Will DeFi Survive This?

A special mid-week episode is in order as we discus the string of events that led to one of the largest risks DeFi has faced in a long time. What happened to Curve, what's at risk, and what can we learn from all of this? *CORRECTION: The address that exploited the CRV/ETH pool controls .082% of the circulating supply, not the 8% accidentally mentioned in this segment. ------ 🚀Join Ryan & David at Permissionless II in September. https://bankless.cc/GoToPermissionless ------ 📣 STADER LABS | ETHX LIQUID STAKING https://bankless.cc/Stader ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 ⁠ 🦊METAMASK PORTFOLIO | MANAGE YOUR WEB3 EVERYTHING https://bankless.cc/MetaMask ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum ⁠ 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle ⁠ 👾POLYGON | VALUE LAYER OF THE INTERNET https://polygon.technology/roadmap 🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/Toku ------ TIMESTAMPS 0:00 Intro 7:23 EVM Exploit Explained 13:21 MEV Bot Sidequest 18:21 CRV Contagion 23:43 CORRECTION: SEE SHOWNOTES* 31:43 The OTC Bailout 35:43 Buying Mansions On Leverage 41:43 Second Order Risks 47:43 Who is to Blame? 53:43 Are we in the Clear? 56:43 Lessons Learned 1:01:43 Risks and Disclaimers ------ RESOURCES DeFi's Contagion Curveball https://www.bankless.com/defi-contagion-curveball ------ Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures ⁠

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:37Ryan Sean Adams?

  Bankless Nation, we have a bonus episode for you today because I think this requires almost a midweek look at what is going on in crypto, specifically what is going on with DeFi, David? So much going on with the Curve protocol. I know you are fresh back from climbing mountains, but I need your help with this.

• 0:55David Hoffman?

  Duty calls.

• 0:56Ryan Sean Adams?

  Yes, I need your help to understand what happened. Can you give us the TLDR of what we're going to cover in today's episode?

• 1:03David Hoffman?

  Yeah, so there has been a series of events which have all, one has led to another. There is a coding language called Viper, which is an alternative to Solidity. So it is an Ethereum coding language that had an exploit in the actual coding language that affected a certain number of DeFi protocols across Ethereum, especially and most importantly, Curve, which is a systemic, I would call a systemically important DeFi protocol, has had some very important pools, Curve pools drained, and that has led and put pressure on the CRV token specifically because the founder of Curve, Michael, has put up a bunch

• 1:42David Hoffman?

  of CRV tokens as collateral across DeFi. So just to recap, a coding language had an exploit in it which led to Curve liquidations, and because the founder of Curve had so much CRV tokens as collateral across lending protocols, we are potentially on the cusp of a liquidation, cascading liquidations of the CRV token across DeFi, which

• 2:10David Hoffman?

  Might put holes into the balance sheets of many of these DeFi lending protocols. Did you catch that?

• 2:15Ryan Sean Adams?

  I did, and I'm so glad. We called David down from the mountains in order to to help us with this episode, David. I'm so glad you're back. I think what we're trying to do in today's episode is just unpack this story and let let folks know as well that it's still developing. So we'll have more things to talk about, but but really, in bankless fashion, we want to talk about like what just happened in the events in order to like learn from this, in order to level up on crypto. So we're going to discuss what happened. What's currently at risk right now? You might be wondering, are my assets safe? Is this a systemic issue for all of DeFi? How scared should I be? And then finally, what we can learn. I think that's the that's the flow of this episode. David, you want to say anything else before we get ready to get in here?

• 3:00David Hoffman?

  Yeah, just a few more bits about Curve and why it's so important. I would say Curve is kind of a yin to a yang of Uniswap perhaps, but it's specifically meant for trading like kind assets. So stable coins trade with stable coins. Ether trades with other versions of synthetic ether. And so like staked ether trades with Rocket Pool Ether or Alchemix Ether, which is one of the pool strains is traded with, you know, ether. So like kind assets is what Curve is really meant for, and it's just a huge, huge amount of DeFi built on top of it. TVL in Curve, Total Value Locked in Curve, was 3.2 trillion up to the point of

• 3:40Ryan Sean Adams?

  Wait, billion, billion.

• 3:42David Hoffman?

  Billion, excuse me, billion, trillion is a different number.

• 3:45Ryan Sean Adams?

  One cycle, we'll do that.

• 3:47David Hoffman?

  3.2 billion down to 1.7 billion. So it takes like a 30% haircut in the TVL. Part of that is because the hacker stole money, but really, most of it is that people kind of flee from from this. And so we'll probably watch some of that TVL return. But the the total sum of all of the assets stolen by this exploiter, by this exploit is about $70 million. But 20 ish million dollars of the stolen money was taken back by a white hat MEV bots, which is another very interesting part of this story. So the hacker has gotten his stolen assets stolen from them,

• 4:30David Hoffman?

  and some white hat MEV bots have returned some capital to some pools. So we have to unpack that as well. And so this is going to be, there's a number of different rabbit holes to go down around this, this particular topic. And we're going to try and take our time to point towards each individual one.

• 4:46Ryan Sean Adams?

  Yeah, there's, there's so much to talk about. And yes, what you need to know at the outset of this is Curve is a very important protocol in all of DeFi. I would say systemically important, and it certainly got a bullet wound here. So we're going to explore all of that. Guys, we'll be right back with the episode to walk you through everything that happened, what this means moving forward. And to answer the question, is DeFi safe? Are we going to make it? But before we do, we want to thank the sponsors that made this episode possible, including Kraken, which is the absolute best way to onboard into crypto. Go create an account.

• 5:22David Hoffman?

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• 6:06David Hoffman?

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• 6:46David Hoffman?

  Communities from around Web3 onboarded like Game7 for Web3 gaming and Bybit for TVL and Liquidity and OnRams. So if you want to build on the Mantle network, Mantle is offering a grants program that provides milestone-based funding to promising projects to help expand, secure, and decentralize Mantle. If you want to get started working with the first DAO-led Layer 2 ecosystem, check out Mantle at mantle.xyz and follow them on Twitter at ZeroXMantle. Arbitrum is accelerating the Web3 landscape with a suite of secure Ethereum scaling solutions. Hundreds of projects have already deployed onto Arbitrum 1. With a flourishing DeFi and NFT ecosystem, Arbitrum Nova is quickly becoming a Web3 gaming hub and social dApps like Reddit are also calling Arbitrum home.

• 7:26David Hoffman?

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• 7:59David Hoffman?

  And we're back. Bankless Nation, when you hear the words "EVM compiler" reveals a zero-day vulnerability, it's not a good day.

• 8:07Ryan Sean Adams?

  No, that's not scary.

• 8:08David Hoffman?

  That's scary. That's a very deep part of the tech stack. And so there's something that actually we need to define before we move on here. There's a specific kind of vulnerability here, and this is called a reentrancy attack. This is actually, reentrancy attack is actually how the DAO hack got hacked. And so a reentrancy, it's a very specific type of exploit. It's when a contract is checking to see the account balance of something, of someone, of some asset. But the attacker is able to actually execute something before the contracts are able to finish checking the state of something.

• 8:48David Hoffman?

