicente Sederberg and co-organizer of the Blockchain Technology, Law and Policy Meetup, told Cointelegraph, “Crypto exchanges often determine the winners and losers of the crypto world, as listed on one is an almost surefire way to raise your token price and provide early investors an opportunity for liquidity. Well-thought-out regulation of centralized exchanges could also ripple out into the broader ecosystem.”

He added that regulating crypto exchanges would force legitimate projects to know they can’t engage in certain acts “if they ever want to list a token on say Binance, FTX or Coinbase, which would be a powerful motivating force. With regulated options for trading, staking and lending, actors could choose to forego riskier and unregulated DeFi ecosystems.”

Regulators must proceed with caution

Crypto exchanges play a central role in the vast crypto ecosystem, as they have numerous services and facilities with many trying to become an all-in-one platform. Some experts are of the opinion that, while regulating centralized exchanges can certainly be the first step toward broader crypto market regulations, that is not enough to ensure smooth operations for the whole industry.

Aleksandra Shelepova, head of legal at crypto-backed loan service provider CoinLoan, told Cointelegraph:

“When it comes to imposing regulations to any new and evolving market, everything should be done step-by-step. Moreover, the regulators should have a proper understanding of how this market operates in detail, technological aspects included. Regulation should come from the middle-bottom, meaning the contribution of the market’s participants’ know-how is crucial.”

She added that regulating just the exchanges is not enough since there are many popular and widely used crypto products, including crypto loans, deposits, etc. that must be regulated as well. Expanding regulation to all aspects of the crypto environment ensures a unified understanding of the products themselves.

While monitoring centralized exchanges can definitely pave the way for a better understanding of the crypto market, regulators should refrain from a “one size fits all” formula.

Nicole Valentine, fintech director at Milken Institute, told Cointelegraph that regulators should be more focused on decentralized platforms:

“Just like there is variation in the digital assets themselves, there is variation in the types of exchanges that enable buyers and sellers to trade those digital assets. Although regulating centralized exchanges can be seen as helpful, there are nuances in decentralized exchanges that should be considered, including the use of digital wallets and smart contracts.” 

Centralized exchanges are a key part of the cryptocurrency ecosystem; they are where most new crypto users go to buy their first coins. Many leading centralized exchanges already have strict onboarding and identification procedures in place and would welcome more clarity from regulators on questions such as whether or not digital assets are securities.

Increased regulation for centralized exchanges is a double-edged sword where, on one hand, it would lead to more new interactions and greater adoption, but on the other hand, increased regulation may drive the more experienced crypto users toward decentralized exchanges, something that experts believe regulators would have a hard time dealing with.

Fidelity Predicts 2025 as Bitcoin’s Breakout Year, Led by Nation-State Adoption

Happy Halloween: The five spookiest stories in crypto in 2022

This Halloween, we pay tribute to the crypto investors and businesses that fought through the various financial and technological nightmares that occurred in 2022.

After over 13 years of ups and downs, this year stands out for having the most turbulent bear market in the history of crypto. Owing to a mix of factors — that include regulatory clearances across the globe and improved credibility among projects that survived the bear market — the world of crypto marked numerous milestones this year. 

However, certain events in 2022 could raise goosebumps on the toughest diamond hands out there. Moreover, it was impressive to see crypto projects, in many cases helping each other, bounce back through an era of uncertainty.

Acknowledging the spookiest events this Halloween, we list the scariest events that shook the crypto ecosystem, leaving a significant impact on investors, businesses, entrepreneurs, miners and developers.

The key driver for the following list is widely attributed to the highly volatile time frame and geopolitical uncertainties, which saw the price fall across all sectors.

The extended crypto crash: Fear of the bears

The year 2022 inherited a turbulent crypto market, which started off slowly crashing in November 2021. As a result, immense fear and uncertainty gloomed across the crypto ecosystem right from the start of the year.

The bear market ate away more than $1 trillion from the crypto market — bringing down the overall market cap from over $2.5 trillion to under $1 trillion in a few months.

The 2022 crypto crash scared investors as it drained out profits from all sub-ecosystems, including Bitcoin (BTC), cryptocurrencies, nonfungible tokens (NFTs), and decentralized finance (DeFi), among others.

The loss was felt both ways. While the price depreciation translated to investors losing a part of their life savings, businesses were struggling to stay open amid massive sell-outs and a lack of investments.

The scary instability of algorithmic stablecoins

The Terra ecosystem collapse is widely considered to be the biggest financial catastrophe ever witnessed in crypto by a single entity, and rightfully so. The two in-house offerings from Terra Labs destabilized and almost instantaneously lost their market value. 

In the early days of the crash, Terra co-founder Do Kwon was found publicly discussing ways to help investors recoup losses. Binance CEO Changpeng Zhao suggested burning LUNC tokens to reduce the token’s total supply and improve its price performance.

Shortly after, as regulatory scrutiny started building up against Terra’s operations, Kwon decided to go incognito, with his exact whereabouts unknown.

Numerous entities — including disgruntled investors, South Korean authorities and a Singaporean lawsuit — are still in pursuit of Kwon, despite his comments to the contrary.

However, Kwon maintains that he’s not “on the run” and plans to come out with the truth in the near future. The whole incident highlighted the risks related to the peg mechanisms of algorithmic stablecoins. 

Similarly, stablecoin Acala USD (aUSD) lost its peg in August 2022 after a protocol exploit caused an erroneous minting of 3.022 billion aUSD. A subsequent decision to burn the tainted tokens was made in order to regain their dollar value. Given the numerous other examples of stablecoin crashes, draft legislation in the United States House of Representatives called to criminalize the creation or issuance of “endogenously collateralized stablecoins.”

