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> But in our email exchanges, he argued that he'd executed a perfectly legal series of trades. In real finance, there is an understanding that technical loopho

by SamBam 4y ago

> But in our email exchanges, he argued that he'd executed a perfectly legal series of trades. In real finance, there is an understanding that technical loopholes can exist, since not every outcome can be foreseen when writing laws, but the legal system can frequently prosecute against a series of actions which are, individually, legal, but which together are taken in order to achieve something illegal. That is, modern finance and the law also attempt to deal with intent. But in the Ethereum smart contracts world isn't the whole premise that the code is the law? That we don't need any of these pesky courts or banks or auditors or anything: the code is the law, and the decentralized blockchain will enforce it. With this worldview, if the attacker simply exploited poorly-written code to find a loophole, how do the owners of Index have a leg to stand on?

miltondts 4y ago
> That is, modern finance and the law also attempt to deal with intent. It does? Maybe for the poor, but certainly not for the rich/corporations.[1] [1] - https://www.imf.org/external/pubs/ft/fandd/2019/09/tackling-global-tax-havens-shaxon.htm https://www.imf.org/external/pubs/ft/fandd/2019/09/tackling-...
- kmlx 4y ago
  so called “tax havens” actually have a role to play in the world economy. but on your main point regarding “modern finance and law”: 2021: https://member.fintech.global/2022/01/05/the-top-five-compliance-failure-fines-of-2021/ https://member.fintech.global/2022/01/05/the-top-five-compli... https://www.kyckr.com/aml-fines-2021/ https://www.kyckr.com/aml-fines-2021/ tldr fines amount to billions in total and sometimes criminal proceedings are brought forward.
  - throw_m239339 4y ago
    > so called “tax havens” actually have a role to play in the world economy. So does the mafia and the child slaves corporations like Nestlé profit from, they all have "a role to play in the world economy". But it's about the morals and ethics and the hypocrisy of western institutions that allow these loopholes for the super rich in order for them to protect their wealth from taxation.
twox2 4y ago
"Code is law" is a dream that is not actualized. It's not actually law, it's just code. I'm pretty sure law enforcement will gladly prosecute for a lot of these "hacks".
- gizmo686 4y ago
  What specific law was broken? In the US, generic "hacks" generally fall under the computer fraud and abuse act, which is notoriously vague about what qualifues as "authorized". Perhaps some other lawvis applicable. But I cannot think of any that are obviously on point. Nor can I think of a clear precedent that clarifies the issue.
  - buzzdenver 4y ago
    > What specific law was broken? Market manipulation, fraud.
    - Dylan16807 4y ago
      Market manipulation might work, but since it was all inside of a flash loan that's harder to argue. I'm skeptical that any fraud happened here.
- knorker 4y ago
  Indeed it cannot be actualized, as it connects to the real world. This is why things like "land registry on the blockchain" will never happen. When a court decides that a sale of a house was unlawful, then the blockchain is wrong and irrelevant. Code isn't law. Law is system that ultimately sends people to your house and puts you in a locked house that you're not allowed to leave, and lets other people live in "your" house now. Math can't enforce who lives in your house.
  - antisthenes 4y ago
    Exactly. Law isn't law unless it's been enforced through courts, precedent and ultimately someone with authority to use force to force compliance.
Ajedi32 4y ago
I've seen this argument regarding smart contracts several times now, and I don't think it makes any sense. It's like robbing someone in real life, then claiming you did nothing wrong because you didn't violate the "laws" of physics. Those are two entirely separate things. In the world of smart contracts code is indeed law, but that doesn't change the fact that in the real world law is law, and the fact that you used a smart contract to commit a crime doesn't make it any less a crime.
- meowface 4y ago
  In the real world law is law, but I think it's still not entirely clear whether smart contracts can be considered legal contracts and how to judge if any particular smart contract is one. If this smart contract is considered a legally binding contract, then, yes, this would likely be illegal despite the proverbial "letter" of the smart contract not being broken. If it isn't, then it may not necessarily be illegal (but possibly still could be).
- daveed 4y ago
  Respectfully disagree. I think I've seen several times the belief(from crypto supporters) that the code is the code is the code, and these are the rules that we play with. The "laws of physics" analogy doesn't match up. I feel like it would be more appropriate in an anarchist society (physics are the only laws, thus everything that obeys physics is game). This feels more like discovering an exploit in a video game. It's up to the devs to patch it, or tournaments to outlaw, but if you find something out, you can use it. We agree to play by the rules, but if someone comes up with something last minute, they can win.