  And so it's like you are able to remove cash from the vending machine and then without, before you finish the The transaction, you actually just keep on pressing, hey, withdraw my money. Hey, withdraw my money. Hey, withdraw my money. And so you you re-enter. I'm I'm doing my best as a non-dev.

• 9:05Ryan Sean Adams?

  This is really good, honestly.

• 9:07David Hoffman?

  You re-enter the same like, hey, you owe me $15. Hey, you owe me $15. Hey, you owe me $15. And before you finish processing the transaction, you just say, hey, withdraw my $15, you know, 5,000 times. And then you finish the transaction and it's $15 turns into, you know, 70 million.

• 9:24Ryan Sean Adams?

  That vending machine analogy is working for me, like, just like the the mental imagery. So you know, you press D5 or whatever, and you got your Snickers bar. But now you can keep hammering on that on that button.

• 9:33David Hoffman?

  But before the vending machine delivers you the Snickers bar, you keep on saying, give me a Snickers bar. And then you do as many times as you can. Unlimited times. Yeah. So that's a very simple, like, re-entrancy attack. That's how the Dow hack got got hacked. And sadly, because in the Viper language, the coding language that this vulnerability was expressed, forgot, did not have the appropriate checks, re-entrancy checks. So that's a very deep level of like, why this is all happening to begin with.

• 10:00Ryan Sean Adams?

  Just really quick on Viper, though. Okay, so it's an alternative to solidity. It's much less used compared to solidity. And so I'm not a developer, so someone come correct me. But my understanding is solidity is a bit more like JavaScript-ish, like, and whereas.

• 10:14David Hoffman?

  More hardened, yeah.

• 10:15Ryan Sean Adams?

  Viper is Python, right? So it's kind of like Python derived. And so it's a different language. It was supposed to be more simple, a bit more functional, but it hasn't had a lot of adoption, but it does in in some in some pockets, including, you know, in Curve, what we're about to talk about.

• 10:32David Hoffman?

  Yeah. So we're looking at a tweet thread here from Bankless HQ, our our analyst, Jack, who just did a bang up job, really, just covering all of this. And so if you want to read the the tweet thread or also the newsletter, these are also fantastic sources. You can also read the the Viper tweet broadcasting the re-entrancy vulnerability in the next tweet, Ryan. The next the next tab that you got or that one as well. Yeah. And so Viper language Twitter account says, Viper versions point to 15, 16, and 3 are vulnerable to malfunctioning re-entrancy locks. The investigation is ongoing, but any project relying on these versions should immediately reach out to us. The project, of course, in question is Curve, as we said in the beginning. And so I think we've, we've done a pretty good job explaining what Curve is, but it is the,

• 11:15David Hoffman?

  to put it into a metaphor, the marketplace for like-kind assets. It is a place where Tether gets turned into Dye, where Dye gets turned into USDC, where USDC gets turned into, uh, you know, any other stablecoin. Uh, and so not all Curve pools were coded in Viper, only a certain number of them. And the, not the Curve pools that were coded in Viper have all been exploited by this one exploit. Uh, so a handful of contracts, all for ETH pairs. Um, and, and so there are, uh, one, two, three, four pools that got exploited. PETH with ETH pair, uh, MSETH with ETH, AL ETH from Alchemix.

• 11:58David Hoffman?

  And so this is Pendle ETH, uh, I can't remember what MS is. It'll, uh, Metronome, uh, Alchemix, and then also the Curve ETH pair itself, which is the Curve DAO. Uh, and so Pendle ETH that is, uh, got drained for 6,000 Ether, that's $11 million. Uh, Alchemix ETH got drained for 1.6 million of Ether and then 1.8 million of, uh, uh, Metronome ETH, excuse me, not Alchemix Metronome. Metron, uh, Alchemix got drained for 7,200 Oof Ether, which is 13.6 million. And then 4.8,000 Ether of Alchemix Ether, which is 9 million. And then the Curve ETH pool, which is the source of all of this further contagion,

• 12:41David Hoffman?

  got drained for 7,200, uh, CR, 7,000, 7,200,000 CRV tokens, which is $5.1 million at the time of exploit. You can imagine that these Curve token has gone down in price since, as well as 7,700 wrapped Ether out of the Curve DAO as, and, and then also 2,800 more Ether. Uh, so if you'd sum it all together, it's about $70 million. Um, that $70 million came like I, from I said, uh, four different protocols, one of them being Curve. Uh, but it's really the source of this contagion and why this is getting into a bigger and bigger story, is that 7.2 million Curve tokens that got taken out of the Curve Ether pool.

• 13:24David Hoffman?

  And is now in the hands of the attacker. And so that is the recap of the assets that has been stolen out of Curve.

• 13:32Ryan Sean Adams?

  Okay, so we'll talk about sort of why this, why this matters and where we are right now, because this does have some wider implications that that's kind of spreading to other protocols. Here, we'll talk about that, but a quick side quest on how this actually works in practice. So my understanding, David, is that some MEV bots captured some of the exploited funds here in the process. Right. And maybe you can kind of explain how block building works and, and how this actually works. I was talking to some people who are staking in Rocketpool, for instance, some very large, call it execution layer fees, right? Some MEV fees were, were not, not donated.

• 14:16Ryan Sean Adams?

  That's the wrong word, were awarded to the Rocketpool community essentially as a result of this.

• 14:22David Hoffman?

  Rocketpool protocol processed the block that had a significant number of MEV bots bidding for some of the exploited funds.

• 14:30Ryan Sean Adams?

  Exactly.

• 14:31David Hoffman?

  Rocketpool just happened to process the block. Therefore, a lot of these stolen funds turned into MEV and then got, you know, turned into rewards for Rocketpool and a few others. But Rocketpool has like, that's where kind of the conversation is because well, what does Rocketpool do with the funds?

• 14:47Ryan Sean Adams?

  Like, well, and what does it do? It basically spreads all of that, those MEV proceeds across all of the.

• 14:53David Hoffman?

  Individuals, yeah. So a lot of stolen funds just got sprinkled out to individual Rocketpool stakers.

• 14:59Ryan Sean Adams?

  Which is interesting, and I think a quick side quest here. Well, here's another one. So one MEV bot, it wasn't just Rocketpool. This is an MEV bot called Coffee Babe dot ETH, actually returned some of the money from the exploit. So returned $5.4 million. So if you're an individual staker, right? And this is kind of like a lottery system. So it's. Bit of random chance as to whether you'll get this reward in kind of the execution layer reward in MEV or not. But if you just suddenly receive $5.4 million worth of ETH in ill-gotten gains, the question is, what do you do with it? Is it finders keepers, losers weepers? Did you just find like, oh, I found $20 on the floor? I mean, you can't be like, hey,

• 15:44Ryan Sean Adams?

  does anyone, does anyone own this? If you find that out in public. But in this case, you actually kind of know who owns the money. You could trace it. So what do you do? Do you refund it?

• 15:55David Hoffman?

