Autor Cointelegraph By Elaine Hu

Are expiring copyrights the next goldmine for NFTs?

Although non-fungible tokens (NFTs) are most commonly known in the form of digital art, they exist in many other forms and represent much more than just art. In the creative industry, NFTs have been used by musicians such as Kings of Leon to release their latest album. In the sports industry, NFTs are created to record the highlights of major sporting events such as the NBA. In the consumer product industry, Nike, Gucci and many others are selling their digital branded products in the form of NFTs. A lot more real-world applications of NFTs are still to be explored and one of them is the digital publishing industry. The game-changing implications of publishing and promoting books with NFTs have already been discussed extensively by many. For example, the Alliance of Independent Authors are helping indie authors to promote their latest books using NFTs. Other associated items for the fans club such as character cards are also made into NFTs. Tezos Farmation, a project built on Tezos network, even uses the complete text of George Orwell’s Animal Farm book and slices it up into 10,000 pieces to use as titles for the NFTs. NFTs created from existing books are normally bound to copyrights. However, in the case of Tezos Farmation, the copyright had already expired. The text from the book can be used by any party for free. This triggers a very interesting question – how can NFTs preserve copyrights and royalties for books with expired copyrights? The NFT application in the publishing industry is so far mostly focused on books that still have royalties and within their copyrights lifespan. But there are authors whose work lives on long past both their mortal existence and that of their copyrights; can NFTs provide their estates a means to extend the life of the book and its royalties?The journey from copyright to public domainCopyright laws are complex and vary widely throughout the world. Although few countries offer no copyright protection in line with international conventions, most jurisdictions work on the premise that copyright is protected for the author’s life plus a minimum of 25 years after their death. In the European Union, copyright is protected for 70 years after the death of the latest living author. It is the same in the U.S, with the exception that books originally published between 1927 and 1978 are protected for 95 years after the first publication. No matter how long the copyrights are protected for, given enough time, anything will end up free in the public domain.When celebrated literature enters the public domain the future value of the work is essentially reduced to zero. However, there often remains a disconnected community who intrinsically value the work. Estates holding copyrights that are about to fall into the public domain have a unique opportunity to create a tangible asset in the form of NFTs from the intangible goodwill embedded in the disconnected community.A good example would be Winnie-the-Pooh, a fictional anthropomorphic teddy bear created by English author A. A. Milne and English illustrator E. H. Shepard is loved by fans all over the world. The first collection of stories about the character was created in 1926. After almost 96 years, the copyrights had expired and the book moved into the public domain on Jan 1, 2022. The estate holding the copyright will receive no future value from Winnie-the-Pooh even though the commercial value of such a world-wide famous cartoon character will remain high for a long time.Just prior to the copyright expiring, the controlling estate has the window of opportunity where no one else is legally entitled to do anything with the works. If the estate had spent time connecting fans with an interest in NFTs, building or collaborating with a project that resonates with them, and launching the NFT collection prior to the completion of the copyright period, the outcome would have been very different. There could have been a much longer copyright lifespan for Winne-the-Pooh.Related: Experts explain how music NFTs will enhance the connection between creators and fansExtending the value of an expiring copyright Currently, publishing houses have no incentives to collaborate with the estate of copyright holders that are about to enter the public domain because the work will soon be free. A certificate of authenticity represented by a tradable NFT might provide an incentive for such collaborations. After the copyright expires and the work goes into the public domain, the NFTs will carry the royalty further into the digital world. Royalties can be generated through sales in the NFT marketplace on the blockchain, or through even more complex smart contracts created for specific use cases for first edition, limited edition or signed vintage copies. The estates holding expiring copyrights have credibility, which is a precious asset in the NFT world, and they have nothing to lose. They are in the box seat to capitalize on their current ownership, and potential for a digital community. Beloved characters and the worlds they inhabit can be a solid foundation for not only NFTs that can extend copyrights, but also extended creativity across mediums like literature, gaming, Metaverse, charity, education and many more to come.The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.

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Was Terra’s UST cataclysm the canary in the algorithmic stablecoin coal mine?