  - bombcar 4y ago
    Many people in crypto want to not have to comply with "real world" laws right up until the point where it would be to their benefit to do so. And if "smart contracts" depend on real law, then they're not really needed in many of the supposed use cases.
    - 4y ago
SkyMarshal 4y ago
> With this worldview, if the attacker simply exploited poorly-written code to find a loophole, how do the owners of Index have a leg to stand on? They don’t. They simply have to accept it as a bug bounty successfully collected and paid out, and treat it as a learning experience and evolutionary process. Do better next time, if there is a next time.
- toomuchtodo 4y ago
  Good luck making that argument in court. Intent is key, and if this is not the intent of the "smart" (lol) contract, "finder's keeper's" is not a legal defense. The legal system doesn't care about your blockchain arguments.
  - glerk 4y ago
    A smart contract deployed on a public permissionless blockchain is not owned by anyone. Only the contract's logic determines how one can interact with it. This is a fact. It doesn't matter who can make the best argument in court. A good enough lawyer can convince a stupid enough jury of pretty much anything.
    - er4hn 4y ago
      Let's say that I place a vending machine in a public space, such as a street or a park. The public is able to interact with it by inserting FIAT coins to purchase DRNK. Someone clever figures out a way to interact with the vending machine to extract DRNK at less than it's intended FIAT price. Two questions at this point: (a) Is this a theft from the person who placed the vending machine? Why or why not? (b) How is this different from a smart contract on a blockchain?
      - cogman10 4y ago
        That sort of depends on what the exploit is, right? For example, if DRNK costs $1 per unit, but I find out that by putting in $1.25 I get 2 units, have I actually exploited the machine? Is it not reasonable to assume that discount was intended? Now, of course, if I'm prying open the machine with a prybar then we could argue that's just theft. But, putting money in the machine and getting units out is the intended interaction. Similar to how if a gas station accidentally puts the price of gas at $0.20 per gallon, even though everyone knows that's probably a mistake, it isn't on them for taking advantage of the artificially low price. So, that's what I'd say the difference is. A smart contract defines all the interactions that are valid. Thus, it is impossible to interact with a smart contract in a way that is "invalid" or "stealing". That'd be different if the user could modify the contract (apply a prybar) however, that's sort of the point, that you can't modify the contract to fix it. If the contract said "all your deposited crypto goes to cogman10" would we call that a theft when someone put their crypto into that contract? Perhaps if I misrepresented the contract, but then the whole point of these contracts is they are visible to anyone that wants to read/use them.
sushid 4y ago
I never hear "code is law" from defi protocols, their ToS, or really from anyone. It's only the detractors of Web3 who tout this false logic of "code is law" so I guess you're screwed. Examples of code NOT being the law: Some defi protocols have made those affected by a hack/loophole whole again with their own funds. Some defi protocols explicitly exclude certain jurisdictions like the US from accessing their protocol. Surely if they all belived "code is law" they wouldn't give a fuck, right?
- SamBam 4y ago
  > Examples of code NOT being the law: Some defi protocols have made those affected by a hack/loophole whole again with their own funds. That's a terrible example. If the code really weren't law, they'd reverse the transaction, or force the hacker to give back the money, like a court could. Since the code is law they're stuck, and so just hand the victim some money out of their own pockets, to try and eliminate bad press and keep people's trust.
  - sushid 4y ago
    That's because the transaction isn't reversible/is hard to trace the funds. It's not that "code is law" in the sense that smart contracts are extralegal. They would and should have legal recourse if the person were caught. And coins like USDC can blacklist addresses and comply with regulatory asks. It's hard to buy your argument that smart contracts are extralegal when there are operators that comply with legal authority.
glerk 4y ago
They really don't have any leg to stand on. A smart contract is a piece of code running on a public permissionless blockchain. The developers who deployed that code do not own it. Medjedovic had as much the right to take money out of the smart contract using the contract's logic as Kellar and Day. Being blockchain developers, Kellar and Day know these facts very well, but they persist in their hypocrisy because it is in their financial interest to do so. They are betting on a non-technical jury being convinced by a good lawyer that Medjedovic "hacked them" or "stole their funds" (which is not at all what happened here).
- woojoo666 4y ago
  By that token, wouldn't rugpulls be legal too?
  - glerk 4y ago