  So I think it depends on the context, right? When we talk about Rocket Pool, and we're taking a very early rabbit hole down this one topic before getting into the rest of the contagion event. But this, so this is definitely a side quest, but it's, this is just what happened so early in these cascade of events. Coffee babe dot ETH. Actually, I think I need to check this if this is true, Ryan, but coffee, the coffee babe dot ETH, front ran, created an MEV bot after the first CRV ether liquidation in the time that the, and another re-entrancy attack was going to happen again. But the second time that the hacker tried to steal funds, I don't know why they're, they didn't just do it all from the first, from the first exploit. Why didn't they steal 100% of it? Some funds

• 16:40David Hoffman?

  might have come in from bots. There's a bunch of extra questions here. There's a lot of dust to be settled. But in the time that the exploiter decided to attack the CRV ETH pool again, coffee babe dot ETH coded up MEV bot and front ran that second and then also third exploits. And so in that second exploit, coffee babe dot ETH front ran the exploiter and got 2,879 ether that was drained from the curve ether pool again. And then that is now being returned to the curve deployer address, which is going to be able to actually determine where the right destination of that ETH goes. But that's just because this one person.

• 17:23David Hoffman?

  Figure out a way to coat up this MEV bot, take responsibility and control over stolen assets and stole money from a thief to return it like back to the rightful owners. But like when it goes back to like, okay, what about a decentralized system like Rocket Pool? Like, these are all interesting questions as to how to actually contend with some of these things.

• 17:42Ryan Sean Adams?

  Yeah, so I guess in this case, the Coffee Babe case, it's a bit more white hacky in that like they just exploited something the exploiter was exploiting. And then so they refunded the funds and that to me is much more, I guess morally clear.

• 17:55David Hoffman?

  Yeah.

• 17:56Ryan Sean Adams?

  What's less clear is the case where you have this big MEV reward and it's distributed across the pool of, say, stakers, right? Like, what do you do? Do you actually? And so what's interesting-

• 18:06David Hoffman?

  In the future, with MEV burn, this would not have been able to happen.

• 18:09Ryan Sean Adams?

  That's the thing. That's kind of the punchline. I think that that is important here because what I'm worried about, David, is I don't know if you've seen some MICA legislation that came down the bike last week, but there was some MICA legislation that basically would make it illegal to benefit from MEV of this kind, like the unethical style of MEV. And I get worried about that when that sort of thing is settled in meatspace, because then we go down this path of, well, do all validators have to be like checked by the state, AML, KYC? Like, how does the nation state actually enforce that? Because the protocol level's not. Anyway, it's an interesting side quest, but I agree with you that the best solution here is probably MEV burn, because then at least it's credibly neutral and we sort of

• 18:53Ryan Sean Adams?

  socialize these proceeds over all ETH holders. I guess, you know, we're socializing the guilt there.

• 18:58David Hoffman?

  I mean, I would still put a white hat hacker ahead of that, because just because we're burning it doesn't mean we are okay with people having their money stolen.

• 19:07Ryan Sean Adams?

  Agreed. Well, so let's get back to the to the main event. So what tweet are we looking at here?

• 19:13David Hoffman?

  Okay, so this is this is Taylor Monahan, who we actually just did a Twitter space with, talking about some of the white hat hackers and, you know, just giving praise at CoffeeBabe.ETH, you know, truly a babe. But we but we need to get into the contagion event that is around CRV because as soon as CRV is sold, first, there's not that much liquidity right now. I don't know if you noticed prices, Ryan, but you know, as bullish as we are, we're still in the bear market. So liquidity is already thin. And then when the CRV ether pool of where CRV gets its liquidity gets exploited, you would imagine that liquidity goes A for that reason, and then B, because anyone else also supplying liquidity to Curve token around DeFi,

• 19:58David Hoffman?

  get scared of getting dumped on, so they they withdraw their liquidity.

• 20:02Ryan Sean Adams?

  So now we're at we're at the point of the story where the the contagion is kind of um becoming around surrounding Curve the token, right? CRV the token.

• 20:10David Hoffman?

  Yes, exactly. And so CRV, the token liquidity starts to drain. We accidentally see a flash crash of Curve down to about 10 cents from 70 cents. And so inside of a very small period of time, Curve went from 70 to 10 cents. And then back up to 60 cents pretty quickly, pretty quickly, without liquidating Curve collateral across various DeFi lending protocols. But you can see how, I mean, I remember Terra Luna. I remember how how and then the Curve is not Terra Luna.

• 20:41Ryan Sean Adams?

  Never forget.

• 20:41David Hoffman?

  But you we all remember how like liquidity just drained very quickly of surrounding uh surrounding these assets when it needed it the most. And so people fled for the hills and all of a sudden Curve the token is in a very precarious position where it doesn't take that much sell pressure to push that price down. Now, that wouldn't be bad. Like tokens are allowed to go down in price. That's a normal thing to happen. This is what we do in DeFi. Things go up in price, things go down in price. But that's just not it's just not where the story ends sadly. Uh, and so the the Curve exploi- exploiter as a result of the Curve uh pool, the Ether Curve Pool, currently holds 8% of the circulating supply of CRV.

• 21:24David Hoffman?

  And so that is about seven, that's seven million curve tokens that we can see in the exploiter's wallet. That's a lot of curve. Eight percent of the total circulating supply is a lot of curve, especially when the hacker is capable of pressing a button and market dumping that thing. And also simultaneously liquidity providers stop providing liquidity because they don't want to be dumped on. And so all of a sudden liquidity dries up. And so this is setting up the dominos, the dominos are currently set up for a bad event in curve tokens. And we haven't even gotten to all of the collateralized CRV positions across DeFi, but you know, you can guess where we go next.

• 22:05Ryan Sean Adams?

  Well, let's, uh, let's just park that for, for one second. So this was the exploiter's wallet, the hacker's wallet as of the 31st, so July 31st. And by the way, all of this happened, I believe, earlier in the week, it was, you know, a bloody Sunday or bloody Monday, depending on your time zone, the, you know, August 30th or August 31st. And so the state of the hacker's wallet at this point in time was all of the curve tokens that you were talking about, eight percent of the circulating supply, and also a whole lot of ether as well. So about $14 million worth of ether. What's crazy about this, and I know I don't have to emphasize this for, you know,

• 22:44Ryan Sean Adams?

  longtime crypto natives and bankless listeners, but we are witnessing yet again, a bank heist play out in real time on the internet. And we get to, like, we get to see it unfold step by step. And I just want to pause and reflect on how crazy is that, that all of this is public? And the on-chain sleuths can track every single transaction here. And we actually see the, uh, the, the address of the exploiter and like, we can see every single move that this person is, is making in real time. That to me is just will never, will never not be crazy. But yeah, that's what's happening here.

• 23:21David Hoffman?

  Yeah, this is, this is what the blockchain provides, right? Like, global eyes are all watching the same addresses and the same contracts. There is currently a game going on right now around CRV. People that own CRV before, uh, you know, traders, DeFi, who, DeFi people who play the DeFi game, a lot of people are watching the current state of CRV, because if it's been two days, the curve exploiter has not made a transaction in two days. But that, I mean, Curve is one button press away from basically being nuked to zero. So liquidity is currently kind of like resettling itself around. People are, there's a new equilibrium being established.

• 24:01David Hoffman?

  But this exploiter has, you know, and they have seven, eight percent of all Curve's supply token, of their Curve's supply. So it's a precarious position to be in. And like I said, we haven't even gotten to all the DeFi lending protocols that are out there.

• 24:14Ryan Sean Adams?