The past week has not been an easy one. After the collapse of the third-largest stablecoin (UST) and what used to be the second largest blockchain after Ethereum (Terra), the de-peg contagion seems be spreading wider. While UST has completely de-pegged from dollar, trading at sub $0.1 at the time of writing, other stablecoins also experienced a short period where they also lost their dollar peg due to the market-wide panic. Tether’s USDT stablecoin saw a brief devaluation from $1 to $0.95 at the lowest point in May. 12. USDT/USD last week from May. 8–14th. Source: CoinMarketCapFRAX and FEI had a similar drop to $0.97 in May. 12; while Abracadabra Money’s MIM and Liquity’s LUSD dropped to $0.98.FRAX, MIM, FEI and LUSD price from May. 9 – 15th. Source: CoinMarketCapAlthough it is common for stablecoins to fluctuate in a very narrow range around the $1 peg, these recent trading levels are only seen during extremely stressed market conditions. The question that now sits in the mind of investors is will the fear spread even wider and will another stablecoin de-peg?Let’s take a look at the mechanism of some of the major stablecoins and how they are currently traded in the Curve Finance liquidity pool.The main purpose of stablecoins is to preserve a stable value and provide investors an avenue to park their money when volatility from other crypto assets are much higher. There are two distinct mechanisms in stablecoins — asset-backed and algorithm-based. Asset-backed stablecoins are the most common version and issuers purport to back stablecoins with fiat currency or other cryptocurrencies. Algorithm-based stablecoins on the contrary seek to use algorithms to increase or decrease the supply of stablecoins based on market demand.Asset-backed stablecoins were in favor during downturn, except for USDTUSDC, DAI and USDT are the most traded asset-backed stablecoins. Although they are all over-collateralised by fiat reserves and crypto currencies, USDC and USDT are centralised while DAI is de-centralised. USDC’s collateral reserves are held by U.S. regulated financial institutions, whereas USDT’s reserves are held by Tether Limited, which is controlled by BitFinex. DAI on the contrary does not use a centralised entity but uses the primary market borrowing rate to maintain its dollar peg, which is called the Target Rate Feedback Mechanism (TRFM). DAI is minted when users borrow against their locked collateral and destroyed when loans are repaid. If DAI’s price is below $1, then TRFM increases the borrowing rate to decrease DAI’s supply as less people will want to borrow, aiming to increase the price of DAI back to $1 (vice versa when DAI is above $1).Although DAI’s pegging mechanism seems algorithmic, the over collateralisation of at least 150% makes it a robust asset-backed stablecoin during volatile market conditions. This can be seen by comparing the price movements of USDC, USDT and DAI in the past week, where DAI along with USDC clearly showed a spike on May 12 when investors lost confidence in USDT and rushed to swap out.USDT, USDC and DAI hourly price. Source: CoinGecko APITether’s USDT has long been controversial despite its large market share in the stablecoin space. It was previously fined by the U.S. government for mis-stating the type of cash reserves they have. Tether claims to have cash or cash-equivalent assets to back USDT. However, a large portion of the reserves turn out to be commercial paper — a form of short-term unsecured debt, which is riskier and is not “cash equivalent” as dictated by the U.S. government.The recent Terra debacle and the lack of transparency of their reserves triggered fresh concerns about USDT. The price reacted violently with a brief de-valuation from $1 to $0.95. Although USDT’s price has recovered and re-pegged closely back to $1, the concerns are still there. This is shown clearly in the largest liquidity pool on Curve Finance. The DAI/USDC/USDT 3pool in Curve shows a proportion of 13%-13%-74% for each of them respectively.Curve DAI/USDC/USDT 3Pool proportion. Source: @elenahoo Dune AnalyticsUnder normal circumstances, all the assets in a stablecoin liquidity pool should hold equal (or very close to equal) weight because the three stablecoins are all supposed to be valued at around $1. But what the pools have shown in the past week is an unbalanced proportion, with USDT holding a much larger percentage. This indicates the demand for USDT is much smaller than the other two. It could also mean that for USDT to hold the same dollar value as the other two, more units of USDT are needed in the pool, indicating a lower value for USDT compared to DAI and USDC.A similar imbalance is observed in the DAI/USDC/USDT/sUSD 4pool. It is interesting to see that sUSD and USDT both spiked in proportion around May. 12 during the peak of the stablecoin fear. But sUSD has quickly reverted back to the equal portion of 25% and since then even dropped in percentage while USDT remains as the highest proportion in the pool.Curve DAI/USDC/USDT/sUSD 4Pool proportion. Source: @elenahoo Dune AnalyticsThe Curve 3pool has a daily trading volume of $395 million and $1.4 billion total value locked (TVL). The 4pool has a $17 million trading volume and $65 million TVL. Both pools show USDT is still less favourable.Are algorithmic stablecoins finished?An algorithmic stablecoin is a different mechanism from an asset-based stablecoin. It has no reserves therefore it is uncollateralized. The peg is maintained through algorithmically minting and burning the stablecoin and its partner coin based on the circulating supply and demand in the market.Due to its uncollateralized, or less than 100% collateralised nature, an algorithmic stablecoin is much more risky than asset-backed stablecoin. The Terra UST de-peg debacle has surely shaken investors’ confidence in algorithmic stablecoins. This has manifested quite clearly in the Curve liquidity pool. FRAX — an algorithmic stablecoin by Frax Protocol is partially backed by collateral and partially based on the algorithm of supply and demand. Although the coin is partially collateralized, the ratio of collateralised and algorithmic still depends on the market price of the FRAX.In the recent perfect storm of stablecoin panic, the ratio of FRAX versus the other three stablecoins spiked to 63% to 37%. Although the disproportion can already be seen from early March 2022, the collapse of UST definitely exacerbated the fear of a FRAX de-peg.Curve FRAX/3CRV 3Pool proportion. Source: @elenahoo Dune AnalyticsA similar surge in fear triggered by the Terra UST de-peg event is also present in MIM — Abracadabra Money’s algorithmic stablecoin. The Curve MIM/3CRV pool shows the MIM proportion jumped to 90% — a similar level reached in January when the Wonderland scandal came about. Curve MIM/3CRV 3Pool proportion. Source: @elenahoo Dune AnalyticsDespite the algorithm similarity to DAI, MIM doesn’t use ETH directly as collateral but instead uses interest-bearing tokens (ibTKN) from Yearn Finance — ywWETH. The additional layer of complexity makes it more sensitive to catastrophic events such as the UST de-peg event.The goal for all stablecoins is to maintain a stable value. But all of them experience volatility and a lot of them have deviated away from the $1 peg much more than expected. This is probably the reason why it has led some regulators to quip that stablecoins are neither stable nor coins. Nonetheless, stablecoin volatility is much lower than any of the other cryptocurrencies and still provides a safe harbour for crypto investors. It is therefore important to understand the risks embedded in different stablecoins’ peg mechanisms.Many stablecoins have failed in the past, UST is not the first and it will certainly not be the last. Keeping an eye on not only the dollar value of these stablecoins but also how they stand in the liquidity pool will help investors identify potential risks ahead of time in a bearish and volatile market.The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.

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ApeCoin is down 70%+ since the Otherside launch — Can Yuga Labs turn the ship around?

ApeCoin (APE), the new cryptocurrency that was recently launched by Yuga Labs, aims to be the bedrock of the Otherside metaverse and recently, the token has experienced massive volatility leading into and after its digital land sale. APE’s price dropped from $26 at the peak on Apr. 28 to $14 on May. 2 — more than a 45% drop within a few days of the mint. The price has now dropped to the $6 range.Given the current volatility, investors will be wondering if ApeCoin price will ever recover to its previous trading range. Let’s first take a look at the historic price trend, particularly what happened on the Otherdeed mint day; then take a deeper dive into the amount of APE that will be locked and released in the next three years. This will provide a better understanding of the supply and demand dynamics that could affect the price going forward. ApeCoin surged after the Otherdeed announcementIn the first couple of days since APE’s listing on March 17, 2022, the price jumped from roughly $7 to $17 at the peak ; an increase of 143%! The price had since fluctuated between $10 to $15 until rumors began circulating of the Otherside metaverse land sale.APE historic hourly price since launch. Source: CoinGeckoThe chart above shows APE made a sharp move up of almost 24% within a day from $13.16 to $16.30. When the Otherdeed rumours surfaced on Twitter on April 20, APE catapulted to $26 on April 28 after the sale was officially confirmed by OthersideMeta two days prior.MAYC & BAYC average price, volume pre-mint. Source: OpenSeaThe price of Yuga Lab’s Bored Ape Yacht Club (BAYC) and the Mutant Ape Yacht Club (MAYC) nonfungible token (NFT) also followed a similar pattern on April 20. MAYC reached an all-time high at 43 Ether (ETH) on April 26, which was the day the sale was confirmed and BAYC started to bounce back from its 105 ETH low to a new all-time high at 168 ETH on May 1.Chaos ensued as Yuga confused users during the Otherdeed saleOtherdeed was seen as an opportunity for new investors who have been priced out of BAYC, MAYC and BAKC to become part of the Ape community.The bullish conviction toward APE was driven by the fact that it is the only currency in the Otherside metaverse and the land sale in the secondary market would also be traded in APE in addition to ETH. Investors who believed in Yuga Labs and the idea behind the Otherside metaverse rushed to acquire APE in preparation for the mint at the price of 305 APE per plot. The increasing demand for APE as the minting date approached was broadly expected and the increase in price pre-mint was also foreseeable.What came as a shock later  is how chaotic the whole process of minting Otherdeeds was. APE’s price plunged from $24 to $14 on May 2, which reflected a more than 40% decrease in two days! The immediate price drop to $20 on the day of the mint could be explained by the sudden decrease in demand for APE after the mint started. A further 30% drop in the following two days is a clear reflection of investors’ loss of confidence in the project after the mint debacle. BAYC and MAYC price also reflected the same sentiment by falling more than the market value of the airdropped Otherdeed.Despite efforts made by the Otherside team to verify new investors through a Know Your Customer (KYC) process before the mint and to offer the sale at a fixed price, these measures were not enough to prevent a gas war. The information was not clear and sometimes plain wrong prior to the mint and a significant