    Probably? A priori there is nothing wrong with someone who owns a large amount of a certain asset transferring it into a liquidity pool in exchange for a different asset. It gets more murky if a founder explicitly lies to investors in order to get them to buy their token. Fraudulent misrepresentation is problematic in most jurisdictions, but this has nothing to do with the mechanics of the "rugpull" itself.
    - s1artibartfast 4y ago
      rugpulls are different because crypto developers lie and deceive investors in their disclosure. A better example would be 3rd parties pumping and dumping a crypto asset. Should this be illegal?
    - ac29 4y ago
      Here's a recent case where the SEC litigated misappropriation of funds among other things: "According to the SEC's complaint, the defendants misappropriated nearly $4 million of investor funds. The SEC also alleges that Chiang and Tippetts misused additional Sharenode investor funds by spending at least 133 bitcoin to list NSG tokens on an unregistered trading platform and to fund a team of captive traders to trade NSG tokens amongst themselves to create the false appearance of a robust market with increasing prices. These traders allegedly created the false impression that more than $2.5 million worth of NSGs were traded daily on BitForex during the first 60 days and that the price of NSGs was steadily increasing due to investor demand. According to the complaint, however, the manipulation scheme collapsed when investors tried to sell their NSG tokens, because there were no actual buyers, causing the token's trading price and volume to fall precipitously." This isnt exactly a classic "rugpull", but it does make it fairly clear that you cant just take customer funds and use them however you'd like just because its a cryptotoken and you have access to the smart contracts controlling it. You really shouldnt use customer funds in furtherance of additional frauds, like these people did here. https://www.sec.gov/litigation/litreleases/2022/lr25377.htm https://www.sec.gov/litigation/litreleases/2022/lr25377.htm
roastedpeacock 4y ago
Am I missing something or did Medjedovic simply use unforeseen actions in the implementation of the contract as arbitrage and did not have an agreement to not attempt such actions? Do not see any 'unauthorised access' in that case i.e not the classic definition of 'computer hacking'. However if the case does end up progressing I do wonder what form a defense will take.
silverlake 4y ago
Citibank mistakenly sent $900M to a bunch of hedge funds. Many refused to return it. Citi lost the court case. https://www.cnn.com/2021/02/16/business/citibank-revlon-lawsuit-ruling/index.html https://www.cnn.com/2021/02/16/business/citibank-revlon-laws...
- rat9988 4y ago
  They sent their lender the exact sum of the loan. It's kind of a different case.
- daniel-cussen 4y ago
  Yeah like the other guy replied, they intended internally to send it to a wash fund but mistakenly (due to a UI glitch) paid the debt back to the lenders. Now that UI glitch was their fault too, so...the courts said, cry all you want. And they're a gigantic bank, it's the original digital business, every banker knows a single arithmetic error is dangerous. Just bankers being inept.
- colinmhayes 4y ago
  They accidentally repaid their loan early, which was explicitly allowed in the contract. The hedge funds were under no obligation to pay them back, since the money was now rightfully theirs.
  - sjtindell 4y ago
    And everything done in this case was in a smart contract. That’s the idea.
    - colinmhayes 4y ago
      I don't think the smart contract explicitly said "there's this arbitrage opportunity available", but it's definitely a fine line.
      - Dylan16807 4y ago
godelski 4y ago
This is a thing that confused me about smart contracts. I don't see how they can exist without a judicial system. They do seem to have some uses under that framework. Like the system is auditable so you can prove if someone cheated and changed a contract out from under you (and you lost your copy), but that's only a minor improvement on the current system. The US has a lot of legal policy that is based on spirit of the law because it is well recognized that humans are imperfect and never will be. It then seems silly that people who are fully aware of failure analysis/engineering would design a system where the mode of failure is easily exploitable.
- webmaven 4y ago
  The legal system has failure modes that are just as easily exploitable, but humans can intervene and reverse the failure, make people whole, etc. The problem with smart contracts isn't that there are bugs, but that buggy results are final with little to no recourse, by design, unless you get everyone to agree to hard fork the chain (rolling the "bad" transactions back and eplacing the buggy contract) and/or the implementation (if the bug was in the platform rather than the contract). The legal system has a similar principle of not being liable for conduct that predates a ruling or law that forbids it, but it also has the principle of agreements being interpreted according to common sense understanding by a person with ordinary skill, and where skill differences exist between them the non-expert's interpretation is the one given precedence. These meta rules don't have equivalents in smart contract systems, which makes them brittle. The only way smart contracts end up being used for non-trivial purposes is if they are made explicitly subordinate to the existing legal infrastructure in ways that will gum up the works, or if smart contracts are subject to mandatory formal verification possibly including game theoretic 2nd order effects.