  So let's talk about that next. And this is where sort of the founder of Curve kind of enters as a, as a main character here. The founder, Michael, his last name starts with an E. I won't pronounce, pronounce it correctly.

• 24:27David Hoffman?

  Igorov, Igorov, Igorov, yeah.

• 24:29Ryan Sean Adams?

  That, yes. And so, so Michael owns 48% of the circulating supply of Curve. So this is very heavy, Michael has very heavy Curve.

• 24:42David Hoffman?

  He hasn't sold.

• 24:43Ryan Sean Adams?

  Yeah, hasn't sold, but I guess maybe bullish.

• 24:46David Hoffman?

  For, maybe a four seller.

• 24:47Ryan Sean Adams?

  But he has been doing something with all of those Curve tokens. And the thing that he has been doing with, again, almost 50% of the supply of this not very liquid token, right? That's a lot of it.

• 25:00David Hoffman?

  Yeah.

• 25:01Ryan Sean Adams?

  He's been lending that out, or sorry, excuse me. He's been borrowing against that with lending and borrowing protocols. And here's a list of them here. In AVE, there's about 34% of that. I'm not sure how much amount of Curve.

• 25:17David Hoffman?

  It's about, so the round numbers, think of about Curve as about 50 cents a token right now. So 100, 150 million dollars in AVE V2, about 25 million dollars in Abracadabra, 20 million dollars in inverse finance, 12 and a half million dollars in inverse finance, excuse me, 20 million dollars in Fraxland. And then, you know, 1.6 million dollars in Stakedout and 1.2 million dollars in Silo. Like everywhere that Curve is accepted as collateral, this guy has a margin account.

• 25:50Ryan Sean Adams?

  Michael, Michael.

• 25:52David Hoffman?

  Michael, what are you doing, bro?

• 25:54Ryan Sean Adams?

  Well, let's, so let's talk about that.

• 25:56David Hoffman?

  Forty-eight percent of the circulating supply is not just in the hands of Michael, the founder of Curve. It is also deposited as collateral in lending protocols everywhere. This guy is levered to the tits, dude.

• 26:13Ryan Sean Adams?

  Well, we don't know. Well, actually, I think we know pretty conclusively because, okay, let's recap what a collateralized loan actually is. I don't know, David, if you've ever been degen enough to actually take out a collateralized loan with a heavily volatile asset.

• 26:28David Hoffman?

  I'm familiar with this.

• 26:29Ryan Sean Adams?

  Oh, you are? So you've been in the situation where you're looking at your liquidation number for the price of something. Let's call it Ether, right? And you have a lot of your Ether locked in collateral, right? So that's what the lending protocol essentially does is you can deposit some asset, in this case it's Curve, but you could deposit Ether. And then what do you get in return? You get, you know, some stable coins, let's say. So maybe it's DAI or maybe it's, you know, something else in the AVE protocol. And what do you do with those stable coins, right? Oh, you just put that somewhere else and in treasury bills, right?

• 27:05David Hoffman?

  Anything else, yeah. It's free money, right?

• 27:07Ryan Sean Adams?

  It's free money. You can buy whatever you want. No, I mean, you don't do the responsible thing generally with these stable coins, which might be like park them in T-bills and you earn an interest. Or I don't even know if that makes sense. It would depend on kind of the amount that you're paying for it. You're probably buying something in real life. You're probably betting on other tokens. Maybe you're so bullish on ETH that you take a loan against your ETH in order to buy more ETH? I don't know if I'm talking to anyone in the bankless audience.

• 27:35David Hoffman?

  I don't know. I don't know a single person who does this behavior. I don't know a single one.

• 27:39Ryan Sean Adams?

  Dude.

• 27:40David Hoffman?

  Couldn't be any of my friends.

• 27:41Ryan Sean Adams?

  David, this almost wrecked me. Like, would you, you know, you have the reputation of being like gas and I'm like more bricks. Okay. Old Ryan, uh-uh. Man, I.

• 27:51David Hoffman?

  Old Ryan was gas?

• 27:52Ryan Sean Adams?

  This felt, this felt very like Bricksy to me, but like I had a number. Oh, do you remember when Ether was above a thousand back in 2019? We're sorry, back in, back in 2017, 2018.

• 28:04David Hoffman?

  Yes.

• 28:04Ryan Sean Adams?

  Right?

• 28:05David Hoffman?

  Yeah, yeah, yeah.

• 28:05Ryan Sean Adams?

  I had a number. I was like, there's no way Ether could drop below 100, right?

• 28:09David Hoffman?

  My Ether just hit $1,400. How could it ever touch $100?

• 28:12Ryan Sean Adams?

  Couldn't do that.

• 28:13David Hoffman?

  Couldn't be done.

• 28:14Ryan Sean Adams?

  So you could take out a responsible loan in a, like lending protocol that was maybe double digits and that was responsible? Let me tell you, uh, the, the, the day.

• 28:24David Hoffman?

  The crypto.

• 28:25Ryan Sean Adams?

  The night Ether went down into the eighties.

• 28:30Ryan Sean Adams?

  Your boy was almost liquidated hard that day. All right? And so like, we got the.

• 28:34David Hoffman?

  Wait, wait, did you do it? Did you have it like a compartmentalized trading account or was it like your main stack?

• 28:40Ryan Sean Adams?

  You know, I'm not going to get into the details here.

• 28:44Ryan Sean Adams?

  On today's episode, but um, yeah.

• 28:47David Hoffman?

  Well, we've got a take that talks about this from Ben Spencer later on in the show.

• 28:50Ryan Sean Adams?

  We'll talk about that later. So, so anyway, so you've got to imagine Michael here, the founder is absolutely like sweating because the value of his curve is going down. He's got a liquidation number right here. And then also the interest rates are going up. That's, that's kind of the context here as we, we talk through the rest of these details.

• 29:07David Hoffman?

  Yeah, no, that's right. And so on, AVE is the big one. So on AVE, Michael has 305 million Curve tokens backing a $63.2 million USDT loan. That's Tether. And so the, in the AVE protocol, there, there are liquidation parameters for any single collateral. Like Ether gives favorable liquidation parameters because there's no, like, there's no smart contract risk. It's very liquid. Curve doesn't have nearly as favorable parameters around the, the liquidation thresholds inside of AVE. And so he gets a 55% loan to value like margin. And so $305 million of Curve backing a $63 million loan.

• 29:51David Hoffman?

  Uh, and so, you know, that's pretty healthy, but you only, you know, you only get 55% of that. Uh, and so that, you know, turns into if a curve price drops about 33%, uh, he would be liquidated. Uh, and then he's also paying 4% APY. And that is before Curve got exploited. Uh, and so once, uh, once all of a sudden people realize that Curve, the token is at risk of going to zero because there is not enough liquidity in the market to absorb a market sell from the exploiter. People realize that lending, um,

• 30:27David Hoffman?

  That lending stable coins to any of the marketplaces that has Curve as collateral is risky because all of these lending protocols might have bad debt. If Curve goes to zero and all of the Curve tokens get liquidated, but that's not enough to cover the hole, then all of a sudden, stablecoin suppliers are left holding the bag if the protocol cannot cover the difference. And so what happened? What does the rational economic actor do in this scenario? Well, they stop taking the risk. They're saying like, hey, they're not, they're not going to take the 4% to 10% APY in the result, in when they might lose 50% in the next day or so. So they start withdrawing.