amount of money has been misspent and burnt on gas as a result of the poor communication by Yuga Labs.What follows are some of the major issues encountered by investors on the day of the mint.What happened to the Dutch auction? On April 26, OthersideMeta tweeted that the mint would be a Dutch auction but three days later they changed their mind and said “Dutch auctions are actually bullshit,” a complete pivot and a brutal slap in the face to investors.A Dutch auction would have been an effective way to mitigate gas wars due to its unique design of a very high start price and a decreasing price over time. Investors could have chosen to mint at the price they could afford at different times, avoiding everyone minting at the same time, at the same price, and creating a gas war.Mint will be Dutch auction style, so the ApeCoin price will decline over time. The starting price of the Dutch auction will be announced later this week.— OthersideMeta (@OthersideMeta) April 25, 2022The delayed mint created additional problemsAfter the team delayed the mint date, APE price experienced some of the largest hourly downside re-pricings.The hourly chart below shows APE increased slightly in the first three hours after the originally planned mint time, then dropped from $22 all the way to $18 by the time the actual mint took place at 9 pm EST (1:00 am UTC). It is hard to say if the delay exacerbated the downward pressure, but the price fluctuation in APE significantly increased the risks taken by investors, especially when the mint was not even guaranteed for the KYC’d wallet holders. APE price dropped by 18% from the original mint time to the actual mint time. Source: TradingViewThe guaranteed mint for KYC’d wallets vanishedThis was the biggest issue and misunderstanding in the whole minting process. Based on Otherside’s article, at the start of the sale (wave 1) each KYC’d wallet would only be allowed to mint 2 plots. Once the gas fee came down, the limit would rise to an additional 4 NFTs (wave 2). Since the number of KYC’d wallets are not disclosed to the public and there is only a fixed amount of plots to mint, it is uncertain whether all KYC’d wallets could mint at least one. Assuming a maximum of 6 plots of land per wallet given the total of 55,000 plots, to guarantee each wallet can mint at least one plot, the maximum number of KYC wallets allowed should be 9,166. It turned out there were far more KYC’d wallets than this number and many investors failed to mint anything after paying a very high price to acquire APE and experiencing stratospheric gas fees during the mint.Gas fees skyrocketed during the actual mintWaves 1 and 2 were designed to mitigate the gas war by limiting the number of plots each wallet can mint. The problem was the total number of KYC’d wallets was too large. The number of people rushing to mint at the same time was not reduced and gas fees never came down. While the early minted NFTs were selling in the secondary market for two or three times more than the cost of the mint, the demand for further mints and the ferocious gas war continued until all 55,000 plots were gone. Numerous users paid between 2.6 ETH and 5 ETH for gas fees during the process and many lost their entire fee due to transaction failures across the Ethereum networkRelated: ETH gas price surges as Yuga Labs cashes in $300M selling Otherside NFTsContinuous supply increase adds downside pressure to APE priceAccording to OthersideMeta, all APE earned during the mint will be locked up for one year. This is over 16 million APE (55,000 * 305) taken out of the circulating supply. Will this reduction in supply save the APE price? Unfortunately not. Compared to the amount of APE being unlocked and released into the market every month, 16 million is a drop in the ocean.Looking at the amount of APE that will be unlocked in the next three years on a monthly basis, the majority of the supply comes from the DAO Treasury and Yuga Labs. There are also three large pumps in supply from the contributors in September 2022, March and September 2023.APE coin monthly additional supply amount. Source: ApeCoinOn a cumulative basis, the initial amount of APE unlocked at launch day dominates the proportion of supply until May 2025, when it is overtaken by the DAO Treasury. At the rate of 7.3 million APE being unlocked per month for 48 months until 2026, the DAO treasury’s allocation is the main source of additional APE inflation.APE coin cumulative supply breakdown in % by allocated groups. Source: ApeCoinGiven the estimated circulating supply of APE in April 2022 is around 284 million, the 16 million APE locked up from the Otherdeed land sale is only 5.9%. Such a small amount of one-time supply reduction is unlikely to have a long-lasting effect on the APE price, especially when supply keeps increasing. APE locked-up from Otherdeed vs. cumulative monthly supply. Source: ApeCoin and OthersideTrading volume is the only potential saviour for APE priceIn addition to APE’s circulating supply, the trading volume is also a crucial factor in determining the future price. Using the ratio of trading volume to circulating supply (utilization ratio), one can often find a relationship with price.The chart below uses a simple linear regression to show the correlation between the APE utilization ratio and price. In March 2022 when the circulating supply is relatively small, the higher the utilization ratio, the lower the price. On the contrary, in April 2022 when the circulating supply becomes larger, the higher the utilization ratio the higher the price.APE price vs. utilisation (trading volume / circulating supply). Source: CoinGecko APIIf the positive correlation between the utilization ratio and the price holds true while circulating supply keeps increasing gradually, it seems the only savior for the APE price is an increasing amount of trading volume.However, APE will struggle to attract more trading volume after the chaotic Otherdeed land sale. Yuga Lab’s tweet about turning off lights on Ethereum and building their own chain seems to have exacerbated the investors’ loss of confidence. We’re sorry for turning off the lights on Ethereum for a while. It seems abundantly clear that ApeCoin will need to migrate to its own chain in order to properly scale. We’d like to encourage the DAO to start thinking in this direction.— Yuga Labs (@yugalabs) May 1, 2022