  - LeifCarrotson 4y ago
    I think a lot of the appeal of crypto/smart contracts is that they are final with little to no recourse, humans can't intervene and exploit failure modes which individuals using the so-called contracts can't defend against. Corporations and wealthy individuals with influence in the writing of this legal system, with massive amounts of financial resources, with negligible moral agency, and with limited criminal liability find very different utility in the ability to use the legal system to roll back contracts, to enforce them, or to ignore them. Those who find themselves on the other side of this power disparity would often prefer to risk a potentially buggy but inviolate contract than one which they expect to be abused against them.
fnordpiglet 4y ago
The courts have found that a written description of the contract is legally binding even if the smart contract has a bug that allows things that were intended to be disallowed. Further the courts held the right to decide whether something was allowed or not allowed on their own judgement regardless of the smart contract, asserting the primacy of the law and jurisprudence over cryptonerd utopian fantasy.
- victor9000 4y ago
  Which cases and jurisdiction are you referring to?
  - fnordpiglet 4y ago
    I’ve long lost my references to the cases, I tried to Google around for a bit but didn’t turn it up. However I did find this analysis from Harvard law that says more or less the same thing, start with the section: What is the “Final” Agreement Between the Parties? https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/ https://corpgov.law.harvard.edu/2018/05/26/an-introduction-t...
c3534l 4y ago
Yes, but the I believe similar cases have appeared where the courts have found against the objectivity of smart contracts. I think, ultimately, the point of regulating the financial markets is not to protect investors, but to protect the economy. And if a smart contract undermines the security of our financial system, then that smart contract may simply be illegal.
renewiltord 4y ago
Contracts are contracts and law is law. Law can overrule contracts. Smart contracts just let you have executable terms which allows greater composition and commoditization.
mikkergp 4y ago
This is a twitter thread apparently from the lawyers hired by Indexed "I want to explain to you why what you did was illegal and wrong": https://twitter.com/ohaiom/status/1451142195369725957 https://twitter.com/ohaiom/status/1451142195369725957
- Spivak 4y ago
  Until this pans out in an actual court this is basically a strongly worded vaguely threatening letter from a lawyer. If they actually had him dead to rights they wouldn’t be posting their legal theory publicly and asking pretty please give it back or else these other people we’re not at all affiliated with and have no control over (but don’t pay attention to that fact) might put you in jail.
bolasanibk 4y ago
The Worlds littlest skyscraper https://en.wikipedia.org/wiki/World%27s_littlest_skyscraper https://en.wikipedia.org/wiki/World%27s_littlest_skyscraper
- Scramblejams 4y ago
  Anybody ever figure out what happened to J.D. McMahon? I searched a little but didn't turn up much.
ummonk 4y ago
As the article mentions, there is a difference between the utilitarian and the libertarian view of DeFi / smart contracts. In the utilitarian worldview, the legal system still exists to handle disputes / exploits, but in the absence of such legal disputes, smart contracts allow you to automatically execute contracts without needing human overhead to manually execute them.
prvc 4y ago
He contravened their "intent" to make more (fiat) money through speculation, simply put. If they actually wanted to promote decentralization and openness, they would not be undermining trust in it and impeding its adoption by invoking the legal system at this stage. All they gain from suing over this is making things hard for the kid who did the trade, and a remote possibility of "recovering" some of their previous valuations in fiat.
xenophonf 4y ago
> But in the Ethereum smart contracts world isn't the whole premise that the code is the law? That we don't need any of these pesky courts or banks or auditors or anything: the code is the law, and the decentralized blockchain will enforce it. It's like the people who invented smart contracts never heard of the incompleteness theorem.
tomaha 4y ago
Like high frequency trading players front-running trades, faking liquidity, manipulating prices, and changing infrastructure to benefit them to really screw people that want to buy or sell stocks? Never heard of anyone getting prosecuted by the legal system for that (besides for taking HFT code with them, but never for screwing a normal buyer or seller). Edit: It would be great if there was more moral in finance, but I think that's wishful thinking and doesn't really distinguish traditional finance or Defi. The only nice thing about Defi is that everyone can see what's going on in contrast to what happens when you do something in traditional finance.

