SEC Seeks $5.3B from Do Kwon and Terraform Labs

$2B SAFE Token | INJ Quadrupled Deflation

Marco Manoppo & Karon Pangestu
April 24, 2024

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Good Morning.

The market is in a weird spot. Leverage is much lower but ETF inflows are much weaker. We have also yet to feel the impact of miners selling post-halving. Most miners are still doing (3,3), speculating on further upward price appreciation.

In Today's Email:

What Matters: Do Kwon & Terra $5.3B fines 💸
Case Study: IBC reentrancy vulnerability 👾
Governance & Features: SAFE is now transferable 🔁

You read and share. We listen and improve. Send us feedback at marco@launchy.app.

Narratives: BTC is back up; expect more sideways actions until we get some macro clarity.

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WHAT MATTERS

The SEC Wants $5.3B from Do Kwon and Terraform

WSJ

State of play: The SEC has requested a NY court to impose $5.3B in fines on Terraform Labs and co-founder Do Kwon for their involvement in the $40B collapse of the Terra ecosystem in 2022.

Terraform Labs and Kwon were recently found guilty of civil fraud in a Manhattan court for misleading investors about their stablecoin UST and the Terra blockchain.
The SEC is seeking $4.74B in disgorgement and prejudgment interest.
On top of that, the SEC also wants $520M in civil penalties, with $420M from Terraform Labs and $100M from Kwon.
The SEC also seeks injunctions against Kwon and Terraform Labs, including bans on future securities violations and Kwon's involvement in officer or director roles at SEC-reporting public companies.
Terraform Labs’ CEO Chris Amani testified that the company, which is currently in bankruptcy, had only ~$150M in assets remaining.

The SEC sought to justify the requested amount by stating that Kwon and Terraform Labs obtained "over $4B in ill-gotten gains (and likely much more) from their illegal actions”.

The court documents detail the "ill-gotten gains" as follows:

Luna sales to institutional investors: $65.2M.
MIR sales to institutional investors: $4.3M.
LUNA and UST sales through the Luna Foundation Guard (LFG): $1.8B.
UST sales on exchanges: $2.3B

Why it matters: Terraform filed for Chapter 11 bankruptcy protection in January, the injunction sought by the SEC will prevent Terraform from discharging its monetary remedies through bankruptcy.

For builders and investors: Kwon had a lot of hubris. Remember, more often that not, your success is the outcome of a significant amount of luck mixed with hard work. Don’t let things get to your head in a bull market.

CASE STUDY

IBC Reentrancy Vulnerability

Asymmetric Research

Credits to Asymmetric Research for the original research.

State of play: Asymmetric Research recently published its findings on a vulnerability in IBC-go, the reference implementation of the Cosmos IBC protocol.

Here are the key takeaways from the research report:

This reentrancy vulnerability, occurring during the handling of timeout messages, could have enabled an attacker to mint an unlimited number of IBC tokens on impacted Cosmos chains.
The research pointed out that the reentrancy vulnerability has existed in IBC-go since the beginning.
It only became exploitable due to recent developments in the Cosmos SDK ecosystem, specifically CosmWasm-based IBC middleware.
Timeout code in IBC allows for a reentrancy vulnerability, compromising replay protection and enabling potential abuse of the IBC timeout packet.
Leveraging IBC hooks and CosmWasm contracts allows for a recursive call exploiting the reusability of IBC timeout packets, potentially leading to multi-spend exploits.
In the case of ICS20 tokens, there is a significant impact from this vulnerability which can result in the theft of tokens from native and IBC-denominated tokens.

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INSIGHTS

INJ Votes to Increase Deflation by 400%

Injective HUB

The Injective community has approved the largest upgrade to Injective's tokenomics system proposal, implementing the INJ 3.0 tokenomics, which will reduce minting and quadruple deflation.

The change reduces token minting and introduces new parameters, making INJ one of the most deflationary assets in crypto.
The proposal will increase INJ's deflation fourfold over the next two years.
The proposal would gradually reduce inflation bounds to 4-7% over two years, with deflationary parameters to be reassessed in Q2’26.
The proposal also suggests raising the inflation rate change parameter from 0.1 to 0.5 for enhanced responsiveness to staking activity.
The proposal received a 99.99% approval rate with 92.83% voting yes and 7.16% abstaining.

FEATURES & GOVERNANCE UPDATE

$2B SAFE Token is Now Transferable

SEP22 has been executed! The Safe Token Contract is officially unpaused and SAFE is transferable, ushering a new era for Safe{DAO} 🔰
— Safe Governance (@safegovernance)
5:42 AM • Apr 23, 2024

Safe Protocol's (previously Gnosis Safe) governance token, $SAFE, has become transferable following a successful vote on the SafeSEP22 proposal by SafeDAO.

The proposal involved executing the unpause method of the token contract through the SafeSnap module.
According to CMC, SAFE's FDV is $2.05B at the time of writing.
Since its October 2022 launch, SAFE has been locked for nearly two years.

Other notable feature updates:

Aevo enables partial TPSL.
Flat Money goes live on Base L2.
Lido launched the Simple DVT module.
Origami Finance goes live on Ethereum.
GMX launched Single-Token Pools on V2.
OKX launched the public mainnet of X Layer.
Jupiter launched Jupiter Staked SOL (JupSOL).
EigenLayer removed all LST caps and unpaused deposits.
Magic Eden now supports Collection Offers for Bitcoin Ordinals.

QUICK BITES

Worldcoin meets Malaysian leaders.
PayPal proposes green Bitcoin mining.
Ripple rejects SEC $2B fine in final judgment.
Crypto(.)com postpones South Korea launch.
Venezuela looks to Tether to bypass sanctions.
Block develops a 3-nanometer BTC mining chip.
Blockchain Association sues the SEC over dealer rule.
Jupiter acquires Ultimate Wallet as part of mobile push.
Talos acquires crypto risk management platform, Cloudwall.
Indonesia’s President warns of money laundering via crypto.
SEC thinks Do Kwon and Terraform Labs should get a $5.3B fine.
FalconX unveils institutional custody, trading, and credit services.

NOTEWORTHY READS & MEME

Arthur Hayes’ read on left curve.
CoinMetrics’ read on L1 landscape.
Asymmetric Research’s read on Cosmos IBC reentrancy infinite mint.

I kind of respect this DeGods guy for just moving his NFT collection wherever he wants whenever he wants. I hope he keeps doing it. I hope you never really know where your DeGod is, everyday you wake up wondering if you’ve become a community member of Algorand or something
— Gwart (@GwartyGwart)
3:49 PM • Apr 23, 2024

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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.