The implications of this tweet are profound. Ethereum has a long, stable track record of security and stability, designed and built by, arguably, the smartest and most established crypto talents in the world. It is more than concerning if Yuga Labs moves away from Ethereum and people have rightly ridiculed this on Twitter.Yuga’s NFT collections derive their extreme valuations largely because they sit on Ethereum and users trust the network to hold their highly valued NFTs. How would any migration away from Ethereum take place? Would users trust a home grown chain from Yuga Labs? No other chain has tokens trading in the price strata as the blue chips that trade on Ethereum.It would be reasonable to assume that APE and Ape-related NFTs could significantly re-price from their meteoric valuations if Yuga Labs was to follow through with the idea of managing their own chain to house their collections. We have seen what happened with Axie Infinity on the Ronin chain. APE could be up for a bumpy road ahead.The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.

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Here’s how OpenSea NFT hacks hurt owners, buyers and even entire collections

The non-fungible token (NFT) market has been booming since the summer of 2021 and as NFT prices were sky-rocketing, the number of hacks targeting NFTs were also increasing. The most recent high-profile hack siphoned approximately 600 Ether worth of NFTs from Arthur0x, the founder of DeFiance Capital, and they were sold off on OpenSea.A 2022 Crypto Crime Report published by Chainalysis highlighted that the value sent to NFT marketplaces by illicit addresses jumped significantly in 2021, topping out at just under $1.4 million. There is also a clear increase in stolen funds sent to NFT marketplaces.Total illicit value flowing to NFT platforms. Source: Chainalysis Crypto Crime Report 2022Given the concerning rapid increase in illicit value flowing into the NFT platforms, it is natural to ask whether security measures and procedures are in place and if so, whether these measures are effective in protecting owners. Let’s take a look at OpenSea, the largest NFT platform, and its security measures.The security measures at OpenSea cannot protect usersOpenSea has two main security measures that kick in once an account has been “hacked” — locking the compromised account and blocking the stolen NFTs. These two measures are very ineffective when looking at them closely.Locking the account can be done on the OpenSea website as shown here without human approval; whereas blocking the NFTs involves a lengthy process of raising a ticket and waiting for the OpenSea help team to respond.In a situation when a hacker has already compromised the wallet and is in the process of transferring the NFTs out, locking the account will only be effective if it’s done quickly enough before the hacker transfers everything out.Similarly, blocking the NFTs is also only effective before the NFTs are sold to another buyer by the hacker. What’s even worse is this security measure creates a series of indirect victims who end up with blocked NFTs that cannot be sold or transferred. This is because the response time for tickets raised in OpenSea is at least 1 day. By the time the NFTs are blocked by OpenSea, they would have already been sold to another buyer who now becomes the new victim of the crime.In the case of the 17 stolen Azuki from Arthur0x, 15 of them were stolen within the same minute and 2 of them were stolen 3 minutes afterwards. The average time these stolen NFTs stayed in the hackers wallet before they were sold is 43 minutes. The security measures from OpenSea are in no way responsive and quick enough to inform the victim and stop the hacker; neither can they inform the buyers promptly enough to stop them from buying the stolen NFTs and becoming the indirect victim.Stolen Azuki NFTs from Aurther0x. Source: Etherscan.ioBlocking stolen NFTs creates indirect victimsAn indirect victim is someone who is not the target of the hack but indirectly suffers from the financial losses caused by the blocking of the stolen NFTs. As seen from many recent NFT hacks, the NFTs are always sold before the block is implemented by OpenSea. The consequence of blocking the NFTs too late is that it creates indirect victims and more losses for more people.To illustrate in more detail how anyone could end up buying a stolen NFT and become an indirect victim of a hack, here are three common cases:Case 1: Alice bought an NFT but only found out later that it is a stolen asset. The NFT is blocked and Alice cannot sell or transfer it on OpenSea. She then proceeds to raise a support ticket. After several weeks, the OpenSea Trust & Safety team offers to refund the 2.5% platform fees; and possibly the email address of the victim who reported the theft if lucky. Then she’ll likely have a lengthy discussion with the victim to negotiate the possibility of lifting the block, which most likely will end up nowhere. Alice can still sell the NFT in other marketplaces but the volume of sales is very low for this particular collection and there is no buyer who can offer a fair price on other platforms other than OpenSea.OpenSea’s response to indirect victim who