Crypto Punk Sale for $532 Million All Comes Out in the Wash
The latest craziness in the NFT world of Crypto Punks where a seemingly record-breaking sale turns out to be a wash trade
A seemingly record sale for a Crypto Punk is uncovered within 10 minutes as a sham
The owner of the Crypto Punk left a cheeky message encoded in the blockchain transaction: “looks rare”
There’s probably no hotter non-fungible token, or NFT, in the cryptocurrency world right now than Crypto Punks. The pixelated profile pictures are selling for millions of dollars apiece as some crypto users flex their newfound wealth in a conspicuous display of filthy lucre.
Those sales, however, pale in comparison to a $532 million transaction for Crypto Punk 9998 that took place yesterday, absolutely obliterating any previous record. The thing is, it was a wash sale involving one person both buying from and selling to themselves.
That’s the conclusion of Robert Miller, who works with Flashbots, a research and development firm formed to help mitigate some of the nastier corners of the new blockchain world. I spoke to Robert last night to understand what he’d uncovered about this astounding half billion dollar sale.
The scheme involved three decentralized finance protocols that were used to raise the enormous amount of Ether paid for the Crypto Punk, something called a “flash loan,” a fair amount of coding knowledge to construct the smart contract correctly and a hidden message in the blockchain transaction.
Whew, that’s a lot. We’ll take it slowly here, there’s much to unpack.
The mini saga began yesterday evening New York time when the owner of Crypto Punk 9998 listed it for sale, triggering a notice from Larva Labs, the creator of the 10,000 unique NFTs. Now anyone hoping to pick up a Crypto Punk can start bidding on it. Or, that’s usually how this works. In this case, about an hour and a half later the contract that executed the wash sale went live on the Ethereum blockchain.
“This is where it gets interesting,” Miller said.
The beautiful thing about blockchain is that transactions are public and can be “read,” in a way. In this case, you can look at the transaction executed by the smart contract to see it do several amazing things instantaneously.
Amassing the Ether
The first several involve getting enough Ether to offer $532,414,877.01 for the Crypto Punk. The owner of the punk went to three places to amass the Ether – the defi applications Maker DAO and Compound and the decentralized exchange dydx.
Keep in mind, this all happens at once as it’s orchestrated by the code in the smart contract the owner of Crypto Punk 9998 deployed. So the many steps I’m about to describe basically take place simultaneously.
You can see here the steps of borrowing Ether, buying the Crypto Punk, transferring the Crypto Punk and then repaying the loans happen in an instant
Maker DAO was used to receive an instant loan of 500 million DAI, a cryptocurrency known as a stable coin because it’s value isn’t meant to fluctuate like Bitcoin or Ether. Next, that 500 million DAI was sent to the defi protocol Compound, where it was used as collateral to get a loan of 87,639 Ether. That was worth about $376 million based on the Ether price at the time.
Next, the smart contract borrowed Ether from the decentralized exchange dydx in two transactions. One is for 16,401 Ether and the second for 20,416 Ether. Together, that’s worth $158 million. So just like that, the Crypto Punk owner built a war chest of $532,000,000 in an instant.
“You’re getting money from two different sources here because they couldn’t flash loan enough Ether from dydx, so they needed to take things out from two sources,” Miller said. “This is instant,” he said. “It all happens in the blink of an eye.”
Now it’s time to buy Crypto Punk 9998. Here we need to use wallet addresses to make our point that it was a wash sale. (See the Etherscan graphic above if it helps). The first is 0x9b5. This is the wallet that was used to gather the $532 million in Ether. The second wallet is 0x8e3, which originally put the Crypto Punk up for sale, according to Miller. The blockchain record shows that as soon as 0x9b5 bought the Crypto Punk it sent it to 0x8e3. A heartbeat later, 0x8e3 sent the $532 million in Ether back to 0x9b5, which then proceeded to repay its flash loans to Compound and dydx.
“You can’t really tell what’s going on with that contract, but you can tell that money hit the contract and it instantly was sent back,” Miller said. “The person here buys the punk, sends Ether and then it just bounces back to the person who just bought the punk.”
Ten minutes
Once Miller was alerted by a friend to the seemingly record-breaking sale last night it took him only 10 minutes to figure out the mechanics of the wash sale. Then, of course, he took to twitter to tell everyone what had really happened.
“You see a $500 million buy and immediately wonder what happened,” he said.
Another wrinkle in the tale of Crypto Punk 9998 – no one made any money from it. Because the transaction was instantaneous – because the terms of the flash loans demand that the Ether be loaned and returned immediately – and because the punk never changed hands there was no profit or gain to be had. In fact, the owner of Crypto Punk 9998 ended up paying about $850 in transaction costs, Miller said.
So why the hell would someone go to all this trouble?
“You’re not making any money, the same account ends up holding the Crypto Punk at the end of the day and you’re paying $850 for it,” Miller said. “It seems to me this was a wash – either someone who just wants to flex their technical muscles or be known as the person who did this the first time. Or it’s someone who wants to generate a lot of buzz about Crypto Punks on twitter.”
Is it something more sinister, like money laundering? No, said Miller, because no money changed hands.
The owner of Crypto Punk 9998 also left a message in the blockchain transaction record that Miler pointed out to me. If you look in the Input Data field and change the setting you see this: "‘looks rare’ - blurr n' arr00.” The phrase “looks rare” is something crypto people say to each other as a way of poking fun at the idea that NFTs are worth anything.
“Their reasons are a mystery,” he said. “It’s very creative, and that’s cool.”
Larva Labs took notice of the wash sale and noted on twitter that “while technically briefly valid, the bid can never be accepted,” The Crypto Punks creators stopped short of saying they’d try to stop the wash sales outright, and said instead “we’ll add filtering to avoid generating notifications for these kinds of transactions in the future.”
In the end, Miller came away mostly impressed and bemused by what he uncovered.
“Where in the world could someone muster half a billion dollars like this to buy a piece of art and then immediately give it all back? What a fun developer platform that enables this kind of stuff to happen, you can’t do it anywhere else,” Miller said. “What a world.”