#15 The Context: Hacking or opportunism?

Also Russia, the IRS and cricket NFTs. Your weekly dose

Apr 21, 2022

Hi, hope you've had a productive week.

A couple of housekeeping things: thanks to everyone who answered our survey on this newsletter; there’s still time if you can find a minute to offer your thoughts. Your feedback will really help shape where this newsletter goes. The point is to try to provide a helpful summary of the week’s most interesting stories about DeFi/Blockchain/Crypto/NFTs/mining etc but with some context (and hopefully no bias). It’s put together by a team led by Yap Global founder Samantha Yap and Jeremy Wagstaff, both of us once of the journalistic parish. We’re trying not to assume a lot of prior knowledge or interest in the subject, but for it to be as helpful for those regularly covering the space as much as those just wanting to keep one eye on it.

To that end we’re trying to link, where relevant, to previous newsletters, and this week are including links to (external) definitions and explanations for those terms that might require it (an asterisk indicates a footnote which will include a brief explanation and a link to a longer one. We’re also trying to credit individual authors of stories. Please let us know if we get names etc wrong.)

As ever, thoughts are welcome, and if there’s anything we can help more on, don’t hesitate to ping us at thecontext@yapglobal.com.

[tl;dr]

NFTs: nothing earthshaking, but enough happening in this space to suggest that predictions of the imminent demise of the NFT are premature. But the search goes on for enduring use cases. Could real estate be one?
Regulations: Russia, once apparently determined to stamp out crypto, may be having second thoughts as sanctions bite harder. Oh, and U.S. tax season may offer a glimpse into how far the IRS is going to go to chase down crypto gains.
Vulnerabilities: hacks don't appear to be disappearing from crypto, but are we lumping everything we don't like together, from genuine software exploits to awkward oversights in drawing up smart contracts?

[NFTs and other tokens]

Several developments in the NFT* and token world illustrate the still-fluid definition of what NFTs are, and what can they do. Are they just about collectibles -- owning a piece of art, say, whose value may or may not go up -- or are they about access, like a membership card? Or are they about ownership of property, physical or intellectual? They may be all these things, but two things may be worth keeping an eye out for if NFTs are going to be a long-term success: how much does an NFT improve on the process of buying, owning, selling, earning from a creator's work? And for the future: what new things can NFTs unlock: processes, products, services, transactions, that we haven't thought of yet?

Just when it looked as if interest was waning in NFTs, Moonbirds came along, clocking up nearly $289 million of sales. Fortune’s Taylor Locke asked: why did these market for these pixelated-bird non-fungible tokens surge so quickly? One reason was the prominent (and respected) people behind it, another the structure of the Proof collective, which guaranteed members two Moonbirds for every membership NFT they owned. For those involved, the drop reflected a maturing of the NFT market, from “selling art” to raising funds for the company behind it to build out a bigger vision, where the NFTs become the centre of their own metaverse/ecosystem. Critics instead saw nepotism and manipulation of the mechanism behind the sale to push up prices, accusations the founders have denied.
Coinbase has joined other crypto exchanges Binance, FTX and Okcoin to launch its own NFT marketplace, at least for select customers. While the waiting list for the marketplace was long, Coinbase knows it’s competing with established players like OpenSea and LooksRare, and so is building a 'community feature' to let collectors engage with each other and with creators. (Story author: Yogita Khatri of The Block)
Sports: A lot of well-known football clubs in Europe have raised money through the sale of tokens to fans (“initial fan token offerings”), and revenue from fees on trading on exchanges, but they have proved less rewarding for holders. Their supporters say the coins aren’t investment assets but access to services, such as exclusive games and content. It’s not often clear what these services will be: a look at the Manchester City ($CITY) Fan Tokens website leave vague what those benefits will be beyond votes, while the team's press release talks about it being part of the "digital collectibles market" which would seem to suggest that, at least in part, the tokens are being marketed as investments. The same page says that the tokens will provide “fans around the world with unprecedented engagement opportunities, as well as unique digital, and - once restrictions are lifted - real-life rewards and experiences.” It's not clear what restrictions the club is referring to. Several countries have banned fan token advertising, and one fan token company has gone into liquidation, leaving several clubs out of pocket. More detail on the legal aspects here: Fan tokens- an addition, or a solution, to the monetary misery? While the FT argues that clubs need to recognise that their fans assume a degree of judgement on the their part, and need to be more responsible. Cricket, meanwhile, has taken a slightly different approach, creating NFTs around players and competitions. (We've looked at fan tokens in The Context #10) Stories’ authors: Ignacio Olivera Doll of Bloomberg; Chris Cook of *The Financial Times;* Rashi Tater of Lexology*; Apoorva Mittal of The Economic Times
Media: A piece by Bron Maher in Press Gazette explores how news publishers made $11m selling NFTs. That's peanuts compared to what Moonbirds and soccer clubs have made, but for an industry long seeking more sources of revenue it may be a life-saver. But the data may be misleading: one outlet, Time, which started selling NFTs more than a year ago, accounts for $10 million. And proceeds for some of the other media company NFTs are going to charity, while the Associated Press abandoned its sale of photography-based NFTs after an outcry.
Celebs: celebrities, film stars and influencers are still pushing NFTs, either endorsing, buying or investing in projects or companies that promote NFTs, according to Bloomberg. This isn't merely bandwagon-hopping, say those involved: “If we have to summarise what are we trying to solve here, it’s ownership. We now have an opportunity to express ownership digitally,” Ivan Soto-Wright, CEO of MoonPay, is quoted as saying. “The key word of this year will be royalties — the idea that you can take this intellectual property and you can monetise it.” More immediately, the problems are more about which way regulators will jump on NFTS, or lawsuits by disgruntled followers who have seen the value of their NFTs tumble. (Story author: Misyrlena Egkolfopoulou of Bloomberg)
Real estate: And then there’s the idea, credited to Reid Hoffman, founder of LinkedIn and venture capital firm Greylock, who says while Web 2.0 (for want of a better term) was about building services around real identities and relationships, so-called web3 is “the upgrade of the web for ownership.” If we can secure ownership, then we can secure transactions, and make any existing transaction smoother and less complex. Take, for example, how web3 is re-engineering real estate, where already houses are being sold via NFTs, according to Natalia Karayaneva, CEO of Propy, a Silicon Valley proptech company exploring home purchasing via blockchain.