purchased a stolen NFTCase 2: Alice made multiple offers to bid NFTs from a collection. One of the offers was accepted by the hacker, who then received the payment from the bid in the victim’s wallet and proceeded to clear out the wallet. The NFT was blocked later on as part of the stolen assets from unauthorised transactions by the victim. Cases like this often happen because listed NFTs cannot be transferred unless the listing is cancelled. The hacker, who is under time pressure, will be more likely to accept a bid offer and get the proceeds from the sale and transfer the money out. The case below shows how the indirect victim’s entire NFT collection was blocked by OpenSea without explanation.Here’s my thread about how @opensea unreasonably blocked my account and frozen all my NFTs after my offer 40 weth for @BoredApeYC #6267 was accepted.I think it’s very important to spread this case among NFT community!Let’s start ⬇️— Mpa3yka (@Mpa3yka) November 10, 2021Case 3: Alice has owned an NFT for quite some time and suddenly it is blocked and marked as “reported for suspicious activity”. The seller’s account is not compromised and the transaction happened a while ago. Since there is no evidence required to report a stolen NFT and block it, anyone can send an email to OpenSea’s anti-fraud team to block any NFT. Although a police report can be requested later on, there is neither a clear statement by OpenSea to specify the evidence needed to prove the hack nor a condition under which a falsely reported stolen NFT can be identified and lifted from the block. There is no consequence for falsely reporting stolen NFTs.NFTs are often blocked with no explanation or evidence such as police reports provided to the indirect victim. Theoretically these NFTs can still be traded on other platforms, but given OpenSea’s monopoly in the marketplace with 95% of the total NFT trading volumes, blocking any NFT on OpenSea is almost equivalent to taking them out of the market forever. Blocking NFTs could artificially increase the priceThe danger of blocking stolen NFTs from trading on the largest NFT platform OpenSea is the permanent reduction in supply. Based on the law of supply and demand in economics theory, when supply goes down, price goes up.As an example, the Azuki collection has 10,000 NFTs and currently only 1,100 are on sale on OpenSea. The Arthur0x hack results in 17 of them being stolen and blocked. Although 17 NFTs are only around 1.5% of the 1,100 circulating supply, the price has already shown a trend of increasing after the hack. The hack happened on Mar. 22 and the price peaked on Mar. 28 to 20.96 Ether prior to the airdrop announcement on March 31 — a 55% increase within a week.Azuki sales and average price after the hack. Source: OpenSeaAlthough not all of the 17 stolen NFTs are blocked as Arthur managed to recover some through negotiating with the indirect victims to buy them back, future hacks in similar form will continuously happen and cumulatively the number of blocked NFTs can only increase as hacks continue and no procedures are in place to unblock them. Using Azuki as an example again, the graph below collects the historic number of sales and average price to create a demand curve and assumes the supply curve is linear. The point where the supply and demand curves intersect is the equilibrium price. As supply continuously decreases, the speed of increase in price becomes faster as the slope of the demand curve gets steeper. An equal decrease of 300 NFTs in supply from 1,000 to 700 versus from 700 to 400 results in a larger price increase for the latter. As shown in the graph below, the price increases from 15 ETH to 21 ETH from the 1,000 to 700 reduction, but increases more from 21 ETH to 28 ETH from the 700 to 400 reduction.Azuki’s supply and demand curve based on sales and prices from OpenSeaIt is clear to see that blocking the stolen NFTs could artificially increase the price of the collection. If someone wanted to take advantage of the loophole in the OpenSea security system by falsely reporting many NFTs from the same collection as stolen (since no evidence is required to report stolen NFTs), the price of the collection could dramatically increase if the supply is low. This loophole could create opportunities for price manipulation in the illiquid NFT market.In any case, blocking NFTs is not an effective measure to stop the hack or punish the hacker, but on the contrary creates more indirect victims and loopholes for market manipulators. This is certainly not the way to go, so is there any effective security measure?Preventive measures and an evidence based system need to be in place The current OpenSea security system has no preventive measures in place to protect users in advance. All the safety measures are only implemented after the hack, which is one of the main reasons why they are ineffective.Based on the behaviours of the hackers, time is an essential component. Security measures that can slow down the hacker or inform the victims early are the keys to win the battle. Here are some more effective preventive measures that can be implemented by OpenSea:Create an early warning system that can detect abnormal account activity and send instant text messages or email alerts to inform users of such activity so they have enough time to respond. For example, if the account has never bought or transferred more than one NFT within one minute; or if the account has never had any activities in the past during a specific time period (i.e. time zones when the user is asleep), the occurrence of such activities will be detected by machine learning algorithms. The account holder can choose to be informed immediately, or allow the account to be automatically locked for safety. Provide users the options to constrain the maximum number of NFT transfers