DeFi week selection 丨 bZx should be stolen? How should DeFi be taxed

In this issue:

  1. One-week DeFi data: Defi ecological lock-up funds rose to 1.58 billion US dollars, which is still an increase of 0.56% from last week
  2. The opposite textbook of DeFi ecology, how bZx asks for help
  3. How is DeFi taxed? These ten questions and ten answers make you understand
  4. One week DeFi golden sentence review
  5. DeFi project progress in one week
  6. to sum up

According to Defi data from dapptotal statistics, after the bZx project suffered two consecutive lightning loan attacks, the lock-up funds of the Defi ecosystem fell by nearly 200 million US dollars, and then began to rebound gradually. As of now, it has risen to 1.58 billion US dollars, compared with last week It still increased by 0.56%, of which Maker locked up USD 5.6314 billion, accounting for 35.65%, EOSREX locked up USD 294 million, accounting for 18.62%.

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In addition, the data shows that the current ETH lock-up volume of the Defi ecosystem is about 3.66 million ETH, which is about 250,000 ETH less than last week.

The opposite textbook of DeFi ecology, how bZx asks for help

Although DeFi has shown its great potential for development, it is a very young industry and is therefore prone to errors.

Last week, the DeFi project bZx suffered two consecutive lightning loan attacks, which lost a total of about 3571 ETH. As for the specific process of these two attacks, many security analysis companies have given wonderful analysis, such as these two articles:

  1. Analysis of hard core technology | bZx protocol attacked by hackers ;
  2. Analysis | The bZx protocol has been hit by the technology behind hackers' "two combos" ;

When many people were amazed by the attacker's strategy, they also revealed the news of 1inch.exchange and the bZx / Fulcrum team, which is as follows:

"On January 11, 2020, when the Fulcrum team released its own Lightning Loan feature on the Ethereum mainnet, 1inch.exchange claimed to have discovered a very critical loophole, which could result in 2.5 million US dollars of user funds in 3 fund pools. Theft, in order to ensure that it is not used by hackers, 1inch.exchange initially prepared to perform a white hat hack on its own to protect user funds. But at the last minute, they decided to conduct a proof of concept and transfer only 1 weiDAI in two separate transactions To ensure that the vulnerability is real. After contacting the members of the bZx / Fulcrum team, 1inch.exchange informed the existence of the vulnerability and hoped that they would stop the smart contract immediately, but after a balance, bZx / Fulcrum chose to reject , And hope to solve it by means of repair. And this repair attempt process took about 16 hours (during which any attacker can exploit this vulnerability).

After the repair work was completed, bZx refused to offer a bounty to the 1inch.exchange vulnerability (industry practice, for bug fixers, a bounty is required).

Later, the bZx / Fulcrum team tried to order the Lightning Loan Functional Security Audit Service from 1inch.exchange. 1inch.exchange made a $ 2,000 offer with a weekly audit by three security personnel. The Fulcrum team wants to bargain to $ 1,500.

Later, the bZx / Fulcrum team proposed that the audit be part of the initial $ 5,000 bonus, requiring a security report.

Later, they proposed to pay only $ 3,500, and asked 1inch.exchange to solve this problem, but they could not choose to make it public.

1inch.exchange believes that it is possible to make mistakes, but it is unacceptable to deny the existence of the problem to the user.

After the lightning loan attack, the bZx / Fulcrum team suspected that it was related to 1inch.exchange …

The 1inch.exchange party did not acknowledge it, and said that the recent Lightning Loan hacking took advantage of old problems discovered and reported by samczsun.

Despite this, the bZx / Fulcrum team still suspects that 1inch.exchange is behind the attacks and accuses the other party of suspected threats …

" In the case of knowing that there are fatal vulnerabilities, bZx still chose to run without closing its contract. This operation is a bit annoying.

In contrast, after receiving a warning from Dominik Harz, Maker chose to vote urgently to modify the GSM delay time, thereby avoiding a catastrophe.

In comparison, it is obvious who is more trustworthy.

How is DeFi taxed? These ten questions and ten answers make you understand

Regarding DeFi, there are still many problems, such as how to tax, which lacks a guideline.

To answer this question, you need to know the relevant tax knowledge, and Shehan Chandrasekera, a certified public accountant and director of tax strategy from CoinTracker, talked about his views on how DeFi is taxed in a recent share.