[Regulations]

Political uncertainty about crypto seems to be a feature, not a bug, allowing crypto to slip through ever-narrower cracks. For the U.S. it may be tax season which determines whether those cracks can be filled, while a heavily sanctioned Russia may be having second thoughts about crypto as a threat to stability. India, meanwhile, seems determined to keep it in the freezer.

Russia, reeling from Western sanctions, is in two minds. Early talk of a ban seems to be shifting, and it now reviewing a finalized bill on legalising cryptocurrencies, drawn up by the country's ministry of finance. Wiggle room may be limited: The U.S. is aiming its sanctioning guns at Russia's Bitcoin miners, the world's third biggest destination, while cryptocurrency exchange Currency.com, has stopped serving its hundreds of thousands of users there, earning itself an unprecedented cyberattack its Belarus-born owner blamed on Russia. (Stories by Arijit Sarkar of Cointelegraph, Casey Wagner of Blockworks and Jim Armitage of The Times) (See more on Russia at The Context #9 and #10)
India: Conflicting signals from official entities in India has led to crypto payments being frozen across India. Several exchanges and trading services have suspended rupee deposits or seen support for their platforms removed by banks and payment gateways. Volumes on crypto exchanges have fallen by up to 96% since October. The result is a chilling effect which leaves India lagging behind, say those in the industry. But there are still signs of bullishness: crypto trading exchange CoinDCX has raised $135 million, doubling its valuation to $2.15 billion, according to The Economic Times. (Story authors: Sidhartha Shukla and Suvashree Ghosh of Bloomberg, and Apoorva Mittal of The Economic Times) (See more at The Context #14 and #13)
U.S.: Anxiety for U.S. crypto investors as the IRS gets serious: Bloomberg explains how crypto is complicating tax returns while Entrepreneur has updated its guide on what investors need to know about this year's tax rules. Bottom line: “taxation of cryptocurrency is complicated and requires diligent record-keeping when buying, selling or exchanging," according to Mat Sorensen, an IRA-focused attorney writing at Entrepreneur. (See more on the U.S. and crypto at The Context #14 and #13)

[‘Vulnerabilities’ covers a multitude of sins]

Crypto is inevitably vulnerable to bad guys because of two things: a) there’s lots of money to be made b) with every progressive DeFi step there’s a mass of vulnerabilities to be exploited. But that second point isn’t as simple as it sounds: while in cybersecurity a ‘vulnerability’ is a fatal flaw in code, what do we call it the flaw is akin to poor wording in a contract? Does exploiting that latter vulnerability in a smart contract make you a hacker, or someone just taking advantage of a loophole?