or sales allowed within a timeframe, i.e. maximum one transfer or sale within one minute; or a minimum time interval imposed between each transfer or sale, i.e. the next transfer or sale can only happen 15 minutes after the previous one. These measures can prevent hackers from stealing a large number of NFTs in one go.Create suspicious account dashboards that allow victims to instantaneously add compromised accounts and hacker’s accounts for public scrutiny. This will give all buyers real-time information about suspicious accounts and the ability to cross check if the seller is on the list before they buy. Evidence such as a police report can be requested later on from the victim to prove the reported accounts are indeed compromised. Some of these measures might create false alarms and inconvenience. But given it is a race of time against the hacker when it comes to preventive measures, users would rather be safe than sorry to avoid becoming the next victim.Common misconceptions about crypto hackingA common misconception about crypto hacking is that “this won’t happen to me because my security awareness is high and I use a hard wallet”. It might be true that a direct malicious hack could be avoided through good security practice, but anyone could become an indirect victim of a hack targeting someone else. When the number of hacks increases, the chance of becoming an indirect victim is also much higher.Another misconception is “as long as I don’t keep too much money in my hot wallet, it doesn’t matter if the wallet is compromised”. What most of the users fail to realise is that monetary loss is only one part of the repercussion from the hack. Losing a web3 wallet is like losing the entire credit history. Any future benefits based on past activities such as airdrops or access to loans and leverage could also evaporate with the compromised wallet.Although blockchain is one of the most secure financial technologies ever created, malicious hacks toward crypto-based platforms are the greatest threat to the Web3 venture. Given blockchain’s irreversible nature and OpenSea’s lack of preventive security measures, it is not hard to see the best solution OpenSea came up with after the Ethereum domain auction hack is to offer the hacker a 25% profit from the sale in exchange for the return of the stolen NFTs. Only in the world of the NFT market can a criminal get rewarded rather than punished for such a serious crime. As the monopoly of the NFT market, OpenSea can certainly do better than this and take security measures more seriously and provide more protection to its users.The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.

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Wonky Mars Protocol launch shows ecosystem expansion may not add to network value

New protocols are launching every day on different networks in the crypto space and the trend is likely to continue through this year. When looking at the top five networks by total value locked (TVL) — Ethereum (ETH), Terra (LUNA), Binance Smart Chain (BSC), Avalanche (AVAX) and Solana (SOL) — according to data from DeFiLlama, Ethereum have 579 protocols (including L1 and L2); Terra has 25, BSC has 348, Avalanche and Solana have 187 and 64 protocols, respectively. The low number of protocols and high TVL from Terra surely stand out as the outlier here.Terra’s TVL reached an all-time high at $20 billion in December 2021 before dropping to $13 billion during the January 2022 crash. To date, the ecosystem has managed to boost its liquidity back to $26 billion. With only 25 protocols built on the chain, Terra has attracted enough TVL to become the second largest network after Ethereum. The recent announcement of backing UST (Terra’s stablecoin) with $1 billion worth of Bitcoin (BTC) reserves and the Mars protocol launch coincide nicely with the sudden rise in LUNA price at the end of February 2022.The rise in the chain’s governance token is often an indication of confidence in the network and the protocols, but does a new protocol launch always add value to the network and stimulate user activity and engagement?Let’s take a look at how the price of LUNA changed when new protocols launched on Terra; then investigate how the most recently launched Mars and Astroport protocols impacted native token prices, user engagement and LUNA price.LUNA is the tool that ensures the UST-USD pegBefore looking into the correlation between LUNA price and the new protocol launch, it is important to understand the LUNA-UST mechanism that ensures the peg of stablecoin UST to USD.LUNA is used as a counterpart to UST to maintain the price peg of UST to USD. When UST is worth more than $1, it means there is a greater demand for UST than the supply in the Terra ecosystem. So the protocol incentivizes participants to burn LUNA and mint UST to meet the increasing demand for UST until the value of 1 UST is equal to $1. On the contrary, when UST’s price is lower than $1, the supply of UST is larger than the demand so UST will be burnt and LUNA will be minted until UST’s value reaches $1 again.By regulating the supply of LUNA in the ecosystem, Terra can effectively keep UST pegged to USD. This mechanism also causes LUNA’s price to increase as the demand for UST increases.LUNA price is highly correlated with new protocol launchesVery often during the initial pre-launch phases of a new protocol, there is a sudden increase in demand for UST. This is because participants wish to obtain airdrop incentive tokens from the new protocol and they are often asked to lock up UST to provide enough liquidity for the protocol when it launches.The increasing demand in UST from participants during pre-launch phases of the new protocol causes more UST to be minted and more LUNA to be burnt, resulting in a sudden increase in LUNA price