Calls for tighter control as degens punk the system
Decentralized financial instruments such as flash loans are allowing those in the know to leverage and play with vast amounts of capital. As increasingly gamified aspects arrive through blockchain dapps it’s no surprise that some are treating it all as a game, where a landmark sale or exploit brings the executor bragging rights for a day. The sale of CryptoPunk #9998 in the last 24 hours for over 500 million dollars via a flash loan has some crying fraud. Others see it as smart kids playing with financial devices inherently designed to be gamed. Either way, it highlights the need for education.
A recent CryptoPunk sale where the owner sold the item to themselves for over $529 million using a flash loan, instantly propelling the sale and themselves to the top of the NFT top sales rank on DappRadar, has led us, as a key participant in the dapp space, to consider the role we play within the industry as it evolves around us.
In an internal discussion on how we, as a platform, should handle this unusual sale, our COO Patrick Barile concluded that “our role is to accurately present data, rather than tamper with it. However, as experts, we are responsible for explaining this data. Yes, we should list such a sale. But we shouldn’t include the sale in the total volume, because it provides a skewed, tampered with picture of what’s going on. We must aim to show our users different perspectives on how to look at such an incident.”
The sale of CryptoPunk#9998 for 124,547.07 ETH is significant as it’s the highest all-time sale of a CryptoPunk, eclipsing previous sales by hundreds of millions of dollars. Normally, this would have the editorial team at DappRadar hurriedly covering the sale. However, it’s not real, as our own Head of Content and an industry spectator quickly pointed out.
Instead, the owner of the punk had taken a flash loan for a large amount of ETH, listed their punk for sale at a super high price, and then bought it from himself using the flash loan. Upon completion, the flash loan was repaid. Importantly, this occurred via a private smart contract sale, therefore only gas fees were paid. The person did not make a profit here either. So what was the point?
This sale will definitely be talked about for a while, and the owner may have thought it could potentially kickstart another NFT bull run. One more possibility — such a bold move can push outlets such as ours, and many others, to better explain flash loans and their intricacies. “DappRadar is the authority in this space, we navigate this very complex world of data for you and strive to serve data you can trust. The inner workings of the decentralized finance ecosystem should not be kept secret from the outside world, issues such as this desperately need explanation and context — that’s where we come in,” Patrick continues.
How does a flash loan work?
In a normal real-world loan, a lender loans out money to a borrower that eventually needs to be paid back in full, usually over a set length of time in months and years. Flash loans are very similar except they use smart contracts — tools enabled by blockchain that don’t let funds change hands unless certain rules are met, just like a digital middleman acting as the trusted third party. In the case of a flash loan, the rule is that the borrower must pay back the loan before the transaction ends, otherwise the smart contract reverses the transaction – so it’s like the loan never happened in the first place.
In many cases, lenders require borrowers to put up collateral to ensure that if the borrower can’t pay back the loan the lender is still able to get their money back. In an unsecured loan, however, no collateral is required. Instead of offering collateral, the borrower needs to pay back the money right away. The smart contract for the loan must be fulfilled in the same transaction that it is lent out through.
This means the borrower has to call on other smart contracts to perform instant trades with the loaned capital before the transaction ends, which is usually a few seconds. In this instance, the person took the loan to buy their own CryptoPunk, the transaction was instant and, to the outside world, looks legit. Moreover, this is not illegal — the owner is not doing anything more than using the instruments at their disposal.
The creators of CryptoPunks, Larva Labs, said on Twitter that “someone bought this punk from themself with borrowed money and repaid the loan in the same transaction.” While the bid is technically briefly valid it can never be accepted, the tweets said, adding that Larva would add filtering to avoid generating automatic notifications for this kind of transaction in the future. Another Twitter observer, Tyler Gellasch, who helped write the U.S. financial regulatory overhaul, tweeted that the U.S. Treasury and Justice Department might want to take a look since a price of more than $500 million “seems just a bit high.”
As mentioned, this appears nothing more than smart individuals gaming a system to get to the top of the leaderboard, or into the center of attention for a moment. Strictly speaking, they did nothing wrong and could repeat this action over and over again with no restrictions, at least currently. In a world with so much noise, it can be hard to get noticed. However, when money is involved, people generally tend to listen. “What’s important for us is how this is reported on and handled, we have a duty to our users to highlight and educate them on these issues. Rather than scaremonger, we would rather foster an approach of learning and benefit,” Patrick concluded.