EU’s Dangerous Law for Founders 😱

Worldcoin Orb (Sam Altman Backed) Is Back | How Euler Got Hacked

March 15, 2023

GM folks 👋🏻 - happy hump day 🐫

Crypto markets are up. Total crypto market cap hit $1.15 trillion with BTC and ETH hitting $26,000 and $1,700 respectively. Sam Altman releases GPT-4 at the same time his Worldcoin project is launching a decentralized identity protocol. The orb is back! 🛸

In Today's Email:

What Matters: EU’s dangerous smart contracts plans 👨‍⚖️
Case Study: Euler $197M exploit, how it happened 👨‍💻
Governance & Features: Worldcoin ID protocol and SDK 🪪

Narratives: Risk assets rose as many expect a dovish Fed due to the banking crisis, but Morgan Stanley’s Mike Wilson says: “sell any bounce”. KWENTA has been on a tear. It launches DeFi options to capture market share away from CEXs amidst fear of counterparty risks.

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WHAT MATTERS

Europe’s Dangerous Smart Contract Plans 👨‍⚖️

Unsplash | Guillaume Perigois

State of play: Europe releases its smart contact plans. Unsurprisingly, it’s controversial. Under the Data Act, the EU Parliament voted 500-23 in favor for rules that would mandate smart contract developers to design reset possibilities, allowing for termination or interruption of transactions. Basically, developers need to create backdoors 🚪

The legislation is not finalized.
It will now enter negotiations whereby policymakers and national governments will hammer out the final details before turning it into laws.
Thierry Breton, EU Commissioner for Internal Market, stated: “These changes may limit more or less the possibility to develop harmonized standards for smart contracts”.

Why it matters: If the legislation gets finalized, it is literally impossible for developers in EU to comply. Crypto projects will need to decentralized significantly, relocate their operations to friendlier jurisdictions.

Crypto innovations will continue to be pushed out of Western countries.

EU passing smart contract backdoor regulation.
US rekting crypto banks and traumatizing ventures.
The only place left with significant regulatory arbitrage and having degens meeting your initial pmf is Asia.
Stay in grey area, long live unregulated gambling casino.
— Minion ⌐◨-◨ (@0xminion)
1:55 PM • Mar 14, 2023

For builders: You need to think fast about the operational angle of your project (jurisdiction, level of decentralization, etc.), especially if your protocol directly handles money via smart contracts.

The faster you do this, the sooner you can focus on building and customer acquisitions. Just like job cuts, do it fast and deep 🏃

For investors: The risk-to-reward ratio of lobbying (or at least educating) policymakers in your respective jurisdictions is higher than ever. No matter how good you’re at discovering undervalued projects or ideas, your founders won’t be able to execute amidst the ludicrous regulatory environment.

Even if you’re small fund, and can’t deploy millions per year in legal fees like a16z, there are still ways to contribute by being extremely precise with your regulatory efforts 🎯

CASE STUDY

Euler $197M Exploit: How it Happens

CoinGecko

For the full post-mortem, click here.

State of play: Euler, a lending-borrowing protocol, got exploited for ~$197M. It’s a relatively high profile project with multiple audits, which is why the incident came across as a shock to most people.

The attack happened because of a code vulnerability that allows for the creation of unbacked token debt position by donating funds to the protocol’s reserves.
When debt > collateral, liquidation can be triggered.
Using flash loans, the attacker was able to liquidate underwater accounts and profit from the liquidation bonuses.

In short, it was an abuse of the donate function, without first checking for liquidity.

Euler has since notified the US and UK law enforcements, as well as engaging TRM Labs and Chainalysis to help track down the attacked. Euler has also offered the attacker a deal to take 10% of the exploited funds, which is roughly $20M — threatening to launch a $1M reward information manhunt if the deal is not taken.

Other protocols are affected by the Euler hack due to composability between these protocols. Some of the losses tracked are:

Angle Protocol, $18.4M
Balancer, $11.6M
Idle DAO, $5M
Yearn, $1.38M
Yield Protocol, $1.5M

Our take: The majority of DeFi is still grossly underestimating the amount of effort it would take to onboard “truly institutional capital” to smart contract-based platforms. These institutions need to decide between smart contract code risks or counterparty risks.

When you have tens of millions and an international connection of law enforcements, you know which one they would pick. If you don’t believe the last sentence, check how much TVL Aave Arc has. Enough said 🤷

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FEATURES & GOVERNANCE UPDATE

The Worldcoin Orb Is Back

Worldcoin

Worldcoin releases World ID Protocol and SDK. The project infamous for scanning your eyeballs with Orb-like devices is back. Backed by Sam Altman, who’s also the CEO of OpenAI, Worldcoin has introduced its privacy-first decentralized identity protocol.

This enables people to prove that they’re indeed people without sacrificing anonymity.
Users can access World ID with any compatible mobile wallet. Early access is available here.
It has 1.3 million sign-ups and is valued at $3 billion after raising $100M in March 2022.

Why it matters: Decentralized identity has always been a big problem. People on the internet need tools to verify that they’re indeed people, not bots, without giving out too much information akin to a traditional KYC. Worldcoin aims to solve this problem 🪪

Other notable feature updates:

DYDX reduces trading rewards.
Aztec sunsets Aztec Connect privacy chain.
Stargate decides to NOT reissue STF tokens.
DeFi Llama launches a browser extension.
Filecoin releases FVM.
Gearbox announces v3.
Convex launches on Polygon.
Kwenta launches DeFi options.
IndexCoop launches Gitcoin Staked ETH Index (gtcETH)
Iron Bank unpaused Alpha Homora.
Instadapp launches Avocado wallet.
Maverick launches on Ethereum.

QUICK BITES

DOJ probes Do Kwon’s LUNA-UST collapse.
CFTC names executive from Circle, TRM, Fireblocks to Tech Advisory Group.
CoinDesk acquisition update, CoinMarketCap deal on hold.
Meta plans to stop working on NFTs.
EU releases controversial smart contract plans.
Coinbase to add Uniswap and Aave to its Layer 2 (Base).
Signature faced criminal probe ahead of its collapse.
Worldcoin releases World ID Protocol and SDK.
Staked ETH tests withdrawals on Goerli testnet.
Euler offers hacker a deal of 10% of exploited funds.

MEME & NOTEWORTHY READS

David Phelps’ article on recent bank collapses and bailout.
DataFinnovation’s article on True USD’s transparency.
Igor Igamberdiev’s thread on how Euler got hacked.

Jason Calacanis this weekend
— High Yield Harry (@HighyieldHarry)
12:18 PM • Mar 14, 2023

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.