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How can the price of the paid network token dropped from $2.8 to $0.3?

Author: LB 2021-03-11 188

We set off on our crypto journey in 2008, when bitcoin appeared as a cryptocurrency based on a peer-to-peer network to facilitate anonymous transactions between peers. The cryptocurrency world threw a double somersault when in 2013 Vitalik Buterin proposed his new solution to utilize the blockchain not only to register cryptocurrency transactions, but to deploy arbitrary programs as well. The Ethereum project brought us many novel ideas and one of these new concepts is what we call “smart contracts” is getting extremely popular these days. On March 5th, 2021 a smart contract was hacked and the exploit resulted in a very serious dip in the underlying token’s market price. Let me put down with exactness all that happened.

A certain amount of ratiocination is necessary if we want to understand every aspect of the story.

If you are a tech person, forking the bitcoin source code on Github and creating your “own‘ cryptocurrency is not a big deal. You can do the whole thing and come up with a completely new currency in a few hours, but you have to have some technological background, because you have to modify the bitcoin (or any other altcoin’s) source code and release your novel solution. This is what usually people do when they launch an ICO.

Nevertheless, this process can be lengthy and mortal participants might desire a more convenient way to create new digital assets to store value. Understanding the ins and outs of cryptographic algorithms (SHA-256, Blake2, Scrypt or Dagger-Hashimoto for example) is usually an insuperable difficulty for many of us, so until the advent of Ethereum creating new digital assets was a territory reserved only for the demigods of the IT sector. Notwithstanding this technical barrier, humanity has created over 900 altcoins and most of them are still effervescing.

Vitalik Buterin managed to lower this entry barrier with his proposal, because with a few lines of code, one can realize smart contracts on the Ethereum blockchain and these contracts, among many other functions, can embody cryptocurrency-like functionalities. A smart contract satisfying the requirements, prescribed in the ERC-20 standard is called an ERC-20 token. A token can be issued (minting), transferred and staked as well.

Currently, the only problem with these smart contracts is that it’s very expensive to deploy them. If we set aside this cost, basically any user can deploy a smart contract onto the Ethereum blockchain. The convenience of smart contract deployment led to an explosive growth in the number of ERC-20 tokens. Currently, there are 366,416 tokens on the ethereum blockchain and this number is growing.

If you’re a business owner and you don’t know how to code, you need to find someone to do the hard work for you. There are several companies to implement a new smart contract and once you pay their fee, they transfer you the keys required to access your smart contract.

The original ethereum standard states that once a smart contract is deployed, it cannot be modified, or in other words it’s immutable. Well, this is pretty much the expected behaviour, because we don’t want our contract to be altered once we signed it, right?

Well, if you listen to what Kyle Chasse, the CEO of the paid network token project said in an interview on YouTube, you learn that the key was mismanaged and the developer leaked the private key that was used to access the ProxyAdmin to switch on the minting functionality. I guess he was referring to the OpenZeppelin Upgrades Plugins. But a simple token can be implemented by using the tutorials from the official ethereum site. If Kyle is not an IT expert and he didn’t ask for mutable smart contracts, then my suspicion is that the developer he paid knowingly used this plugin so that he can leak the key to access the ProxyAdmin later.

This tiny mishap led to a very serious predicament and investors who purchased paid network tokens for ~$2.8 on the 5th of March, realized that their tokens were worth only ~$0.3 on the next day. This unprecedented accident could happen, because the hackers, enabling the mint function on the smart contract issued tokens of approximately $3.000.000, and they started dumping their stealthily acquired digital assets onto the market, which created an extreme supply. And we all know the laws of economics. When there is too much supply, nobody wants to buy and the price drops.

Right after the leak, the paid network token crashed, as investors were trying to catapult from the market and the token was moribund for a few days. Luckily, Kyle Chasse and his team appeared to be very vigilant and in a few days they were able to rectify the software bug. As investor trust recovered and money started flowing into the second version of paid network token, the digital asset exhibited a very herky-jerky upward trend, but its price seemed to have settled on the $2 level.

There is an ongoing clamour on YouTube and Twitter about the issue. I tried to comment under the interview on YouTube to ask for clarification about the immutability of the contract, but my comment got deleted. Let’s be tactful and suppose it was a YouTube bug...


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