🟣 What color hat to wear?

Exploring the grey area between whitehat and blackhat

Author

Luke Leasure
June 20, 2024

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Welcome back to 0xResearch. Here's what we’ve got for you today:

  • LayerZero’s $ZRO claims go live

  • CertiK identifies a bug in Kraken deposits

In liquid crypto markets, dispersion abounds. With Bitcoin only ~13% off of its all time high, the TOTAL3 index (total crypto market less BTC and ETH) has drawn down in excess 27%, as many long tail alts have been taken out to the woodshed. This comes as the S&P500 and Nasdaq are making new highs daily, continuing a 3 week winning streak.

ZRO is live

LayerZero’s $ZRO launched this morning, with trading clearing between $3.65 - $4.90. With a circulating supply of 250M and a total supply of 1B, this puts the market capitalization around $925M and $3.7B fully diluted. The LayerZero team has certainly been keen to experiment on their approach to this airdrop. Having long received ire that protocol user metrics were inflated with sybil users farming this airdrop, the team had announced a sybil bounty program, whereby users could self report their own sybil activity and receive 15% of their original allocation. Otherwise, sybillers faced the risk of identification by the LayerZero team and would receive no rewards. Additionally, users could identify and report other sybils, and receive 10% of their allocation.

While well-intentioned, this experiment was rife with perverse incentives, as users could inaccurately report other users as sybils in an attempt to earn more rewards. According to the LayerZero team, this bounty program, self reporting, and research performed by Nansen and Chaos Labs, about 1% of the total ZRO supply was withheld from sybil users.

LayerZero team also introduced a new experiment in the claims process, with the introduction of “proof-of-donation”. With this system, users claiming their airdrop allocation would need to donate $.10 of ether or stablecoin per ZRO claimed. Proceeds from this would be donated to the Protocol Guild to fund Ethereum developers, and up to $10 million would be matched by the LayerZero foundation.

Kraken vs CertiK

The top drama over the past day involves 2 major US crypto firms, Kraken and CertiK. According to the Chief Security Officer at Kraken, some security researchers had identified an exploit in the Kraken deposits system that would allow an attacker to withdraw a balance in excess of what was deposited. In “testing” this exploit, addresses associated with the security researchers withdrew around $3M in crypto assets on $4 in deposits. Subsequently, some of these addresses moved funds through the OFAC-sanctioned Tornado Cash.

Following Kraken’s public statement on this matter, CertiK came out to identify themselves as the security researchers, and gave their end of the story. Between the amount of funds withdrawn, the use of Tornado Cash post-exploit, and the discourse between these two entities, the conduct is quite suspect. More on this odd tale in today’s Empire newsletter. As of this morning, Kraken shares that all of the funds have since been returned back to Kraken. While funds have been return, I don’t think we’ve yet seen the end of this story.

— Luke Leasure (X: @0xMether)

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Source: Dune @pipistrella

With the proliferation of LSTs, this cycle is built different. Lido’s stETH is both the dominant LST and the dominant form of collateral across DeFi. stETH accounts for over 80% of the LST market and over 30% of collateral in DeFi. With the ETH ETF approval on the horizon, potentially only 2 weeks away, the importance of stETH’s role as natively onchain, reward-bearing collateral will continue to grow. More on this in @magicdhz’s latest unlocked report.

With the spot ETH ETF approval, the institutions are coming. stETH - given its dominance in marketshare, existing liquid market structures, and highly desirable properties - is poised for institutions.

Wormhole’s Native Token Transfers (NTT) is an open source development framework that allows projects to define a canonical multichain deployment for their tokens. NTT builds upon Wormhole Messaging to embed multichain interoperability at the token layer, and it is open and flexible to accommodate additional verification frameworks.

Unpacking Trump memecoins and the Kraken/CertiK situation.

Instead, the primary path to real RWA growth is dollar-backed stablecoins.

The insights, views and outlooks presented in the report are not to be taken as financial advice. Blockworks Research analysts are not registered broker/dealers or financial advisors. Blockworks Research analysts may hold assets mentioned in this report, further outlined in the Firm’s Financial Disclosures.