QUADRIGA INITIATIVE
CRYPTO WATCHDOG & FRAUD RECOVERY PLATFORM
A COMMUNITY-BASED, NOT-FOR-PROFIT
$550 000 USD
JULY 2020
GLOBAL
UNISWAP
DESCRIPTION OF EVENTS
"Uniswap is an Ethereum exchange, built using smart contracts and liquidity pools, as opposed to the order book of a traditional centralized exchange (CEX), such as Binance. With any Ethereum wallet, users can simply connect to the Uniswap application and effortlessly exchange ERC20 tokens without first sending them to the exchange platform account."
"[T]he development of Uniswap was facilitated by Vitalik Buterin’s idea for a decentralized exchange (DEX), which would involve an automated market maker. Actually, the protocol developer himself, Hayden Adams, at first tried to just practice development on Solidity, and later this hobby brought him several grants and $100 000 from the Ethereum Foundation. Now the project went far beyond just entertainment and became one of the most important components of the entire DeFi industry."
"ICOs, or Initial Coin Offerings, exploded in popularity in 2017. In 2019, it was Initial Exchange Offerings (IEOs), where centralized cryptocurrency exchanges like Binance served as third-party springboards for new token offerings. Circa 2020, traditional ICOs and IEOs have all but died down, while a new kind of crypto-native offering type has arrived: Initial DeFi Offerings."
"DEX offerings are different from listings on centralized exchanges, such as Binance, as anyone is able to list their tokens on the open Uniswap platform. In theory, just as IDOs allow anyone to list tokens, they also allow anyone to buy them."
"During an IDO, users send money directly to the team, and an asset’s price grows as a function of buying activity." "IDOs on Uniswap are unlike ICOs where investors sent funds directly into teams’ wallets at predetermined price bands, as an automated pricing model means the token price can start climbing as soon as the sale starts. Also, the liquidity pool at the core of DEXs like Uniswap, means that traders can instantly cash out."
"Lending platform bZx listed its BZRX tokens, and like other Et[hereu]m projects, it did so via the fan-favorite decentralized exchange Uniswap, adding to a wave of so-called Initial DEX Offerings, or IDOs. The bZx team seeded the listing with $500k in capital and included a bridge for presale investors to claim liquid BZRX tokens."
"In February 2020, the bZx protocol was attacked via flash loan exploits, which resulted in losses just under $1 million. In early July, the bZx team announced a “plan to compensate traders for that downtime and restore liquidity to the [protocol’s] iETH pool.” This plan involved a vested BZRX fund that affected traders could apply for compensation through, as well as an iETH campaign that allowed liquidity providers to trade iETH for BZRX at a considerable discount. Users wanting to exit the iETH pool will be able to purchase discounted BZRX that will be locked in a vesting contract for 4 years."
"In late June, the bZx team unveiled the BZRX token model v3. As part of the rollout, the creators announced a token disbursement program that would allocate 20% of the total BZRX token supply to rewarding bZx users. Of that allocation, 17% will go to a fee-refunding system, which will refund half of users’ bZx trading fees in BZRX per an initial rate of .0002 ETH per token. The other 3% will go to a disbursement fund, which will pay out 0.25% of the BZRX token supply weekly over a period of 3 months. This bootstrapping fund will be distributed proportionally according to the amount of fees generated weekly by users."
"As for value capture, the tokenomics of BZRX will offer stakers multiple avenues to yield. To start, there’s the token’s fee-sharing system: staked BZRX entitles a holder to fees generated by bZx “in proportion to their contribution to the staked supply.” These fees get sweeped into one of two Balancer pools, through which BZRX stakers also receive associated Balancer LP tokens. In turn, these Balancer pools accrue fees to the benefit of those holding the fee pools’ shares. These pools also generate BAL rewards, so BZRX stakers can simultaneously liquidity mine through Balancer while serving as an LP for AMMs."
"Another key value capture prospect for BZRX is the bZx insurance fund, which is grown through trading fees, half of all origination fees, and interest payments. Since BZRX can be redeemed for a proportion of the insurance fund, this dynamic brings value to the tokens by backing them with “current assets as well as future cash flows.” Zooming out, the new BZRX model also paves the way to bZx providing swap liquidity for margin traders, wherein the protocol could serve as an LP for other AMMs."
"BZRX tokens unlock[ed] to the public on July 13th, 2020." "The initial decentralized exchange offering (IDO) of bZx protocol’s token BZRX on Uniswap highlighted the IDO model’s imperfections." "Less than a minute since the BZRX IDO started on Jul. 13, the price jumped 12x due to the front-running bot activity. Bots were placing buy orders in the same block that marked the start of the IDO."