by SamBam 4y ago

miltondts 4y ago

> That is, modern finance and the law also attempt to deal with intent. It does? Maybe for the poor, but certainly not for the rich/corporations.[1] [1] - https://www.imf.org/external/pubs/ft/fandd/2019/09/tackling-global-tax-havens-shaxon.htm https://www.imf.org/external/pubs/ft/fandd/2019/09/tackling-...

kmlx 4y ago
so called “tax havens” actually have a role to play in the world economy. but on your main point regarding “modern finance and law”: 2021: https://member.fintech.global/2022/01/05/the-top-five-compliance-failure-fines-of-2021/ https://member.fintech.global/2022/01/05/the-top-five-compli... https://www.kyckr.com/aml-fines-2021/ https://www.kyckr.com/aml-fines-2021/ tldr fines amount to billions in total and sometimes criminal proceedings are brought forward.
- throw_m239339 4y ago
  > so called “tax havens” actually have a role to play in the world economy. So does the mafia and the child slaves corporations like Nestlé profit from, they all have "a role to play in the world economy". But it's about the morals and ethics and the hypocrisy of western institutions that allow these loopholes for the super rich in order for them to protect their wealth from taxation.

twox2 4y ago

"Code is law" is a dream that is not actualized. It's not actually law, it's just code. I'm pretty sure law enforcement will gladly prosecute for a lot of these "hacks".

gizmo686 4y ago
What specific law was broken? In the US, generic "hacks" generally fall under the computer fraud and abuse act, which is notoriously vague about what qualifues as "authorized". Perhaps some other lawvis applicable. But I cannot think of any that are obviously on point. Nor can I think of a clear precedent that clarifies the issue.
- buzzdenver 4y ago
  > What specific law was broken? Market manipulation, fraud.
  - Dylan16807 4y ago
    Market manipulation might work, but since it was all inside of a flash loan that's harder to argue. I'm skeptical that any fraud happened here.
knorker 4y ago
Indeed it cannot be actualized, as it connects to the real world. This is why things like "land registry on the blockchain" will never happen. When a court decides that a sale of a house was unlawful, then the blockchain is wrong and irrelevant. Code isn't law. Law is system that ultimately sends people to your house and puts you in a locked house that you're not allowed to leave, and lets other people live in "your" house now. Math can't enforce who lives in your house.
- antisthenes 4y ago
  Exactly. Law isn't law unless it's been enforced through courts, precedent and ultimately someone with authority to use force to force compliance.

Ajedi32 4y ago

I've seen this argument regarding smart contracts several times now, and I don't think it makes any sense. It's like robbing someone in real life, then claiming you did nothing wrong because you didn't violate the "laws" of physics. Those are two entirely separate things. In the world of smart contracts code is indeed law, but that doesn't change the fact that in the real world law is law, and the fact that you used a smart contract to commit a crime doesn't make it any less a crime.

meowface 4y ago
In the real world law is law, but I think it's still not entirely clear whether smart contracts can be considered legal contracts and how to judge if any particular smart contract is one. If this smart contract is considered a legally binding contract, then, yes, this would likely be illegal despite the proverbial "letter" of the smart contract not being broken. If it isn't, then it may not necessarily be illegal (but possibly still could be).
daveed 4y ago
Respectfully disagree. I think I've seen several times the belief(from crypto supporters) that the code is the code is the code, and these are the rules that we play with. The "laws of physics" analogy doesn't match up. I feel like it would be more appropriate in an anarchist society (physics are the only laws, thus everything that obeys physics is game). This feels more like discovering an exploit in a video game. It's up to the devs to patch it, or tournaments to outlaw, but if you find something out, you can use it. We agree to play by the rules, but if someone comes up with something last minute, they can win.
- bombcar 4y ago
  Many people in crypto want to not have to comply with "real world" laws right up until the point where it would be to their benefit to do so. And if "smart contracts" depend on real law, then they're not really needed in many of the supposed use cases.
  - 4y ago