Hackers: No question that crypto has become the main game in town for seasoned hackers, either as the preferred method of extracting ill-gotten gains, but also as a target in itself. Take for example, North Korea, long a whale in criminal (i.e. financial) hacking. This week the FBI, tied North Korean hacker group Lazarus to the theft of more than $600 million worth of cryptocurrencies from Axie Infinity last month. The U.S. Treasury identified a wallet address used by the hackers as being under Lazarus' control. Blockchain analytics companies have confirmed that North Korea was behind the break-in. Indeed, Lazarus is believed to have been behind numerous cyberattacks on the cryptocurrency industry, allegedly stealing nearly $400 million worth last year. Arthur Cheong of DeFiance Capital says the crypto industry is facing a much broader front of North Korean attacks.
But it might, some argue, be misleading to throw every 'theft' into the same bucket. Take news that Ethereum-based stablecoin protocol Beanstalk lost about $182 million to an exploit involving a flash loan*. Flash loans allow users, usually arbitrage traders, to borrow large amounts of stablecoins without any security: the borrowing and returning happens in a single blockchain transaction, but are vulnerable to any lapse in the underlying smart contract code. Indeed, Ed Zitron, a PR practitioner and journalist, argues this isn't a hack: whoever was behind it merely understood the code better than its creators. “To describe the Beanstalk incident as anything other than a system working as intended is giving cryptocurrency developers far more credit than they deserve," he argues. It's not clear how much of the loss is recoverable; the perpetrator was able to move the $80 million they had left after returning the flash loan to a crypto mixing service, which allows users to hide their tracks. They then donated $250,000 to the Ukrainian government’s fund, according to Bloomberg. (Story authors: Joanna Ossinger of Bloomberg and Michael McSweeney of The Block. ) (More on hacks in The Context #14 and #12)

[Tidbits]

**Meta** is allowing some creators to sell virtual experiences and digital items on its Horizon Worlds metaverse, but will take a 47.5% cut on each transaction, vs the 2% or 2.5% charged on NFT marketplaces like OpenSea and Looks Rare. (More on Meta and crypto at xxxx)
Browser developer **Opera** brings its Crypto Browser to iPhones and iPads following earlier versions for Windows, Macs and Android devices. The app’s built-in crypto wallet supports Ethereum, Polygon and Celo blockchain technology and Opera plans to integrate more ecosystems.
The WSJ takes a raised-eyebrow look at stablecoins, which tout stability but are dismissed as critics as dangerous.
Is Bitcoin making inroads as a hedge against inflation? Probably, not, in this era of hard assets to hedge inflation, writes Joanna Ossinger of Bloomberg.
Last week we flagged the Ethereum revamp known as The Merge; here are a couple of follow-ups: Tim Beiko, the Ethereum Foundation coordinator for core developers, talks about why the Merge was delayed and why it won't reduce gas fees much on its own, while Bloomberg quotes a Beiko tweet as saying mining of Ethereum is nearing its end. (See also [Reading] below.)

[Reading]

Meet the Blockchain Detectives Who Track Crypto’s Hackers and Scammers: The unsung, and often unknown, heroes who "expose scammers and track down hackers in an attempt to both call them out and alert potential investors to stay away from them, often from behind pseudonymous identities," according to VICE's Lorenzo Franceschi-Bicchierai (We looked at this trend in newsletter #6)
Bloomberg's Muyao Shen looks at “one of the biggest bets in all of crypto”: Ether tokens deposited on a platform called Lido Finance in anticipation of the Ethereum revamp.
A thoughtful piece by Molly White on “anti-crypto toxicity”, and how both those loudly advocating for crypto and those loudly advocating against it are doing themselves and each other a disservice. If the broader goal is to diminish the negative impacts of crypto on society, targeting our ire at the individuals who casually engage with it seems like poorly-spent energy.

[Definitions]

NFT = Non-fungible token, a unique digital asset stored on a blockchain that represents an identity, a digital or real world asset, and so cannot, unlike cryptocurrencies or fiat money, be substituted traded or exchanged at equivalency. Non-Fungible Token definition from Investopedia
Flash loans = unsecured, instant loans that use smart contracts to perform instant trades, both borrowing and returning the funds within one blockchain transaction Flash loans definition from Decrypt

This newsletter is pulled together by a team led by Jeremy Wagstaff, formerly of the WSJ, BBC and Reuters and Samantha Yap, founder of YAP Global. Other members: Ruby Wu, Roslyn Tear and Becky Corbel. Many thanks to Joey Woo for production. Any views expressed here are not necessarily those of the writers, YAP Global or its clients.