"Less than 60 seconds after the Uniswap liquidity pool was seeded, BZRX price jumped 12x from it’s listing price of 0.0002 ETH to 0.0024 ETH. You’d think this was a sure win for early investors. However, when looking under the hood of what happened, the main “winners” were those running scripts to purchase BZRX in the same block it became available."
"The offering kicked off roughly 30 minutes after the suggested start time, with $500k in capital being seeded to a Uniswap pool by the core team using presale investors migrated tokens. As expected, the token price absolutely skyrocketed just seconds after listing, peaking at a 12x the listing price under 60 seconds of the pool being created. Underpinning eager DeFi day-traders were a few savvy individuals who ran scripts to be the first to purchase tokens in the first block that liquidity was added."
"Following the announcement that BZRX token, the native cryptocurrency of DeFi project bZx, will be listed for trading on UniSwap decentralized exchange, reports suggest that a trader made more than half a million dollar within 30 minutes of trading the token." "On Monday evening, Security engineer Roman Storm took it to Twitter to explain how he spotted someone who made $1 million in a half-hour by trading the BZRX during an Initial DEX Offering (IDO) on UniSwap."
"How someone made a million dollar in 30 min? (1) Wait for BZRX news for [U]niswap listing. (2) Write a smart contract that buys token on Uniswap. (3) Spam [the] eth[ereum] network [s]o others can't get in with failed t[ransaction]s." "After the liquidity transaction was processed in block 10451767, he became the first person to purchase the BZRX token with the help of his bot. This allowed him to open a long position at a very low price. On-chain data suggests he made a buy order of 650 ETH ($155,154) to get 1,966,111 BZRX, at the rate of 3024 BZRX/ETH."
"Besides front-running buyers, the bots spammed the network so that users couldn’t push their transactions through." "Once other buyers finally got in for the sale, the price was already high, and the bots’ owners took substantial profits. One early buyer made $500,000."
"The trader made a total of 2,780 ETH from the sales with a profit of 2,030 ETH ($509,431). He is left with a balance of 300,000 BZRX, which is currently worth around $48,290."
"While the incident wasn’t a hack, it raised concerns about the viability and fairness of IDO models." "While some, especially the less technically inclined investors, may argue that the trader might have hacked or exploited the system, what he did was to leverage a trading bot to buy low and sell high for profit. Using DeFi bots and spamming networks to prevent others from immediately buying tokens during IDOs has become a common occurrence."
"The BZRX IDO was not an exploit nor a hack. Uniswap IDO generically still has problems with front running, and that's all I'm trying to show. My intent was to teach the community about technical details of Defi bots on Ethereum."
Uniswap is a decentralized trading platform, where users place orders using Ethereum on the blockchain.
The BZRX token was launched at a low price which was quickly corrected by market trading bots, operating through smart contracts.
Other users missed purchasing at the low initial price, by being seconds late.
HOW COULD THIS HAVE BEEN PREVENTED?
There was no actual loss in this situation. One trader made a significant gain based on the low price, however the situation thereafter was the same as if the token had been launched at the higher price.
Millions Lost: The Top 19 DeFi Cryptocurrency Hacks of 2020 | Crypto Briefing (May 22)
Fundraising Breakthrough: Hegic, Perpetual Protocol Reinvent Token Offerings | Crypto Briefing (Jun 27)
Is bZx's New DeFi Token Enough to Win Back Wary Users? | Crypto Briefing (Jun 27)
@rstormsf Twitter (Jun 27)
DeFi Reinvented the ICO, It Flopped: Assessing the IDO | Crypto Briefing (Jun 27)
How BZRX Uniswap Listing Made One Trader $550K In 30 Mins | Headlines | News | CoinMarketCap (Aug 11)
@bZxHQ Twitter (Aug 11)
BZRX Initial DEX Offering Recap - Uniswap Listing Review - DeFi Rate (Aug 11)
Uniswap Info (Aug 11)
@angelomint Twitter (Aug 11)
@sassal0x Twitter (Aug 11)
@ZacharyDash Twitter (Aug 11)
@kaiynne Twitter (Aug 11)
In an Ethereum-based 'Initial DEX Offering,' open doesn’t always mean fair - Decrypt (Aug 11)
How Does Uniswap Work (Jun 5)
Initial DeFi Offering or Initial DeX Offering (Aug 11)
What is IDO - the new alternative to IEO and ICO? | Hacker Noon (Aug 11)
Security Engineer: BZRX IDO Not Hack But Exposes Uniswap IDO Problems With Front Running | CoinNess (Aug 11)
No Title (Aug 11)
