Standard Kepler

USDT in High Demand Despite New Exchange Vulnerability

06/25 – 07/01

USDT in High Demand Despite New Exchange Vulnerability
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WEEKLY RECAP

  • Total market cap. reached $256.16 bn (a 4% increase), where 7 day trading volume dropped 10.2% for top 100 crypto


WEEK AHEAD

  • 5 July: ADA to release roadmap update
  • 6 July: ETH to participate in TechCrunch sessions: Blockchain 2018 in Zug


THOUGHTS OF THE WEEK

Investors’ attention turned towards USD Tether (USDT) this week. USDT plays a crucial role in the cryptocurrency ecosystem, as each USDT is supposedly backed by 1 USD, allowing USDT to act as a stable coin. After the 25 June issuance of 250mn USDT tokens into cryptocurrency markets, Slowmist, a Chinese private cybersecurity firm, detected a double-spending vulnerability in USDT.

Slowmist detected a logical flaw in USDT transactions, whereby they were able to send USDT to an unnamed exchange without correct transaction field values. In particular, they found that when users deposit USDT, the transactions can be processed even when the valid flag is displayed incorrectly as “valid=false”. The result is that users can trade the credited tokens even if they failed to deposit USDT, leading to a problem of double spending.

There are currently no crypto exchanges exposed to USDT’s vulnerability, with OKEx and ZB.com claiming it is safe to trade USDT with them following a series of system examinations. To minimize the exposure of this vulnerability in USDT, we suggest that crypto exchanges should perform a detailed checking to ensure the accuracy of valid flag values when verifying transactions.

The controversy over USDT continues, and exchange Kraken is forced to defend itself against allegations of market manipulation using USDT, with several experts and institutions raising doubts, among them NYU professor and market manipulation expert Abrantes-Metz who has stated that “Large trades are not impacting prices. I’ve looked through lots and lots of data, and I don’t think [the USDT trading on Kraken] is real”. Kraken defended against the above allegations, stating that 1) the majority of USDT orders exist within a very close range around the price level of 1 USD with very small price changes in USDT being the result, and 2) small and large trades may result in no or similar changes in price since there is likely a much larger buy or sell order in the order book that has not yet been filled.

Regardless of their merit, we would expect allegations such as those brought against Kraken to have a dampening effect on the interest from large institutional investors who are eying cryptocurrency markets, as they want to confirm that markets are fair before committing capital. Despite these allegations we expect the trading volume of USDT to rise in the short term as investors tend to trade altcoins with USDT to lock in portfolio values.

 

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