Curve Finance

Frax’s shift to a fully backed stablecoin signals the end of DeFi’s algorithmic experiment

The sun sets on algorithmic stablecoins as Frax shifts to a fully-backed model.

The Frax community recently approved a proposal to make its FEI stablecoin fully backed by USD equivalents, rather than maintaining a partially backed and semi algorithmic stablecoin. With Frax’s decision, the days of experimentation with algorithmic stablecoins could finally be behind us.

The decentralized stablecoin space has only proved effective with ETH, USDC and BTC backed stablecoins. The failure of algorithmic stablecoins (like UST) and depegging of overleveraged stablecoins (like MIM) has become one of the primary reasons for loss of confidence in decentralized stablecoins.

The decentralized stablecoin space is still tiny

Decentralized stablecoins account for 5.5% of the total stablecoin supply. MarkerDAO’s DAI commands the lion’s share of this with 71% dominance. The transfer volumes of decentralized stablecoins are largely dominated in DAI and have declined since Q3 2022, suggesting that activity across the sector is still inhibited.

90-day moving average of decentralized stablecoin transfer volume. Source: Dune

During the bull run of 2021 and 2022, platforms like Abracadabra and Luna flourished due to higher yields, but when the market took a negative turn these stablecoins were some of the first to collapse. Luna’s UST stablecoin crashed in May 2022 after major withdrawals of the stablecoin disrupted its algorithmic mechanism.

Before its collapse, UST had become the third largest stablecoin with a larger supply than BUSD and only behind the USDT and USDC. However, the ripple effects of Luna’s collapse caused Abracabra’s MIM stablecoin to lose its peg due to widespread drop in prices of assets backing MIM. Liquidations piled across the platform with no buyers, leading frequent dips below the $1 peg level.

Only a few incumbents remain standing

MakerDAO’s DAI stablecoin is the longest-standing decentralized alternative, with a significant market share. While DAI’s design promoted decentralization, the token became a victim of centralization, with more than 50% of assets backing DAI composed of Circle’s USDC.

The MakerDAO community has progressively taken steps to diversify the platform’s backing. In October 2022, the community voted to convert $500 million USDC to U.S. Treasury bonds.

Recently, MarkerDAO and the decentralized stablecoin space received another blow after court ruling in England forced the platform to include an option to seize assets from a user. It creates a considerable regulatory risk for platforms using and launching decentralized stablecoins.

Besides MakerDAO, Liquity has earned a decent reputation in DeFi as a purely ETH-backed stablecoin platform. Liquity is censorship resistance as it only provides smart contracts on Ethereum, which are not managed by administrators. The total supply of LUSD is 230 million, with LQTY as the utility token of the platform.

The project’s native token, LQTY, doubled in price after its Binance listing on Feb. 28, 2023. There was alleged insider trading activity behind the price surge reported by anonymous on-chain analytics portal An Ape’s Prologue. Still, the token’s low issuance rate and real yield in protocol fees could give it a lot of advantages over governance-only tokens like Uniswap’s UNI token.

Stablecoin platforms building liquidity and trust over time

Frax’s decision to migrate away from a partially algorithmic design to a fully backed stablecoin could see a rise in demand for FEI. Moreover, Frax is a significant holder of Curve’s CRV and Convex Finance’s CVX token, enabling the DAO to incentivize liquidity provision on Curve. This is notable because adequate liquidity is one of the first requirements for a stablecoin’s success.

Currently, crypto market volatility discourages many users from minting crypto-collateralized stablecoins. The lack of trust in decentralized stablecoins and the long-standing permeability of centralized stablecoins across numerous exchanges makes it harder for decentralized alternatives to gain market share.

Still, the long-term market opportunity for decentralized stablecoins is significant. Over time, decreased volatility and regulatory clarity around cryptocurrencies will likely increase the demand for crypto-backed stablecoins.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

Binance recovers the majority of funds stolen from Curve Finance

Binance recovered and froze around $450,000 worth of the stolen assets, which is around 80 percent of the stolen funds.