Sweeping layoffs and job cuts 

The burden of losses was also shared by some crypto companies’ ex-employees. Prominent players including Robinhood, Bitpanda and OpenSea announced massive layoffs, owing to reasons that circle back to surviving the bear market.

On the other hand, crypto exchanges such as FTX and Binance showcased resilience to price volatility and continued their hiring spree to support the ongoing expansion drive.

Crypto organizations that chose to lay off employees did it to cut operational costs and wind down loss-making components.

More recently, it was found that over 700 tech startups have experienced layoffs this year, impacting at least 93,519 employees globally. However, the tech community — from both crypto and non-crypto sectors — has been found migrating into Web3.

Crypto hacks: Humans are the real monsters 

One of the more visible problems engulfing crypto such as hacks and scams just got bigger in 2022. Hackers drained out millions of dollars worth of crypto by exploiting vulnerabilities present in poorly vetted crypto projects.

A strategy that was widely opted by the hacked projects this year was to offer the hacker a pink slip for returning a part of the loot. In the case of Transit Swap, a decentralized exchange aggregator, the hacker agreed to return around 70% (roughly $16.2 million) of the stolen $23 million fund.

While some hackers chose to return a part of the funds in exchange for immunity against prosecution, other projects such as Kyber Network and Rari Fuze have not been successful in pursuing their respective hackers to return the stolen funds.

This year also was witness to a spike in the number of phishing attempts, where hackers managed to access social media accounts of prominent figures, such as the South Korean government’s YouTube channel, Indian Prime Minister Narendra Modi’s Twitter account, and PwC Venezuela’s Twitter account to shill fake giveaways to millions of followers.

Governments across the world consistently issued warnings against phishing attempts involving fraudulent apps and websites impersonating prominent crypto exchanges like Binance.

Resurrection overdue: NFTs, Web3 and the metaverse

Talks around nonfungible tokens (NFTs), Web3 and the metaverse took over the crypto ecosystem by storm, promising virtual use cases that extend into the real world. Celebrities, actors, musicians and artists catalyzed adoption by using the budding technologies as tools to reconnect with fans or simply inflate their own wealth.

The NFT hype was officially declared dead in July 2022 when daily sales recorded yearly lows as investors that recently suffered losses refrained from stepping on the seemingly sinking ship.

Despite the nosedive statistics, the NFT ecosystem saw support from some of the biggest celebrities, which include musicians Snoop Dogg and Eminem, tennis legend Maria Sharapova and professional fighters Connor McGregor and Floyd Mayweather.

The decreasing interest in NFTs translated into a lack of investments in newer projects building use cases around Web3 and the metaverse. Meta, arguably the biggest contender in the metaverse, has plans to pump $10 billion every year into its project. However, an unclear roadmap and uncertain revenue streams plague the ecosystem from attaining mainstream acceptance.

Setting aside the fear, the biggest lesson that the spookiest events in the crypto showcase is the need to do independent research before making any investments. Past mistakes — such as investing in an unvetted project, trusting unknown sources and sharing private information over the web — will come back to haunt you.

This Halloween, Cointelegraph wishes you pumpkin spice and everything nice. Visit Cointelegraph to stay up-to-date with the most important developments in crypto.

Fidelity Predicts 2025 as Bitcoin’s Breakout Year, Led by Nation-State Adoption

Boo! Halloween-themed shitcoins materialize to haunt crypto Twitter

Halloween-themed cryptocurrencies are taking over the crypto ecosystem on Twitter, typically purchased as an off-the-shelf product providing no real use case or future for investors.

The crypto community never shies away from deploying new cryptocurrencies that are themed on current events, and Halloween was no exception. The industry saw an influx of Halloween-themed cryptocurrencies hoping to cash in on the hype around the festivities.

Halloween-themed cryptocurrencies have taken over the crypto ecosystem on Twitter, typically offering no real use case or future for investors. Projects like these have a track record of being sourced as an off-the-shelf product, which can be quickly renamed and deployed in the free market for trading. 

Projects like Halloween Token, as shown above, came up just days before the occasion with the sole purpose of amassing $50 million in market cap. Halloween Spook, a project that cropped up on Sept. 2022, claims the status of being the “scariest meme token on Binance Smart Chain (BSC).” The project promotes Halloween Elon (SINK) token, which is based on a recent “let that sink in” meme sported by Elon Musk.

Found again on the BSC network was Halloween Wars Token, which blatantly shares its intent to “ride the hype of what many claim is the most exciting time of the year: halloween.” Despite no attempt to market the project, the project gained 17 followers who remain at risk of losing their assets to market capitulation.

One of the stronger contenders this year was halloween bsc, yet another BSC-hosted project with no apparent goal set for the investors.

As shown above, the project recently celebrated a temporary bull run but a reverse search showed no existence of an ENDS/BNB (BNB) trading pair on Binance or any other trading platform.

While cryptocurrencies themed on current trends tend to spike in market price, the surge is often limited to a few days until the owner decides to cash out and rug investors from making profits. As a result, it becomes paramount for investors to do their research (DYOR). 

Related: Cointelegraph Store introduces Halloween Crypto Monsters merch

Twitter is home to a majority of the crypto world, and with Elon Musk taking over the social media platform, crypto exchange Binance decided to lend support to developing crypto and blockchain solutions for Twitter.

As Cointelegraph reported, Binance CEO Changpeng Zhao committed to back Musk’s Twitter acquisition with a $500 million fund.

Fidelity Predicts 2025 as Bitcoin’s Breakout Year, Led by Nation-State Adoption