SkyMarshal 4y ago

> With this worldview, if the attacker simply exploited poorly-written code to find a loophole, how do the owners of Index have a leg to stand on? They don’t. They simply have to accept it as a bug bounty successfully collected and paid out, and treat it as a learning experience and evolutionary process. Do better next time, if there is a next time.

toomuchtodo 4y ago
Good luck making that argument in court. Intent is key, and if this is not the intent of the "smart" (lol) contract, "finder's keeper's" is not a legal defense. The legal system doesn't care about your blockchain arguments.
- glerk 4y ago
  A smart contract deployed on a public permissionless blockchain is not owned by anyone. Only the contract's logic determines how one can interact with it. This is a fact. It doesn't matter who can make the best argument in court. A good enough lawyer can convince a stupid enough jury of pretty much anything.
  - er4hn 4y ago
    Let's say that I place a vending machine in a public space, such as a street or a park. The public is able to interact with it by inserting FIAT coins to purchase DRNK. Someone clever figures out a way to interact with the vending machine to extract DRNK at less than it's intended FIAT price. Two questions at this point: (a) Is this a theft from the person who placed the vending machine? Why or why not? (b) How is this different from a smart contract on a blockchain?
    - cogman10 4y ago
      That sort of depends on what the exploit is, right? For example, if DRNK costs $1 per unit, but I find out that by putting in $1.25 I get 2 units, have I actually exploited the machine? Is it not reasonable to assume that discount was intended? Now, of course, if I'm prying open the machine with a prybar then we could argue that's just theft. But, putting money in the machine and getting units out is the intended interaction. Similar to how if a gas station accidentally puts the price of gas at $0.20 per gallon, even though everyone knows that's probably a mistake, it isn't on them for taking advantage of the artificially low price. So, that's what I'd say the difference is. A smart contract defines all the interactions that are valid. Thus, it is impossible to interact with a smart contract in a way that is "invalid" or "stealing". That'd be different if the user could modify the contract (apply a prybar) however, that's sort of the point, that you can't modify the contract to fix it. If the contract said "all your deposited crypto goes to cogman10" would we call that a theft when someone put their crypto into that contract? Perhaps if I misrepresented the contract, but then the whole point of these contracts is they are visible to anyone that wants to read/use them.

sushid 4y ago

I never hear "code is law" from defi protocols, their ToS, or really from anyone. It's only the detractors of Web3 who tout this false logic of "code is law" so I guess you're screwed. Examples of code NOT being the law: Some defi protocols have made those affected by a hack/loophole whole again with their own funds. Some defi protocols explicitly exclude certain jurisdictions like the US from accessing their protocol. Surely if they all belived "code is law" they wouldn't give a fuck, right?

SamBam 4y ago
> Examples of code NOT being the law: Some defi protocols have made those affected by a hack/loophole whole again with their own funds. That's a terrible example. If the code really weren't law, they'd reverse the transaction, or force the hacker to give back the money, like a court could. Since the code is law they're stuck, and so just hand the victim some money out of their own pockets, to try and eliminate bad press and keep people's trust.
- sushid 4y ago
  That's because the transaction isn't reversible/is hard to trace the funds. It's not that "code is law" in the sense that smart contracts are extralegal. They would and should have legal recourse if the person were caught. And coins like USDC can blacklist addresses and comply with regulatory asks. It's hard to buy your argument that smart contracts are extralegal when there are operators that comply with legal authority.

glerk 4y ago

They really don't have any leg to stand on. A smart contract is a piece of code running on a public permissionless blockchain. The developers who deployed that code do not own it. Medjedovic had as much the right to take money out of the smart contract using the contract's logic as Kellar and Day. Being blockchain developers, Kellar and Day know these facts very well, but they persist in their hypocrisy because it is in their financial interest to do so. They are betting on a non-technical jury being convinced by a good lawyer that Medjedovic "hacked them" or "stole their funds" (which is not at all what happened here).