Crypto exchange Binance has recovered a big part of the funds from the recent hack that targeted the decentralized finance (DeFi) protocol Curve Finance.

In a tweet, Binance CEO Changpeng Zhao announced that the exchange has frozen and recovered $450,000 of the stolen assets, which is more than 80 percent of the stolen funds. According to Zhao, the hacker tried to send the funds to the exchange in various ways but was detected by Binance. The exchange is currently working to return the funds to their rightful owners.

The Curve Finance team detected the hack on Tuesday and alerted their users to refrain from using their website. An hour after the warning, the team announced that it was able to find and resolve the issue. However, the attackers were still able to hijack around $537,000 worth of USD Coin (USDC) before the issue was resolved.

According to experts from the blockchain analytics firm Elliptic, a hacker compromised the domain name system (DNS) of Curve Finance, which ended with malicious transactions getting signed. The experts told Cointelegraph that the funds were then sent to various exchanges and crypto mixers in an attempt to hide the trail. In the end, the funds were sent to Binance and were caught by its team.

This is not the first time this week that the good actors in the crypto community have worked to return stolen funds. On Monday, whitehat hackers and researchers returned an estimated $32.6 million worth of USDC, Tether (USDT) and other altcoins to Nomad following the recent $190 million exploit.

The Curve Finance exploit is only one of the many attacks that happened in 2022. According to analytics firm Chainalysis, $2 billion worth of funds were drained because of cross-chain bridge hacks. This is 69% of the overall stolen amount in the year.

Curve Finance exploit: Experts dissect what went wrong

Attackers who hijacked Curve Finance’s landing page moved quickly to convert stolen funds to various tokens through different exchanges, wallets and mixers.

Decentralized finance protocols continue to be targeted by hackers, with Curve Finance becoming the latest platform to be compromised after a domain name system (DNS) hijacking incident.

The automated market maker warned users not to use the front end of its website on Tuesday after the incident was flagged online by a number of members of the wider cryptocurrency community.

While the exact attack mechanism is still under investigation, the consensus is that attackers managed to clone the Curve Finance website and rerouted the DNS server to the fake page. Users who attempted to make use of the platform then had their funds drained to a pool operated by the attackers.

Curve Finance managed to remedy the situation in a timely fashion, but attackers still managed to siphon what was originally estimated to be $537,000 worth of USD Coin (USDC) in the time it took to revert the hijacked domain. The platform believes its DNS server provider Iwantmyname was hacked, which allowed the subsequent events to unfold.

Cointelegraph reached out to blockchain analytics firm Elliptic to dissect how attackers managed to dupe unsuspecting Curve users. The team confirmed that a hacker had compromised Curve’s DNS, which led to malicious transactions being signed.

Elliptic estimates that 605,000 USDC and 6,500 Dai was stolen before Curve found and reverted the vulnerability. Utilizing its blockchain analytics tools, Elliptic then traced the stolen funds to a number of different exchanges, wallets and mixers.

The stolen funds were immediately converted to Ether (ETH) to avoid a potential USDC freeze, amounting to 363 ETH worth $615,000.

Interestingly, 27.7 ETH was laundered through the now United States Office of Foreign Assets Control-sanctioned Tornado Cash. 292 ETH was sent to the FixedFloat exchange and coin swap service, while the platform managed to freeze 112 ETH.

Elliptic is now monitoring these flagged addresses in addition to the original Ethereum-based addresses. A further 23 ETH was moved to an unknown exchange hot wallet.

Elliptic also cautioned the wider ecosystem of further incidents of this nature after identifying a listing on a darknet forum claiming to sell “fake landing pages” for hackers of compromised websites.

It is unclear whether this listing, which was discovered just a day before the Curve Finance DNS hijacking incident, was directly related, but Elliptic noted it highlights the methodologies used in these types of hacks.