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The Ballad of Risk-Free Avi
A crypto arbitrageur allegedly crosses the line between trading and fraud. His story is a parable for the wider cryptocurrency community.
There can be a thin line between trading and stealing. A trader’s goal is to exchange something for more than what they paid for it. In a ruthlessly efficient market, a trader has to capitalize on asymmetries between the information they possess and the information available to their counterparties. The greater the asymmetry, the greater the trader's opportunity to profit. The age-old question for traders and regulators is: What is the point where the asymmetry becomes so great between two parties that a trade is no longer just a trade, but theft?
A cryptocurrency trader named Avraham Eisenberg chose to walk the line between trading and stealing, and allegedly crossed that line. He publicly bragged about executing risk-free trades and openly admitted to using clever tricks to loot his targets. He believed in the crypto ethos of "code is law," that any action within the marketplace is permissible as long as you are clever enough. However, he eventually discovered that all trades have embedded risks, and that "code is law" only holds until the cops show up.
This is the story of Risk-Free Avi.
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Avraham Eisenberg is a motivated guy. While completing a bachelor's degree in mathematics at Yeshiva University, Avi was a member of the debate team and occasionally wrote for the school paper. In what appears to be ironic foreshadowing, Avi listed his intellectual interests on a Yeshiva profile as "epistemology," "philosophy of science," and "applied ethics."
While completing his undergraduate studies, Avi simultaneously founded and operated his own company. Thimes Solution, Inc (TSI), was an Amazon-based reseller of various products. According to a lawsuit filed by TSI in 2020, it was a small but successful company with over $300,000 in profits annually. However, TSI was subsequently accused of selling counterfeit products by a Chinese WiFi manufacturing firm called TP-Link. TSI was banned from selling on Amazon and the business collapsed. TSI subsequently sued TP-Link, alleging that TP-Link had fraudulently alleged counterfeiting to remove a competitive product reseller from the market. Unfortunately for Avi and TSI, the lawsuit was dismissed. It appears that TSI formally ceased doing business sometime in 2020.
The suit against TP-Link was not Avi's first experience with civil litigation. He had previously sued the town of Clarkston, NY for negligence after he slipped and fell on ice. Like the lawsuit against TP-Link, his personal injury case was eventually discontinued with prejudice in 2019.
With the failure of TSI and his lawsuit against the town of Clarkston, Avi went in search of more profitable pastures. Sometime in 2020 or 2021, Avi began trading crypto. In July 2021, he created his "DeepFiValue" Substack blog, which promised "deep dives into cryptonomics." His first article, "Anatomy of a Yield Farm," is an excellent analysis of how decentralized finance (DeFi) protocols generate yield. In his explanation, Avi acknowledges that the vast majority of these protocols are doomed to failure by nature of their design:
Usually what happens is the token jumps a lot initially, then slowly declines as rewards get sold off, until eventually the token isn’t worth enough for people to think it’s worth continuing to “farm” it, and they exit. This is ultimately a zero sum game; all money being made by anyone here comes at the expense of others who played it wrong.
Avi later (in)famously wrote an article titled "How our team makes millions in crypto risk-free." In this piece, Avi explains two strategies that he had used to make several million dollars. In one instance, he used bots to mass-purchase NFTs by "spam[ming] transactions with minimal fees right when the project launched." In another strategy, he borrowed a large amount of the rebase token Amplforth, taking advantage of a differential between the borrowing rate and the rewards distributed to holders of the AMPL token. In both cases, these appear to have been legal trades. While many cried foul at his use of bots to "spam" NFT auctions, it does not appear that this was illegal.
However, Avi did not restrict himself to legal and "risk-free" trading opportunities like these. He ran into some trouble in February 2022 due to his relationship with a "decentralized autonomous organization (DAO)" called Fortress DAO. You can think of a DAO like a joint-stock corporation, except one that operates without any of the legal advantages of incorporation and uses blockchain tokens to settle questions about governance. DAOs pool assets from users to execute various strategies. One well-known example is "Constitution DAO," a DAO that attempted to buy a copy of the U.S. Constitution that was being auctioned by Sotheby's.