• 31:08David Hoffman?

  And so what happens when a DeFi lending protocol has stablecoins withdrawn from it? The utilization ratio goes up as in more and more of a percentage of these stablecoins that are lent to these protocols are actually already being borrowed. And so this is just a natural way for these, you know, AVE money market type systems to naturally balance themselves. When there's not many stablecoins, there's insufficient supply of stablecoins lent to the protocol and more people are borrowing them than supplying them. It just drags up the interest rates. And so here's Delphi Digital's tweet. At 100% utilization, which is for Tether, which it currently is at, all Tether, all

• 31:49David Hoffman?

  Tether tokens, all USDT supplied to AVE is being borrowed by Michael and others because all the USDT lenders are like, oh, no, I'm getting out. So at 100% utilization, the interest rate doubles every 12 hours. The current payment that you pay for borrowing Tether from AVE is 81%. And that can increase to a maximum of 10,000% APY after just 3.5 days. So basically, you're like, Michael's got a date with Destiny. He's going to get liquidated at this current rate because the, the interest rates are just accruing up to his point of limitation too fast.

• 32:27Ryan Sean Adams?

  Unless, unless there's a hope, David, unless he can continue paying kind of interest and stay ahead of it, right? Keep just staying ahead of it as the interest rates.

• 32:35David Hoffman?

  He needs to pay down his, he needs to sell Curve and for Tether and pay back his loans. That's what he needs to do.

• 32:43Ryan Sean Adams?

  That's hard when the price is dropping, right?

• 32:45David Hoffman?

  Yes, especially when the price is dropping. Yes. So, but this is what he did actually. So he was able to sell.

• 32:53David Hoffman?

  Some of his loans. This tweet doesn't have it specifically. We'll get, there's another tweet that we have later in this agenda, but he had OTCs a bunch of Curve and he pays, he gets about $16 million. Yes, here we go.

• 33:06Ryan Sean Adams?

  This is the tweet.

• 33:07David Hoffman?

  So Sandra is an account that apparently covers OTC trades. And so here are some Curve movements from Michael to other people. That's 17.5 million Curve to an unknown address. 5 million Curve sold to Justin Sun. So Justin Sun coming into bid. 4.25 million Curve to DCF God. 2.5 million Curve sold. 2.5 million Curve sold. So buyers are stepping in and buying Curve. We do not know the price that they were sold for. Ignis DeFi Research, who I think does a pretty good job, hypothesized about 4 cents a token. And with the current Curve price of about, I think, 55 cents, if you want to pull up CoinGecko for Curve, that's a pretty hefty discount, 58 cents. So you can go to Curve or Uniswap, wherever CRV is sold, right now on the market and buy a Curve token for 58 cents.

• 33:58Ryan Sean Adams?

  Not financial advice.

• 33:59David Hoffman?

  Not financial advice. I'm saying this is just what the market is offering. This is what the market is offering you. There's speculation that the OTC trades for a very large amount of Curve tokens, he was getting about 40 cents per token. And that's just because, you know, if he had sold these tokens on the open market, he would have gotten probably a worse rate than that.

• 34:16Ryan Sean Adams?

  So again, you're Michael. You don't want to get liquidated, right? At a very low price. So what are you trying to do? You're just trying to stay a step ahead and you're trying to like ideally pay down those loans in order for your money. So what are you doing? You're getting funds from other sources off-chain, basically. So Justin Sun coming in with like a $3 million check and buying some Curve tokens. OTC, that just means over the counter. It's just like private Telegram group or something where, yeah, Michael's like, hey, Justin, you want to buy some Curve? And he's like, what will you give me? And then Justin's like, I'll give you, or you know, Michael's like, I'll give you this rate. And you know, Justin, I'm sure has some provisions. That's what's happening in order for Michael to kind of raise these funds.

• 34:54David Hoffman?

  Yep, that's exactly right. And so raising about $16 million. And so remember, remember, he's gotten, he's got an outstanding debt of $110 million pledged against $290 million of Curve tokens. That's before Curve went down in price. So he owes $110 million and he just raised $16 million.

• 35:17David Hoffman?

  It's not, that's not a lot. It's not a lot.

• 35:21Ryan Sean Adams?

  Man, gotta be sweating.

• 35:22David Hoffman?

  He needs a little bit more margin than that. Ironically, okay, so this is advanced Spencer take that I was talking about earlier. Defending your liquidation price on chain is a religious experience. Call God. Call God.

• 35:37Ryan Sean Adams?

  That hits, man.

• 35:38David Hoffman?

  Yes, that hits. I have been there. I have done that before.

• 35:41Ryan Sean Adams?

  So painful.

• 35:42David Hoffman?

  So this is Michael. Ironically, I don't mean to kick a guy when he's down, but this is just too good. July 22nd, how many days ago was that? 10 days ago. Still haven't, still shocked that I haven't yet been affected by DeFi hacks.

• 35:55Ryan Sean Adams?

  Ooh, shit.

• 35:57David Hoffman?

  Oof, that's so unfortunate.

• 35:59Ryan Sean Adams?

  Man, uh, yeah, I mean, but I guess there's an element of, you know, it is, it is kind of shocking, but now it's happening. Wow. You can never count your chickens here.

• 36:09David Hoffman?

  Yeah. Uh, okay. So this individual lives in Australia. And there's a, there's a few Australian DeFi protocol founders who are also, I don't know if they directly are, but they imply that it's kind of funny. It's a funny meme on crypto Twitter that they just have these like mansion comparison fight, like mansion offs, if you will. Michael, yes, Michael has not one, but two mega mansions in Melbourne, Australia. Not too far away from our good friend Anthony Cisano. Anthony Cisano does not have a mansion.

• 36:42David Hoffman?

  I know that I know of, not the one I've been invited to. He bought, this is actually, this picture, these two pictures that we're seeing at, this is actually the same mansion from different angles. I don't know where the other one is. This one he bought for $40 million. This is for the bankless listeners who are not watching YouTube. An insane house, an insane property. We're looking three, it's kind of nice. Yeah, we're looking at three stories. It's gotta be like, it could be like a 10 bedroom kind of thing. There's a pool. There's like a garden. It's, it's, that is a mansion and a half.

• 37:15Ryan Sean Adams?

  Let me just say, we don't know the particular circumstances for Michael. He could have been like, made his investment money elsewhere. He could have like, um, bought Bitcoin, you know, back in 2010, the proceeds. But one has to wonder if some of the stable coins that he withdrew borrowed, borrowed against his curve, went to fund in real life things.

• 37:36David Hoffman?

  Well, Ryan, he bought this house two months ago. And he currently borrowed $110 million to buy a $40 million mansion. I don't know if it was directly, I put up money inside of AVE, I withdraw stable coins, send it to my bank account and buy a house with that money. I don't know if it's that clear. But when you buy a $40 million house with $150 million of stable coins borrowed, that factors into your decision making at some point in time.

• 38:03Ryan Sean Adams?

