Hegic Options Arbitraged

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Hegic Exchange

Hegic Exchange had an options service, which ran through a smart contract hot wallet and had an issue where newer liquidity providers missed out on potential upside, which earlier liquidity providers could capitalize on. It was estimated that $3k worth of additional profits were exploited before the protocol was upgraded. It does not appear that the Hegic team has done anything to make right the differences.

This is a global/international case not involving a specific country.

About Hegic Exchange

"Hegic is an options protocol taking a fresh approach to minting and trading options." "Trade non-custodial options for profits or to hedge your positions. Enjoy fixed price and unlimited upside of the options contracts. No registration, KYC or email required.". "Traders and holders can use options on Hegic to insure against price volatility. Consider ETH is worth $500, and a user buys an option contract, which enables them to sell one ETH for 500 DAI within some time window. If ETH price tanks to $400, the user can safely exercise the contract, liquidating their position for 500 DAI." "Hegic Protocol V1 code has been audited by @trailofbits. Security audit includes HegicOptions, HegicCallOptions, HegicPutOptions, ETHPool and ERCPool contracts."

"Hegic made its debut on the mainnet on 23rd April 2020, hours after going live, they claimed to have a bug in the smart contract. The bug locked user funds into expired options contracts, rendering them permanently inaccessible. Up to $48,000 worth of funds were forever locked up in the platform’s smart contract." "All found issues were fixed and now IT IS MUCH SAFER TO USE THE CONTRACTS!"

"Instead of a P2P orderbook based model, Hegic uses a pooled liquidity P2C (Peer to Contract) model for users to buy & underwrite options. Options buyers buy calls/puts that are underwritten by the collective funds provided by Hegic liquidity providers"

"However, not all LPs are created equal. Older LPs have accrued premiums over time while newer LPs have not and carry the same underwriting risk (their liquidity is also used to cover pre-existing options)" "In addition, LPs can remove their liquidity at any time, taking the revenues (not just premiums) from options paid for while relieving themselves from downside risk."

"New LPs take the burden [of old LPs], not having gotten paid premiums." "An opportunistic LP that understands this would provide liquidity early, accrue revenue, and remove liquidity before potential exercising of options. A clever one may even purchase options themselves to expedite the process."

"The code was reviewed by many talented individuals including @0mllwntrmt3, @trailofbits, and @samczsun, but the shut down of Hegic V1 resulted from a weak point in system mechanics."

"Someone did just that." On "May 21, 2020, Hegic Options was arbitraged out of $3K." "Over 13 transactions & 1.5 days, this LP netted ~$3,340 in profit."

"@HegicOptions has shut down again. Not due to an error in the code base, [b]ut from a fundamental design flaw that was exploited."

"Taking into account recycled capital, this was essentially a quick low risk 22% ROI." "The LP mainly profited from the DAI (put) pool. They went through the following process twice: (1) Deposit Liquidity. (2) Purchase Put. (3) Withdraw Liquidity. (4) Exercise Put. 1st Round = $500 Profit. 2nd Round = $2,843 Profit."

"To maximize profit, the LP bought DEEP ITM puts at strikes of $990 and $2,800 when $ETH was at ~$190. Doing so minimized the size of the premium of the option relative to the total price. The 2nd round contracts cost $2633/ea with the premium comprising 0.8% ($22/ea)."

"The actual profit is derived by looking at the LP capital withdrawn from pool, and subtracting the costs (premium + LP capital initially provided). In the 2nd round, $10,512 + $389 = $10,901 was withdrawn, $58 paid in premiums, and $8,000 initially deposited = $2,843 profit." · "The profit came from other LPs who suffered substantial % losses even though there was no price movement from option purchase to exercising. The time from Put purchase to Put exercise was ~30 min in both rounds."

The algorithm was changed on June 2nd. "This is how early exercising / "re-selling" of the options contracts to the pool works in v1.1 on https://hegic.co now." "Your profits" = net profits on this particular trade excluding the costs (premium + settlement fee): the price paid for an option."

"Molly is currently working on a V2, where a lock up period is added and premiums are only distributed after option expiry."

This is a global/international case not involving a specific country.

The background of the exchange platform, service, or individuals involved, as it would have been seen or understood at the time of the events.

Include:

• Known history of when and how the service was started.
• What problems does the company or service claim to solve?
• What marketing materials were used by the firm or business?
• Audits performed, and excerpts that may have been included.
• Business registration documents shown (fake or legitimate).
• How were people recruited to participate?
• Public warnings and announcements prior to the event.

Don't Include:

• Any wording which directly states or implies that the business is/was illegitimate, or that a vulnerability existed.
• Anything that wasn't reasonably knowable at the time of the event.

There could be more than one section here. If the same platform is involved with multiple incidents, then it can be linked to a main article page.

The Reality

This sections is included if a case involved deception or information that was unknown at the time. Examples include:

• When the service was actually started (if different than the "official story").
• Who actually ran a service and their own personal history.
• How the service was structured behind the scenes. (For example, there was no "trading bot".)
• Details of what audits reported and how vulnerabilities were missed during auditing.

What Happened

The specific events of the loss and how it came about. What actually happened to cause the loss and some of the events leading up to it.

Key Event Timeline - Hegic Options Arbitraged

Date	Event	Description
May 21st, 2020	Main Event	Expand this into a brief description of what happened and the impact. If multiple lines are necessary, add them here.

Technical Details

This section includes specific detailed technical analysis of any security breaches which happened. What specific software vulnerabilities contributed to the problem and how were they exploited?

Total Amount Lost

The total amount lost has been estimated at $3,000 USD.

How much was lost and how was it calculated? If there are conflicting reports, which are accurate and where does the discrepancy lie?

Immediate Reactions

How did the various parties involved (firm, platform, management, and/or affected individual(s)) deal with the events? Were services shut down? Were announcements made? Were groups formed?

Ultimate Outcome

What was the end result? Was any investigation done? Were any individuals prosecuted? Was there a lawsuit? Was any tracing done?

Total Amount Recovered

There do not appear to have been any funds recovered in this case.

What funds were recovered? What funds were reimbursed for those affected users?

Ongoing Developments

What parts of this case are still remaining to be concluded?

General Prevention Policies

It was unclear from the analysis performed whether any customers lost funds or were simply short on potential profits. Platforms in general should prepare for the full loss of any hot wallet funds, and have funds available to assist customers in such situations.

Individual Prevention Policies

No specific policies for individual prevention have yet been identified in this case.

For the full list of how to protect your funds as an individual, check our Prevention Policies for Individuals guide.

Platform Prevention Policies

Policies for platforms to take to prevent this situation have not yet been selected in this case.

For the full list of how to protect your funds as a financial service, check our Prevention Policies for Platforms guide.

Regulatory Prevention Policies

No specific regulatory policies have yet been identified in this case.

For the full list of regulatory policies that can prevent loss, check our Prevention Policies for Regulators guide.