Tax

(Picture from: tuchong.com)

(Note: The following content is for the United States. For DeFi users in other countries, some rules may apply and some will not apply.)

Original link: https://bankless.substack.com/p/how-to-do-defi-taxes

Author: Ryan Sean Adams

About Ethereum and Staking

Question 1: Is converting ETH to WETH a taxable event?

A: Most likely not, the purpose of converting ETH to WETH is to enable ETH to trade directly with other ERC20 tokens. The prices of ETH and WETH are almost the same. There are no capital gains or losses here.

Question 2: Does using ETH for gas consumption constitute a taxable event?

Answer: Yes, when you spend ETH on gas, you are dealing with "property" to pay the fees. If there is a difference between the ETH (cost basis) and FMV you pay when you pay for gas, there is a capital gain or loss.

Question 3: If I deposit ETH into a staking contract, will this trigger a taxable event that will require me to declare a capital gains tax?

A: Depositing ETH into a staking contract is not a taxable event. Generally, when you process ETH (permanent recovery of property from a user), a taxable event is triggered. Depositing ETH into a contract does not meet this condition, because you can get it back. Therefore, this matter does not involve taxation.

Question 4: Does upgrading ETH from 1.0 to 2.0 constitute a cryptocurrency transaction, so I need to declare capital gains tax? Is ETH 2.0 token a new asset?

Answer: The migration from ETH 1.0 to ETH 2.0 can be considered as a non-taxable token exchange, similar to the migration from Sai to Dai. We assume that ETH 1.0 tokens are replaced by 2.0 tokens at a 1: 1 ratio. The consideration here is that after migration, you can only access ETH 2.0 tokens, and the original 1.0 tokens are no longer valid.

About stablecoin

Question 5: Is it a taxable event to convert Chai to Dai?

A: Chai is an ERC-20 token that allows you to earn interest on Dai without having to lock it into Maker's Dai savings contract.

Position 1 : According to IRS Announcement 2014-21, cryptocurrencies are considered property. From a tax perspective, the conversion of Dai to Chai can be interpreted as disposing of one property and acquiring another. Therefore, if there are slight differences in the prices of Dai and Chai, these differences can be taxed as capital gains or losses.

Position 2 : Both Chai and Dai are stablecoins, and their purpose is to work as a traditional currency. The IRS has not proposed any direct guidance related to stablecoins. Due to the lack of direct guidance, neither Chai and Dai are speculative assets. One can argue that small price extensions during conversion should not be taxed as capital gains or losses. For example, if you make $ 100 last month and spend money on something next month, a $ 100 bill may fluctuate slightly due to inflation or deflation. In this case, you will not get any gains or losses because you did not hold $ 100 as speculative assets.

Position 3 : Converting Dai to Chai is an operation of depositing interest rates in Dai and should not be taxed.

In the above three positions, Chai's interest income can be regarded as interest income or lease income.

Note: The above three cases also apply to the exchange of other stablecoins, such as Dai to USDC, or GUSD to USDT.

Liquidity pool

Question 6: Suppose you add liquidity to Uniswap, how do you tax it?

Answer: Let's deal with each component of this transaction separately.

Increase liquidity for Uniswap :

Position 1: No tax is required. You are not disposing of your property, you are just depositing a pair of tokens. The token you receive only represents your original deposit interest rate, it is not new property.

Position 2: Need to pay taxes. Someone may say that you are selling your original deposit and receiving a new token property. Under A15, transactions between cryptocurrencies and cryptocurrencies are taxable.

Earn fees on Uniswap :

Uniswap collects 0.3% of the transfer fee from the exchange, and then apportions among all liquidity providers in that particular pool based on the amount of the pool of funds provided by the exchange. If we adopt the staking rule, these expenses can be taxed both as interest income and as rental income you earn.

Trade (or exchange) on Uniswap :

Under the A15 regulations, the exchange of cryptocurrencies with cryptocurrencies is taxable. Your gain or loss is the difference between the FMV of the property you receive and the cost basis of the virtual currency you exchange.

Current ratio change :

Every time your original deposit ratio changes, it means that you either gain access or lose access. Someone may say that you are selling one side of this trading pair in exchange for the other. Therefore, each rate change constitutes a taxable event. However, this is actually impossible to track because the ratio changes very frequently. Another option is to levy taxes when you withdraw your deposit. as follows.

