CrypTalk ep 9 – The likelihood of more Bitcoin volatility and the $100m Binance Bridge hack

Written on 10/13/2022
Ross Sinclair

From the $100m Binance Bridge hacks, the effects of the merge, to the likelihood that Bitcoin will be more volatile in the future.

In this episode of CrypTalk, BizNews’ Ross Sinclair and Jaltech’s Gaurav Nair discuss the $100m Binance Bridge hacks, the Celsius Network’s data leaks, miners moving from the Ethereum chain to Bitcoin after the merge, the likelihood that Bitcoin will be more volatile in the future, and more about the tokens in the Jaltech Cryptocurrency basket. 

For more information about Jaltech:  https://www.biznews.com/jaltech-cryptocurrency-notes

Excerpts from the discussion with Gaurav Nair

Gaurav Nair on the Binance bridge hack

Binance is the world’s largest exchange, and in the last 24 hours, about $15 billion was traded on there. And Binance has two blockchains, actually. One is known as the Binance Smart Chain, and the other one is just known as Binance Chain. And these two blockchains have various tokens or assets that trade on them. And so Binance has introduced a bridge which allows you to take assets from the one chain and move it to the other chain. Now, a bridge is not something that’s part of a blockchain that’s not built into the blockchain. Typically, if you have different blockchains, a blockchain only knows about the assets that are on its chain and all the miners, etc. on that chain. They keep track of where all the assets are, but they’re totally blind to the assets that are in any other chain. 

So if you want to move assets from one chain on to another chain, how does that happen? And in essence, what happens is a bridge, a company or a group of people, they create a bridge. And what the bridge does is it takes the tokens that you want to move across and it locks it up on the one chain that no one else can spend it. And then it creates a copy on the other chain. And this copy that it creates often is a wrapped version of the first token. And so at this point, the copy only has value because someone knows that if they return the copy to the bridge, they can get the original token on the first chain, which actually has value. And so an analogy is, let’s say there are gold coins in circulation. If gold coins are deposited with a bank, the bank might give people a piece of paper saying this is proof of your gold coin deposit. And that piece of paper only has value in that someone knows that they can get a gold coin back later on. That piece of paper is the bridged asset. And so what happened is the bridge was hacked. Now, there are numerous ways in which bridges can be hacked. One way is that hackers fooled the bridge into believing that deposits had been made. They get on the other side, they get these pieces of paper, they either spend them or they try to redeem them and get gold coins out. The second way is if they actually somehow take control of the bridge. 

If they control the bridge, then they do either one of two things. They either pull out the gold coins or they just create new pieces of paper and then redeem them for their original gold coins. And so the hack that happened with Binance’s is that a hacker managed to create, in essence, fake tokens on the other side. And they created up to $560 million worth of tokens. These were the native tokens of Binance. They’re called BNB tokens. And then from there, they then deposited $100 million into one of these defi protocols. So these are programmes that run on the blockchain. And you can interact with them so often they’re made to provide loans, that kind of thing. So someone deposited $100 million of these BNB tokens, the hacker. And then they took out a loan of Stablecoins. And so they took out this loan. And then they started bridging it to other chains as well. To Ethereum, another chain Fantom. And potentially that $100 is now gone. People may try and stop that and they might have some success doing that. So that’s kind of what happened with the bridge hack. 

On how incidents like this can be prevented in future 

So what’s quite interesting is that one should differentiate between the security of a blockchain and the security of bridges. And the security of bridges has always seemed suspect. Vitalik Buterin, one of the founders of Ethereum, has famously commented that he’s against bridges. And so we have all these blockchains and they just know about their own assets. What you have is you have a number of people, if it is truly decentralised, who are independent. They’re all either running hardware, which is running the blockchain, or they’ve put funds at risk in order to run the blockchain. And for a hacker then to make changes to the blockchain, they need to spend a lot of money either in hardware or these funds at risk in order to hack the blockchain, in essence. And that’s why you see relatively few hacks of actual blockchains. However, when it comes to bridges, you don’t have a variety of people. You generally have a closed group of people who are running that bridge for profit. And so that means that if you attack one company well, like with the Ronin hack that I mentioned earlier, the amount of money you spend trying to hack that or attack it is relatively small compared to a blockchain. Hence why it is much less secure. Also, you have complex programmes that are trying to keep track of the assets across two blockchains that it’s trying to bridge and that leaves numerous places where there could be a loophole or some kind of error in the programme that someone can attack, to actually then drain the funds out of these bridges. What’s happening is definitely with each of these hacks, more and more is learnt and future bridges then potentially close up these gaps. But what we face in this space is that blockchain technology really is about the technology of money. And so in the interim, while these systems are growing and there are new developments being made in them, a lot of money is actually lost during this process. And sometimes financing criminals or rogue states like North Korea. 