woojoo666 4y ago
By that token, wouldn't rugpulls be legal too?
- glerk 4y ago
  Probably? A priori there is nothing wrong with someone who owns a large amount of a certain asset transferring it into a liquidity pool in exchange for a different asset. It gets more murky if a founder explicitly lies to investors in order to get them to buy their token. Fraudulent misrepresentation is problematic in most jurisdictions, but this has nothing to do with the mechanics of the "rugpull" itself.
  - s1artibartfast 4y ago
    rugpulls are different because crypto developers lie and deceive investors in their disclosure. A better example would be 3rd parties pumping and dumping a crypto asset. Should this be illegal?
  - ac29 4y ago
    Here's a recent case where the SEC litigated misappropriation of funds among other things: "According to the SEC's complaint, the defendants misappropriated nearly $4 million of investor funds. The SEC also alleges that Chiang and Tippetts misused additional Sharenode investor funds by spending at least 133 bitcoin to list NSG tokens on an unregistered trading platform and to fund a team of captive traders to trade NSG tokens amongst themselves to create the false appearance of a robust market with increasing prices. These traders allegedly created the false impression that more than $2.5 million worth of NSGs were traded daily on BitForex during the first 60 days and that the price of NSGs was steadily increasing due to investor demand. According to the complaint, however, the manipulation scheme collapsed when investors tried to sell their NSG tokens, because there were no actual buyers, causing the token's trading price and volume to fall precipitously." This isnt exactly a classic "rugpull", but it does make it fairly clear that you cant just take customer funds and use them however you'd like just because its a cryptotoken and you have access to the smart contracts controlling it. You really shouldnt use customer funds in furtherance of additional frauds, like these people did here. https://www.sec.gov/litigation/litreleases/2022/lr25377.htm https://www.sec.gov/litigation/litreleases/2022/lr25377.htm

roastedpeacock 4y ago

Am I missing something or did Medjedovic simply use unforeseen actions in the implementation of the contract as arbitrage and did not have an agreement to not attempt such actions? Do not see any 'unauthorised access' in that case i.e not the classic definition of 'computer hacking'. However if the case does end up progressing I do wonder what form a defense will take.

silverlake 4y ago

Citibank mistakenly sent $900M to a bunch of hedge funds. Many refused to return it. Citi lost the court case. https://www.cnn.com/2021/02/16/business/citibank-revlon-lawsuit-ruling/index.html https://www.cnn.com/2021/02/16/business/citibank-revlon-laws...

rat9988 4y ago
They sent their lender the exact sum of the loan. It's kind of a different case.
daniel-cussen 4y ago
Yeah like the other guy replied, they intended internally to send it to a wash fund but mistakenly (due to a UI glitch) paid the debt back to the lenders. Now that UI glitch was their fault too, so...the courts said, cry all you want. And they're a gigantic bank, it's the original digital business, every banker knows a single arithmetic error is dangerous. Just bankers being inept.
colinmhayes 4y ago
They accidentally repaid their loan early, which was explicitly allowed in the contract. The hedge funds were under no obligation to pay them back, since the money was now rightfully theirs.
- sjtindell 4y ago
  And everything done in this case was in a smart contract. That’s the idea.
  - colinmhayes 4y ago
    I don't think the smart contract explicitly said "there's this arbitrage opportunity available", but it's definitely a fine line.
    - Dylan16807 4y ago

godelski 4y ago

This is a thing that confused me about smart contracts. I don't see how they can exist without a judicial system. They do seem to have some uses under that framework. Like the system is auditable so you can prove if someone cheated and changed a contract out from under you (and you lost your copy), but that's only a minor improvement on the current system. The US has a lot of legal policy that is based on spirit of the law because it is well recognized that humans are imperfect and never will be. It then seems silly that people who are fully aware of failure analysis/engineering would design a system where the mode of failure is easily exploitable.

webmaven 4y ago
The legal system has failure modes that are just as easily exploitable, but humans can intervene and reverse the failure, make people whole, etc. The problem with smart contracts isn't that there are bugs, but that buggy results are final with little to no recourse, by design, unless you get everyone to agree to hard fork the chain (rolling the "bad" transactions back and eplacing the buggy contract) and/or the implementation (if the bug was in the platform rather than the contract). The legal system has a similar principle of not being liable for conduct that predates a ruling or law that forbids it, but it also has the principle of agreements being interpreted according to common sense understanding by a person with ordinary skill, and where skill differences exist between them the non-expert's interpretation is the one given precedence. These meta rules don't have equivalents in smart contract systems, which makes them brittle. The only way smart contracts end up being used for non-trivial purposes is if they are made explicitly subordinate to the existing legal infrastructure in ways that will gum up the works, or if smart contracts are subject to mandatory formal verification possibly including game theoretic 2nd order effects.
- LeifCarrotson 4y ago
  I think a lot of the appeal of crypto/smart contracts is that they are final with little to no recourse, humans can't intervene and exploit failure modes which individuals using the so-called contracts can't defend against. Corporations and wealthy individuals with influence in the writing of this legal system, with massive amounts of financial resources, with negligible moral agency, and with limited criminal liability find very different utility in the ability to use the legal system to roll back contracts, to enforce them, or to ignore them. Those who find themselves on the other side of this power disparity would often prefer to risk a potentially buggy but inviolate contract than one which they expect to be abused against them.