  I think so as well. At least I can say that factored into my decision making. And again, like not knowing, you know, Michael's particular situation, it's impossible to, to, to fully weigh in on it. But why, why would someone do this? Right? Like, one reason to do this is you don't have to sell your curve tokens. There might not be liquidity. If he owns 50% of the curve market, right? And he were to just like sell even 5% of that, it's going to tank price for a while. Right? So why sell your curve token if you're bullish on the project? You're, you're kind of the founder when you can lend it essentially in a protocol and you have a liquidation price. You know, kind of the, you know, the minimum amount you'll make from it. That's one reason you, you might want to do that rather than just kind of market sell

• 38:48Ryan Sean Adams?

  in order to buy your in real life stuff or like, you know, get, get some money out of the system. The other reason you might do it is to avoid capital gains taxes is what wealthy people like have been doing for all the time. Rather than sell your actual asset, you just get a loan against that asset, borrow against that asset. You don't have the capital gains tax event and then you can go do whatever you want with the proceeds. That might be another reason. Impossible to speculate, but one thing I will say at this point in time is the lesson is, you guys ready for it? Don't use leverage. All right. Like this is a very bad position to be in. I don't, you know, like it, it seems very clear that Michael does not have the liquid cash in order to pay down his loans or else he would. I'm sure he's sweating.

• 39:33Ryan Sean Adams?

  This could happen to you, bankless listener, if you kind of play these games with volatile assets. So that is one lesson. Certainly we can take away from this, but there are definitely other lessons.

• 39:44David Hoffman?

  On the whole leverage piece, like leverage is a tool. It requires like, you really need to be thoughtful and intentful when you use it and why you're using it. The mistake like to not like leverage is a tool. So like, can you use leverage? Of course you can. When you use leverage with your entire stack, you don't give yourself any margin for error. Because you have no more bullets left. And so when you use all your money and then you leverage all your money, you got nothing, you have, you have no tolerance. And so the thing that Michael did not account for when he was making his economic decisions, like granted, like he didn't,

• 40:25David Hoffman?

  he didn't account for curve getting exploited. He didn't account for a reentry hack and Viper. And that's why we're here today. But, I mean, he didn't have any margin for error for any sort of event like this whatsoever, because he leveraged up his entire

• 40:38Ryan Sean Adams?

  I mean, I will say some have made the point that this could have been intentional and that there's like a, there's like a perverse incentive going on here too. Because what you can do in a way is, is if you are a, you have a large, you know, amount of some particular token, you get a loan against it, you sort of set your sell price as kind of a liquidation price, basically. And you know, if you kind of go under, there's an element to, you can socialize your losses to that, that protocol. So like, some have pointed out that this is actually a incentive mismatch at play, where like, hey, you know, should, should someone be able to, to kind of do this in this type of

• 41:21Ryan Sean Adams?

  scenario? There's like a founder could just, rather than sell their tokens, take out a loan against it. And then who's the bag holder at the end of the day? Well, we'll get to that later, but maybe some of these protocols, maybe Ave gets a haircut. And so it's Ave token holders, or, you know, rather than Michael in this case. I see a little bit of that, but I'm at the, at the same time, that is what the protocol is supposed to do. That's what, if you're lending and borrowing protocol, you're supposed to manage risk appropriate in these types of scenarios.

• 41:48David Hoffman?

  So, okay, so moving on in the story, one of the things that's going on right now is that all of these lending protocols are realizing that they are in a precarious position for exactly what you said, right? If curve gets market sold, then all of these lending protocols has, have bad debt. And so what the, what are these lending protocols doing? Well, fracs Ave, they're all naturally increasing the interest rates at which they are charging Michael. And so, interest rates are going up. And another Interesting thing about this story, Ryan, is that Ave not too long ago had a governance proposal submitted from Gauntlet. And Gauntlet does exactly this kind of thing. It does economic modeling on-chain.

• 42:28David Hoffman?

  So it tells you about like potential black swan risk events due to the parameters of liquidity for particular assets. Just in June 18th of this year, not too long ago, Gauntlet said, hey, Ave needs to freeze CRV. And it jack up the risk parameters around CRV because the on-chain liquidity does not bode well for any sort of, it's a precarious position. And Gauntlet has identified this a month ago. It's too risky. Exactly. Yeah. And this was actually struck down 100% to zero by Ave Governance.

• 43:07David Hoffman?

  And so Gauntlet said, hey, like just, you know, not even 12 days ago, 12, 20, 14 days ago, two weeks ago, Gauntlet was like, hey, like the, this curve, these curve parameters are all wack. They need to be fixed. We need to shut down this market. And Ave was like, Ave Governance was like, nah.

• 43:22Ryan Sean Adams?

  And it was because there's a single, they say this, the motivation, looking at the risk profile of this address, I assume this is Michael's address. This one account has borrowed roughly $63 million.

• 43:33David Hoffman?

  Oh, yeah, that's.

• 43:33Ryan Sean Adams?

  190 million of CRV. We recommend, yeah, to one, freeze CRV collateral. And they basically, oh, they're recommending to freeze CRV collateral and set the curve LTV to zero is what they recommended back then.

• 43:49David Hoffman?

  That's interesting. Okay. So the, actually, so I'm just learning this right now. In this post, Gauntlet says, as of June 13th, this account, Michael, has borrowed 63 tether, a million dollars of tether against 190. So I didn't realize how recent this was. But again, of course, recently, just a few months ago, he bought the house. And so, and then the viper exploit happens? Wow. Wow.

• 44:15Ryan Sean Adams?

  Well, this is what the, um, this is why it's kind of hard to govern lending and borrowing protocols, isn't it? This is kind of the squishy role where you have to like assess the risk of a particular asset before you let it into the lending and borrowing protocol and set kind of your threshold for how much can be borrowed against it and how much you're willing to lend, right? And that's what's happening on these, these governance forms, because if you get it wrong, what's the cost? Well, your protocol, your token has to essentially absorb that somehow.

• 44:42David Hoffman?

  Right.

• 44:43Ryan Sean Adams?

  Um, you know, if you have kind of a, you know, insurance type of side pocket. So you're the one, uh, getting a haircut from that. So it's interesting that this was, um, updated so close to, uh, to the event. Um, I'm sure people would wish they could like change their vote, um, but can't happen.

• 45:02David Hoffman?

  A little bit late now. All right. So there's a few more topics that we have coming up in the rest of the show. We have this protocol game of chicken that we need to talk about. Ryan and I are going to unpack what's really at risk here, like what happens, like in theory, what would happen if there is a cascading liquidation event? What happens if Michael does get liquidated? Uh, what happens to that? Is there a systemic risk in DeFi? And then we got some takes in what we are going to be able to pull out as learning lessons from this event. So all of that is coming up right after we talk to some of these fantastic sponsors that make this show possible, especially MetaMask and MetaMask's brand new feature, MetaMask Portfolio, which can give you the lay of the land for all of your collateralized positions that maybe you should keep a better eye on as we go into this bull market. Let's go here from MetaMask right now. Are you a MetaMask user? Well, you're listening to Bankless, so of course you are.

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• 48:46David Hoffman?

