Did an NFT CryptoPunk just sell for $ 500 million? In a way, in a transaction that highlights the differences between the NFT market and the art market



On Thursday night, a wild-haired, black lipstick CryptoPunk, traits that aren’t particularly uncommon when it comes to pixelated NFT characters, sold for a mind-boggling half a billion dollars – in crypto, of course. .

A Twitter bot that tracks CryptoPunk sales announced the news shortly before 8 p.m. EST, sending a crypto buzz on Twitter and making people wonder what just happened. Was it massive money laundering, or what?

If this was a real art sale, it would have CryptoPunk 9998 the most expensive NFT ever, far surpassing punk 7523, which sold for $ 11.8 million in June, and leaving the Beeple NFT sold for $ 69 million in March in the dust.

But it wasn’t a real art sale. Nor was it money laundering or an exploit. It was just crypto traders trading like they do. The owner of punk 9998 was having a little fun with crypto derivatives. In other words, the deal was a farce.

Even Larva Labs, the creator of the pixelated alien creatures, crossed out the sale, which means it doesn’t actually matter.

So what exactly happened? To begin with, the seller and the buyer in this translation are one and the same. In mainstream finance, this is called a wash trade – a type of illegal manipulation of the market aimed at making an item appear more valuable than it actually is.

Second, the funds for the laundry business came from a “flash loan”. if you don’t know what a flash loan is – and why would you be? – it is a type of unsecured loan that has become extremely popular in the world of decentralized finance, or DeFi for short.

Larva Labs, CryptoPunks 2, 532, 58, 30, 635, 602, 768, 603 and 757. Photo courtesy of Christie’s.

Ethereum-based DeFi exchanges, such as Compound and Uniswap, make available a ton of their liquidity that anyone can “lend” for the duration of a single trade. Flash loans use smart contracts (pieces of computer code uploaded to a blockchain) to set the terms and conditions of the loan.

The idea is this: you borrow the funds, build a complex transaction by doing whatever you want using the funds, and you pay them back at the end of the transaction. The contract checks whether the “loan” has been repaid. If not, the transaction is rolled back, as if it never happened, and the funds are returned to the lender.

This all sounds like a low risk proposition for lenders and borrowers, but the truth is, flash loans are commonly used by hackers to exploit loopholes in poorly drafted contracts and steal millions of dollars. Just last week the pirates took 130 million dollars of DeFi Cream Finance protocol using a large flash loan transaction.

“Flash loans only exist for the purpose of manipulation,” Nicholas Weaver, a researcher at the International Computer Science Institute at Berkeley who has been following cryptography since 2011. “The primary use is to provide enough money to throw a feat, but doing wash-trading also seems like a perfectly matched use. “

Here’s how the laundry business collapsed with punk 9998: On Thursday, the manager of the Ethereum address starting with “0xef76” sent the CryptoPunk NFT to another Ethereum address starting with “0x8e39”. You can see this transaction here.

Shortly thereafter, “0x8e39” sold the NFT to an address beginning with “0x9b5a” for 124,457 Ether, valued at $ 532 million.

Where did the purchase address get the money from? He flash borrowed a massive amount of crypto from three sources, but most (87,000 Ether) came from Compound. (You can see his flash loan agreement here.)

The sales address then immediately returned the 124,457 Ether to the buyer, who repaid the loans. Once done, the buyer sent the NFT back to where it all started, and the NFT was relisted again, for double the amount of the wash trade!

If that sounds a little dishonest, well, yes. You might call it performance art if you’re feeling indulgent. Without knowing who controls these addresses, we’ll never know the real motivation behind the stunt. The owner didn’t make any money from the trade, although it cost him around $ 800 in transaction fees.

“PSA: This transaction (and a number of others) is not a bug or an exploit, they are done with ‘flash loans’,” Larva Labs said in a Tweeter Thursday evening. “In a nutshell, someone bought this punk with borrowed money and paid off the loan in the same transaction.”

Apparently, this was not the first time that people have used flash loans to try and buy CryptoPunks. “Some recent major offerings have been made in the same way,” Larva Labs said. “So, although technically briefly valid, the offer can never be accepted. We will add filtering to avoid generating notifications for this type of transaction in the future. “

Meanwhile, if you want to buy punk 9998, it could be yours for $ 1 billion (250,000 Ether), the current price the owner is now offering it for. Unfortunately, you probably won’t be able to buy it with a flash loan.

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