fnordpiglet 4y ago

The courts have found that a written description of the contract is legally binding even if the smart contract has a bug that allows things that were intended to be disallowed. Further the courts held the right to decide whether something was allowed or not allowed on their own judgement regardless of the smart contract, asserting the primacy of the law and jurisprudence over cryptonerd utopian fantasy.

victor9000 4y ago
Which cases and jurisdiction are you referring to?
- fnordpiglet 4y ago
  I’ve long lost my references to the cases, I tried to Google around for a bit but didn’t turn it up. However I did find this analysis from Harvard law that says more or less the same thing, start with the section: What is the “Final” Agreement Between the Parties? https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/ https://corpgov.law.harvard.edu/2018/05/26/an-introduction-t...

c3534l 4y ago

Yes, but the I believe similar cases have appeared where the courts have found against the objectivity of smart contracts. I think, ultimately, the point of regulating the financial markets is not to protect investors, but to protect the economy. And if a smart contract undermines the security of our financial system, then that smart contract may simply be illegal.

renewiltord 4y ago

Contracts are contracts and law is law. Law can overrule contracts. Smart contracts just let you have executable terms which allows greater composition and commoditization.

mikkergp 4y ago

This is a twitter thread apparently from the lawyers hired by Indexed "I want to explain to you why what you did was illegal and wrong": https://twitter.com/ohaiom/status/1451142195369725957 https://twitter.com/ohaiom/status/1451142195369725957

Spivak 4y ago
Until this pans out in an actual court this is basically a strongly worded vaguely threatening letter from a lawyer. If they actually had him dead to rights they wouldn’t be posting their legal theory publicly and asking pretty please give it back or else these other people we’re not at all affiliated with and have no control over (but don’t pay attention to that fact) might put you in jail.

bolasanibk 4y ago

The Worlds littlest skyscraper https://en.wikipedia.org/wiki/World%27s_littlest_skyscraper https://en.wikipedia.org/wiki/World%27s_littlest_skyscraper

Scramblejams 4y ago
Anybody ever figure out what happened to J.D. McMahon? I searched a little but didn't turn up much.

ummonk 4y ago

As the article mentions, there is a difference between the utilitarian and the libertarian view of DeFi / smart contracts. In the utilitarian worldview, the legal system still exists to handle disputes / exploits, but in the absence of such legal disputes, smart contracts allow you to automatically execute contracts without needing human overhead to manually execute them.

prvc 4y ago

He contravened their "intent" to make more (fiat) money through speculation, simply put. If they actually wanted to promote decentralization and openness, they would not be undermining trust in it and impeding its adoption by invoking the legal system at this stage. All they gain from suing over this is making things hard for the kid who did the trade, and a remote possibility of "recovering" some of their previous valuations in fiat.

xenophonf 4y ago

> But in the Ethereum smart contracts world isn't the whole premise that the code is the law? That we don't need any of these pesky courts or banks or auditors or anything: the code is the law, and the decentralized blockchain will enforce it. It's like the people who invented smart contracts never heard of the incompleteness theorem.

tomaha 4y ago

Like high frequency trading players front-running trades, faking liquidity, manipulating prices, and changing infrastructure to benefit them to really screw people that want to buy or sell stocks? Never heard of anyone getting prosecuted by the legal system for that (besides for taking HFT code with them, but never for screwing a normal buyer or seller). Edit: It would be great if there was more moral in finance, but I think that's wishful thinking and doesn't really distinguish traditional finance or Defi. The only nice thing about Defi is that everyone can see what's going on in contrast to what happens when you do something in traditional finance.