  Three Ours Capital all got effed because Three Ours Capital was the contagion. And so I actually see a similar pattern. That's one of the big learning lessons between that and this is Michael put Curve in every single place in DeFi that would allow him to collateralize Curve. And so now, all this, this is how the contagion happened. One single actor actually spread out all of the contagion and because of the weakness in the Curve, all of a sudden, this is how contagion works. Ave, for example, where the biggest loan position is, actually does have an insurance fund. And so they have the safety module, which grows and grows and grows from fees collected by the Ave DAO. So there's $327 million in the Ave safety module, which is

• 49:31David Hoffman?

  actually more than enough to pay for any sort of hole that Michael may leave in Ave. There's one problem here, which is that that safety module, $327 million, is actually denominated in Ave. So there's a little bit of reflexivity there. And so if Ave, I think Ave, if the worst case scenario, they would have to cover like $80 million or $60 million of Curve in Ave. And so like if they, they were gonna have to sell Ave into the market and to cover that loss, which means that the actual size of that safety module is also precarious because it's denominated in its own token. But that's one of these, another one.

• 50:09Ryan Sean Adams?

  That's the token holder haircut they were talking about.

• 50:11David Hoffman?

  That's the token holder haircut, yeah.

• 50:12Ryan Sean Adams?

  That, that sale is gonna affect the price of Ave if it happens.

• 50:15David Hoffman?

  Yeah, same exact mechanism as when MKR has to get sold to cover for die, bad die debt, which actually only happened once, which was Black Thursday, right during COVID. When you were getting like.

• 50:25Ryan Sean Adams?

  I remember that. How much was that? That was just a few million. It wasn't that much.

• 50:30David Hoffman?

  It was, yeah, 12 million. I think it was, but 12 million back then was actually a decent number of amount of money because we were all super broke.

• 50:38David Hoffman?

  All of crypto is broke. But yeah, that's a kind of the precarious nature of like using your protocols own token as the defense, as the line of defense.

• 50:47Ryan Sean Adams?

  I think that's very precarious. Like that's systemically. Yeah, that's a great point here. But at least they have a

• 50:53David Hoffman?

  At least they've got it. Yes. I alluded to this earlier, but I'll double down on it now. Because Michael had a curve all over lending protocols. Different lending protocols are all realizing that they need to get paid back first, or else they might not get paid back at all. And so Michael rushed to repay the loan on Fraxland first, because that's where the borrowing rates were highest. And so now naturally, all the other protocols with curve collateral also want to increase the borrowing rates because they're like, I mean, this is, this is happens in

• 51:28Ryan Sean Adams?

  They don't want to be

• 51:29David Hoffman?

  They don't want to

• 51:29Ryan Sean Adams?

  They're holding the bag.

• 51:30David Hoffman?

  They're holding the bag. Yeah. So they're like, hey, we need to jack up the rates. So Michael pays us back first. And so there's this like protocol game of chicken going around because no protocol wants to be holding the back. And so who are these protocols? We talked about them earlier, but Magic Internet Money, Mim, Inverse Finance, Silo Dow and Ave are all these different protocols that are all figuring out how to deal with this problem. Silo Dow has, for some reason, is chill, says Ignis from DeFi Research. DeFi Research is just what he does. Because the risk is isolated, that's a must be a specific design for a money market. But each one of these protocol DAOs are like figuring out like, hey, we, we don't want to hold the bag. Let's jack up the interest rates.

• 52:09Ryan Sean Adams?

  Well, that's a real like Moloch trap, prisoner's dilemma, because like, we would all be better off.

• 52:15David Hoffman?

  Like if everyone just put the interest rates to zero.

• 52:17Ryan Sean Adams?

  Like honestly, at this point, like we're rooting for Michael, like all of DeFi wants him not to get liquidated, or it causes bad things at this point in time. So rooting for his positions anyway. And, you know, but what happens is when you have this kind of prisoner's dilemma, this scheme of chicken, then you're incented to kind of defect first.

• 52:34David Hoffman?

  Yep.

• 52:34Ryan Sean Adams?

  And the, you know, the faster they defect and the more they raise interest rates, the more likely it is that Michael gets liquidated. And so that's, it's kind of a bad race condition that's happening right now.

• 52:46David Hoffman?

  Yeah. So that's what's currently going on with the AMMs. What else is there to talk about? It's systemic risk to DeFi. Is there systemic risk to DeFi? I don't think so. I don't think these holes are that big where like I have, I currently have an AVE position. It's not curve denominated and I'm not lending stables into AVE. I'm not necessarily too worried. I don't really think, I don't feel like I'm at risk. I do hold AVE tokens, but I mean, I've hold them down to lower numbers than what they might go to. So I'm not particularly worried about that either. I don't think there's that much contagion. I'm, but, but there's a big fog of war here.

• 53:30Ryan Sean Adams?

  I agree. I mean, the thing affected right now, the contagion seems to be primarily focused on the CRV token itself. And then everything affected. And so there's a question of like, well, you know, the contagion is kind of spread to these lending and borrowing protocols essentially. And it's not going to be existential probably for any of them, but it, but it is a haircut. But it's like some pain and you know, the question is, well, will they look at these governance protocol, like these governance proposals a bit more carefully when they're from Gauntlet or something? And there's like one single, you know, holder with a very large portion of the, of the, of the lent amount. I think the answer is yes. And that, that is how we all level up together.

• 54:09Ryan Sean Adams?

  But I don't, I agree with you, David. I don't think that at this point in time, this spreads systemically across all of DeFi. So that is good because the reality is this could have been a lot worse, right? Zero day Viper EVM bug, right? Again, you said at the very beginning that those are, those are words you do not want to hear. And so we are like, we are hashtag blessed that this wasn't like far worse event at this point in time.

• 54:38David Hoffman?

  Well, not knock on wood because it's not over. I just sent you a tweet in the Zoom chat. If you want to pull that up from Delphi Digital. So this is the current, as of about 24 hours ago, yeah, 24 hours ago, this is the current positions that. Michael has so Ave Frax and Abercadastra a $54 million owed, $8 million owed, $14 million owed, with all the different collaterals and different liquidation prices. He's currently paying, he might have already paid off the Frax. He's currently paying 124% APY on $8 million borrowed from Frax. He's currently paying 50% APY on $54 million borrowed from Ave. And then 18% on $14 million borrowed from Abercadastra.

• 55:22David Hoffman?

  Liquidation price, the highest one is at Ave, which is also the biggest position at 37 cents. So that is the line that curve must stay above in order to prevent any sort of cascading liquidation.

• 55:35Ryan Sean Adams?

  Unless Michael can somehow raise more.

• 55:38David Hoffman?

  To raise more capital.

• 55:40Ryan Sean Adams?

  Off Jane and pay down those loans.

• 55:42David Hoffman?

  But 37 cents is the number to stay above. What's, what's the current price of curve? You want to open up that coin, Gekko? Current price of curve, 58 cents. So he has room. He's paying a lot. He's paying a lot.

• 55:57Ryan Sean Adams?

  Yes.

• 55:58David Hoffman?

  Chart doesn't look great, but 58 cents to 38 cents, that's, there's room.

• 56:03Ryan Sean Adams?

  There's a chance for sure.

• 56:04David Hoffman?

  He can make it.

• 56:05Ryan Sean Adams?

  This is like a, if he makes it.

• 56:07David Hoffman?

  He can make it.

• 56:08Ryan Sean Adams?