Avi was one of the main developers of the Fortress project. He eventually ended up essentially controlling the main wallet holding the DAO's pooled assets. He created his own "stablecoin" called FUSD, then was able to ram through a proposal to convert all of Fortress' funds, some $14 million, into FUSD. Avi said this was for the good of everyone, as FUSD was "fully backed." He then deployed the assets in a variety of "yield-farming strategies." Understandably, the members of Fortress DAO cried foul at this move. However, since Fortress DAO's design did not actually provide token holders with real power, they were stuck howling into the wind as Avi made off with their funds. Again, Avi had taken advantage of the lack of regulatory oversight to engage in tactics that would be unacceptable in a regulated market.
Despite his questionable practices, it wasn't until October that Avi finally made headlines after he targeted a mid-sized decentralized exchange platform called Mango Markets. Mango enabled users to trade cryptocurrencies and issued its own token, $MNGO, to act as a "utility token" within the market. In addition to "spot" trading (buying and selling “real” cryptocurrencies), Mango enabled trading in perpetual futures contracts betting on the price of the MNGO token.
Mango also allowed users to borrow funds from their platform, using the user's account balance as collateral. Unfortunately for Mango, they allowed ALL assets held in the account to be used as collateral. This included the value of perpetual futures issued on the platform. When Risk-Free Avi discovered this set-up, he moved quickly to exploit it.
Avi's scheme was relatively simple. He first created two accounts on the Mango platform and deposited several million dollars' worth of the USDC stablecoin to each account. He then sold perpetual futures contracts on the MNGO price to Account #1 from Account #2. He was therefore able to make a huge bet on $MNGO price going up without spending more than transaction fees. Next, he proceeded to make large spot purchases of MNGO using both Mango and accounts on two other exchanges. The price of MNGO jumped. As a consequence, the value of Avi's perpetual futures in Account #1 spiked 1300%, taking the value from $18.5 million to $260 million.
Using his futures contracts as collateral, Avi then borrowed essentially all of the available funds held by Mango in a few minutes, a total of some $117 million worth of USDC ($52.8 mil), wBTC, USDT, SOL, and SRM. He then transferred the "borrowed" funds off-platform to another wallet. Of course, it isn't really borrowing when you never intend to pay the money back...
In other words: Avi made a big bet on the MNGO token price, then manipulated that price, and then used the artificially inflated value of his bet to “borrow” $117 million.
Finally, Avi sold the MNGO tokens he had accumulated, and the price collapsed. The value of the futures contracts in his Mango account collapsed as well, leading to a margin call on Account #1. Of course, he had already sucked all of the money out of the platform so the attempted liquidation failed to recoup any losses.
Blockchain sleuths rapidly discovered that Avi was behind the heist. After being outed, Avi posted an infamous Twitter thread in which he referred to his scheme as a “highly profitable trading strategy:”
While many asserted that he would face legal action for his actions, Avi seemed unconcerned. He asserted that his actions were “legal open market actions” because he had “us[ed] the protocol as designed.” After all, code is law, and since crypto was unregulated he figured he would be fine. Eventually, he settled for repaying $67 million from his haul to "make users whole." A cool $50 million for a few hours of risk-free work, and Avi had entered the crypto trading history books.
However, just two months later Risk-Free Avi discovered that there had been risk in his actions after all. He was arrested in Puerto Rico and charged with commodities fraud and manipulation in relation to the Mango exploit. He is now waiting to stand trial.
The story of Risk-Free Avi is a case study for cryptocurrency as a whole. The space has capitalized on a perceived lack of legal clarity to perform what some playfully call "regulatory arbitrage." People routinely make unregistered securities offerings, sell unregistered investment products, and engage in market manipulation tactics that have been illegal in U.S. markets since at least the 1930’s.
Avraham’s clever arrogance does not strike us as unique. Instead, Risk-Free Avi’s attitude mirrors the broader crypto community’s perspective. These folks remain infatuated with their ability to construct and exploit complicated Rube Goldberg-esque financial constructs while remaining blind to the externalities and hidden risks generated by their actions. Programmers who imagine they are philosophers, the crypto-conomists confuse technical skill with wisdom. Limited by simplistic understandings of law and economics, trapped by their ignorance and conceit, they fail to recognize that cleverness can only be a temporary refuge from reality.
For Avi, reality came in the form of handcuffs and a quick flight from Puerto Rico. And just as it came for Avi, reality is rushing forward to interrupt the crypto community’s convoluted dreams of perpetual financial motion and risk-free opportunity.
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