On how likely Bitcoin volatility is in the future 

I think it certainly makes sense that volatility is going to be increasing. Other metrics that maybe support this is that more and more volumes of Bitcoin are being taken off the exchanges. Now, what this means when there’s a small amount of volume on the exchange, is that a little bit of buying pressure starts moving the price up aggressively because there aren’t tons of sellers. And similarly, a little bit of selling pressure starts moving the price down aggressively. And the fact that Bitcoin’s currently been moving sideways mostly recently, does lend credence to the idea that there may be a volatile move coming soon. 

On many of the Ethereum miners moving over to the Bitcoin chain and what it means for Bitcoin 

One of the things that people sometimes don’t appreciate is that as miners move in and there’s more mining, this doesn’t increase the supply of Bitcoin because the protocol is made such that it then increases the difficulty of the problems that these miners are trying to solve, in order to keep the issuance rates stable. And if miners leave, the reverse happens. So the supply is still at a stable issuance rate. But what this means for the individual miners as competition increases, is that it becomes more difficult to solve a problem and they end up winning less blocks. So this means that their revenue is dropping. And given that the Bitcoin price is off its all time highs, revenues are already down. And then add to that the high cost of energy due to the war in Ukraine, etc. and high inflation. And what you actually have is a perfect storm for miners where revenue is dropping and costs are going up. So in terms of effect on the Bitcoin price, generally, speculators, when they see the difficulty increasing, it makes them feel more confident in the network. It becomes harder to hack the network. And so it’s a good signal for people who are just looking to buy or sell Bitcoin. The buyers then say, Well, it’s harder to hack the network. It’s a safer asset. And that adds to the case to buy. However, for the miners and a lot of them are listed, this isn’t good news. And what you may see is you may see, in fact, some of these mining shares losing value. 

On the Jaltech Cryptocurrency Basket 

So the philosophy behind the basket is to go into the largest market cap tokens. And so, of course, that’s why you see the likes of Bitcoin, Ethereum and Solana. And as and when the promise in the market increase, you see those going up. However, there are many other use cases and there are other blockchain networks, the likes of Polkadot, which is an alternative way of running a blockchain and the likes of Polygon, which token is MATIC. And so these are alternative ways of running blockchains. And in as much as the existing chains have weaknesses, these chains might be able to address those weaknesses. However, there are other tokens, and these other tokens are the leading defi protocols. And so what we have is you have the biggest exchange really, Uniswap, on there and it’s really proven itself. It’s got the biggest amount of liquidity, and is seen as a blue chip in the defi space. You’ve got the biggest defi bank Aave on there, which allows people to deposit tokens, earn an interest rate, as well as to borrow tokens by putting in collateral. And then you have the likes of Chainlink, which is like an information service. And currently, if you think about the traditional world, in order for people’s contracts, they need information. So they might need the price of gold if we agreed to sell each other transaction gold at the ruling price or the oil price. There are current information services out there like Bloomberg and Reuters and S&P, to provide this information. Chainlink is the equivalent of that in the blockchain ecosystem. And they do two things. They provide information that is on chain. So maybe what’s the Ethereum price? Someone might need that, but also off chain information. So you and I might get into a contract on the Ethereum blockchain, but we might say that if it rains tomorrow, then you owe me $1,000. Now who’s going to give us that information? The blockchain doesn’t know about it, so Chainlink takes that information from the real world and brings it on chain. And so these defi protocols, what you often see is that other protocols that have been built today, they use these protocols either to make exchanges to generate liquidity, or because they need information. And so these are seen as the blue chips. When the crypto ecosystem starts to get a bit more momentum again, it’s highly likely that these protocols will see a high level of usage first. 

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