  Wow. But like, this is like watching a slow motion train wreck. That, that actually might not happen. You're like, it's just like, it looks like it's about to happen, but it might not.

• 56:19David Hoffman?

  Happen, it might not.

• 56:19Ryan Sean Adams?

  Might be able to bail this out. Rune Christensen had to take here. Curve getting exploited, risk of bad debt and liquidations in the ecosystem. This might seem like it's an over moment, but perhaps it's just cycles. This cycle's Black Thursday, as the one you were referring to.

• 56:34David Hoffman?

  Rune would know a thing or two.

• 56:37Ryan Sean Adams?

  He calls this maybe the last crash before the bull market with everything coming back 100x stronger. Yeah, well, there's an element to that, maybe.

• 56:46David Hoffman?

  I think that's right. I think that could be.

• 56:48Ryan Sean Adams?

  I like to pattern match history.

• 56:49David Hoffman?

  I love, I love that.

• 56:50Ryan Sean Adams?

  I like bull markets.

• 56:52David Hoffman?

  Yeah, and this is, this guy would know a thing or two about, because Rune, he's the founder of Maker Dow. He was definitely paying attention when Maker Dow had its Black Thursday. Now we're having Black Sunday, Monday.

• 57:02Ryan Sean Adams?

  Well, so let's talk about this. Let's end the episode here, David, with what do you think we learned from all of this? What's your take on the lessons here?

• 57:11David Hoffman?

  The biggest thing that's rattling around in my brain is, man, Curve had a lot of Lindy. That protocol was deemed safe.

• 57:20Ryan Sean Adams?

  What do you mean Lindy?

• 57:21David Hoffman?

  Lindy. Lindy is, how would you explain Lindy very simply? Always you like to use the example. What do you think is going to be around? What would you make a bet on in being around a larger, longer amount of time? The pyramids of Egypt or the White House?

• 57:37Ryan Sean Adams?

  It's clearly Egypt, right?

• 57:39David Hoffman?

  Yeah, because the White House is like a couple, it's like 100 years old. In fact, the first White House burned down and so it's Lindy got reset very quickly. Fun fact is, we're on the second White House already. Pyramids of Egypt have been around for thousands of years. So like, what are you going to bet on to be around for another thousands of years? The thing that's already been around for a thousand years. Curve had a lot of Lindy. It had a lot of TVL for a very long amount of time, and then it got hacked. I think this might set the record as like the longest Lindy resetting event in DeFi's history. I think that's probably correct. And that hurts.

• 58:13Ryan Sean Adams?

  But you know what's also interesting here is like, it also wasn't Curve's fault at all.

• 58:17David Hoffman?

  Yeah, it wasn't.

• 58:18Ryan Sean Adams?

  I think there's, I think there's a lesson here, and that lesson is almost like scary. So this wasn't like a smart contract risk where Michael and the Curve team, the developers over there could have been more careful, wish they had audited more, that sort of thing.

• 58:31David Hoffman?

  Right.

• 58:31Ryan Sean Adams?

  This was deeper in the stack.

• 58:33David Hoffman?

  Yeah, that's as deep as it goes.

• 58:34Ryan Sean Adams?

  This is a problem at the kind of EVM compiler level with a Viper, specifically a couple of versions of Viper, right? It was like introduced at one point in time and then, and then it kind of like, you know, it's no longer the case in the newest versions of Viper. It was like accidentally introduced. That in itself is kind of scary. So we might say that Solidity has a stronger Lindy than Viper because it's an older language and it also has more assets that are dependent on. It's more vetted, right? And so I think there's a lesson here of, well, again, what do we always say at the end of every Bankless podcast? Crypto is risky, you could lose. Which you put in like the lesson is you never know.

• 59:15Ryan Sean Adams?

  But then there's also a question of what other zero day bugs lurk in the codebase out here. And I do think that, you know, solidity EVM is becoming a bit more like Egypt, you know, pyramids. And I wonder and worry about some of the newer languages and other ecosystems. At some point in time, something like Solana is going to have its Viper.

• 59:36David Hoffman?

  Its compiler moment. Yeah.

• 59:38Ryan Sean Adams?

  Yeah. And Viper, Viper itself, which is interesting. What's the future of Viper? Who's going to use it moving forward?

• 59:44David Hoffman?

  Yeah.

• 59:45Ryan Sean Adams?

  So there's, there's that kind of learning here. The last thing I'll say is, um, is this an example, do you think of like, okay, so Viper is a public good, right?

• 59:57Ryan Sean Adams?

  I, I guess I feel like all of the, all, many of the actors who have some responsibility for this, you know, are kind of like feeling, feeling the brunt of this. So in that way, DeFi is kind of performing as expected. It's not like socializing the losses to, you know, the public, right? So if you, if you're in Ave and you chose to lend more money to Curve, kind of knowing the risks here. Well, you get a haircut. That's as it should be, right? If you are Michael and you're like lending all of the CRV inside of a protocol and taking excessive leverage. Well, you, you get hit too. And so you're kind of, you know, I, I guess punished for this. And of course Curve is, uh, as with all DeFi protocols, appropriately risky.

• 1:00:37Ryan Sean Adams?

  So from my perspective, it kind of, DeFi is performing, uh, as expected, except that there's this one thing, this public good that we call Viper, EVM language. How well funded is that?

• 1:00:50David Hoffman?

  Right.

• 1:00:50Ryan Sean Adams?

  Right? It's like the public infrastructure that we're really not paying attention to. And so I, there's probably other places like this inside of crypto that are woefully underfunded, but should be funded far better and should be audited and should be vetted far better. Because like that's Atlas's shoulders that the entire thing is, is, is kind of hanging on. So that's another takeaway to me.

• 1:01:13David Hoffman?

  Yeah. And this is something that you can audit, you can vet, you can audit again, you can audit again. You'll never know.

• 1:01:23David Hoffman?

  You'll never actually know.

• 1:01:26David Hoffman?

  You're muted.

• 1:01:28Ryan Sean Adams?

  Is there anything comforting here as we enter?

• 1:01:32Ryan Sean Adams?

  Silver lining is it couldn't have been worse?

• 1:01:36Ryan Sean Adams?

  I mean, we made it, right? That's good.

• 1:01:39David Hoffman?

  We made it, did we?

• 1:01:41Ryan Sean Adams?

  We did. We made it. I mean, imagine if this had been a solidity, like EVM issue.

• 1:01:46David Hoffman?

  Yeah, right. Yeah, what doesn't kill DeFi does make it stronger.

• 1:01:51Ryan Sean Adams?

  Yeah.

• 1:01:51David Hoffman?

  I guess that's a takeaway.

• 1:01:52Ryan Sean Adams?

  Yeah, and, and all of the protocols performed as expected according to the rules. We didn't socialize losses. There were no bailouts. I don't know. Maybe there's a silver lining there, David.

• 1:02:03David Hoffman?

  I think I'm gonna take a few moments to try and think of some more silver linings, but we'll do it on the weekly rollup tomorrow.

• 1:02:10Ryan Sean Adams?

  Guys, that's it. We gotta end with this. I think quite appropriately, risks and disclaimers. Crypto is risky, so is DeFi. You could lose what you put in, but we are headed west. This is definitely the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.