Remove liquidity :

If the change in the original deposit ratio is not taxed in real time as mentioned above, another method is to tax it when you withdraw the deposit from the pool. This is more of a market value approach. For example, you can compare the difference between the cost base when ETH entered the liquidity pool and the FMV when it was retrieved as a capital gain or loss for taxation.

About Sets

Question 7: Will Sets be taxed like ETFs? If two tokens are bundled into one, will the holder pay taxes for this?

A: In the traditional financial world, when you trade ETFs, they are similar to taxes on stocks. According to the Securities and Exchange Commission (SEC), "ETF is an exchange-traded investment product that must be registered as an open investment company (commonly known as a" fund ") or a unit investment trust under the Securities Exchange Act of 1940 ". Since these funds are not registered with the Securities and Exchange Commission (SEC), they cannot actually be called ETFs, although they have similar functions to ETFs.

So yes, we have reason to think that when you trade sets, taxation is similar to selling the underlying assets, that is, it will lead to capital gains and losses.

DeFi interest and payment

Question 8: Is the DeFi bonus interest exempt? (Is it interest or capital gain?)

Answer: Because IRC's definition of interest income does not include anything very similar to the DeFi platform, and traditional interest income is obtained by borrowing money, it can be considered that DeFi interest is not interest income for tax purposes.

For tax purposes, interest can be classified as rental income. According to Regulation 1.61-8, "total income includes rent received or accrued as a result of occupation of real property or use of personal property". Personal property refers to any property that is not real estate such as land and buildings. Since cryptocurrencies are considered "property," the return you get from the DeFi platform looks more like rental income.

Question 9: If you use the streaming service Sablier to transfer someone's tokens, when will the taxable events of the parties occur?

A: Let us answer this question for the payee and payer separately.

For the payee, a taxable event is triggered when you receive tokens in exchange for the products or services you provide to the payer.

For payers, a capital gains and losses event (A13) occurs when you pay tokens to the payee. In addition, if the payer is a business, it will receive the equivalent of FMV deductions. This will be classified as wages or contractor costs on the books and tax returns. The payer may also need to accept 1099-K and 1099 miscellaneous reports.

Synthetix destruction

Question 10: When you burn sUSD at Synthetix to repair your mortgage rate, is this considered to be an increase in the cost base of all the underlying SNX you hold and your claimed future SNX / sUSD? What good tools are there to track.

A: The allocation cost method is a reasonable method. I don't know of any tools to track this.

One week DeFi golden sentence review

  1. "For unmanaged DeFi products, as long as they clearly reveal their centralized risks (management keys, oracles, etc.) and provide a clear roadmap for future decentralization."-Chris Blec
  2. "I don't know who needs to listen to this sentence. The reason you earn 4% -8% annualized income from DeFi products is not because you remove the middleman, but because you have to bear the main risk." —— Jake, co-founder of Better Tomorrow Ventures
  3. "As a DeFi security officer, you need to learn (1) consensus algorithms, (2) smart contract languages, (3) program analysis, (4) network and mobile security, (5) financial derivatives, (6) market manipulation, ( 7) Transaction algorithms, etc. This is one of the most exciting and difficult specialized ATMs. "-ConsenSys security researcher Bernhard Mueller

DeFi project progress in one week

  1. MetaCartel Venture DAO launches on the Ethereum mainnet ;
  2. tBTC is released on the Ropstein test network ;
  3. The integrated stablecoin project mStable debuted ;
  4. DeFi insurance program Nexus Mutual paid two bZx claims ;
  5. MakerDAO announces entry into defense mode for GSM governance ;
  6. bZx uses the administrator key to cancel the smart contract time lock function ;
  7. Data: Compound registered assets soared to more than $ 200 million ;

to sum up

It is difficult to avoid loopholes in the current DeFi project. When problems are discovered, should you first ensure the safety of user funds or ensure that you reduce the negative impact? This is a problem that every project party will encounter.

Obviously, bZx made a wrong demonstration, and this demonstration paid a very heavy price.

In addition, regarding the taxation of DeFi, although the regulator has not yet reached a conclusion, this is almost an inevitable problem for investors, so it is very helpful to know the relevant knowledge in advance.