during these pre-launch phases. Here is an example of the recently launched Mars protocol, where LUNA price jumped from sub $50 to over $60 in two days right after the new protocol pre-launch phases started. LUNA February 2022 price. Source: CoinGeckoHere is another example of how LUNA price went up from sub $60 to over $90 in December 2021 right after Astroport’s pre-launch phases started.LUNA November to December 2021 price. Source: Flipside CryptoThe new protocol launch in the past two recent cases did help push up LUNA’s price, which can be seen as a positive effect on the Terra network. But to know whether they add value to the Terra ecosystem, one needs to also look at the protocol’s token price and user engagements after the launch.ASTRO price and volume after the launchAstroport accumulated $90 million in the lockdrop, but the token price of ASTRO has experienced a downturn after the launch of the protocol due to the bearish market environment at the beginning of 2022. The price has picked up since the beginning of March and now is trading its launch valuation.ASTRO/UST price since Astroport launch. Source: TradingViewThe daily number of swaps on Astroport has been gradually increasing since the launch for about three months, indicating active user engagement on the platform after the airdrop. Astroport total swap count. Source: Flipside CryptoThe total trading volume transacted on Astroport has also shown a strong increasing trend since the launch, which peaked in the middle of March.Astroport trading volume in USD. Source: Flipside CryptoThe Astroport launch was successful and the post launch data also show that the platform has been able to maintain user activities and engagements. The story of Mars protocol is however quite different.Mars price and volume after the launch Immediately after the Mars launch on March 7, 2022, MARS token price dropped off a cliff within an hour from 1.65 UST to 0.7 UST. This is very different from the price reaction right after Astroport’s launch. So what happened to MARS?It turns out that the protocol couldn’t load successfully in the web browser at the time when it was scheduled to go live on March 7, 2022, 11 am GMT. Users who attempted to claim the airdrop tokens through the protocol’s website failed to do so and had to wait until the website became functional. However, sophisticated users who knew how to interact with the Terra chain directly called the claim rewards method on Terra station and managed to claim MARS ahead of the non-tech savvy users. They dumped the tokens immediately in the market, causing an immediate drop in price. MARS/UST price 4-hour. Source: TradingViewTo explain a bit more in detail how one could claim MARS by interacting with Terra chain, the investor first needs to know Mars protocol’s airdrop contract address, which is publicly available on etfinder; then they need to know which method in the code to call on Terra Station to claim the rewards, which is the tricky part. Since the protocol just launched, the code is often not available in the public domain for people to find the claim method. But a wild guess most of the tech-savvy investors had was that Mars protocol was forked from Astroport. So the claim method was highly likely the same as Astroport’s. It turned out to be true and these investors managed to claim the MARS airdrop using the same function “claim_rewards_and_unlock” on the chain.Three hours after the official launch time, Mars protocol’s website was still not functioning and the airdrop MARS still couldn’t be claimed from the website. The price of MARS had already dropped to $0.64 from $1.65 — a 60% drop in three hours and nothing could be done if the investor did not know how to interact with Terra chain. Protocol is still not working… and $MARS are getting dumped like trash…— E.Hu (@elenahoolu) March 7, 2022Let’s have a look at the two major products on Mars protocol right after the launch. Red Bank, the saving and lending space, has failed to maintain user engagements after the airdrop. The number of transactions peaked on the third day after the launch to almost 5,000 a day and has been dropping since then. The daily volume in USD has also been decreasing since day 1 from $212 million to $13 million as of March 27.Mars Red Bank transaction count and volume in USD. Source: Flipside CryptoFields is the space in Mars protocol for yield farming strategies where users can provide liquidity to ANC-UST, LUNA-UST and MIR-UST. Fields’ historical transaction and volume after the launch show a similar story. The product struggles to maintain the same level of activity as the launch day and the number of transactions is 1/8 of what it was at the peak while the volume in USD is less than 1/30 of the launch day.Mars Fields transaction count and volume in USD. Source: Flipside CryptoAlthough it’s not certain that the incident at the launch affected Mars protocol’s user engagements and confidence, the data shows the protocol has been struggling to attract volumes and activities since the launch.A new protocol launch does not necessarily always add value to the network, as shown in the comparison between Astroport and Mars, which have very similar pre-launch strategies but very different outcomes post launch. Incidents on the launch day jeopardize not only the protocol, but could also affect user confidence in the ecosystem. An airdrop incident allowing only the tech savvy investors to claim first will drive away the vast majority of future investors. New protocols launching on Terra chain in the future should make greater efforts to prevent such incidents, otherwise investors’ long-term interests and trusts could evaporate sooner than one could imagine.The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.

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