November 2, 2023

How a Fantom trader turned $116K into $1M in WBTC

Yesterday, an interesting arbitrage play occurred when a trader turned its $116,000 in Fantom tokens into about $61,000 worth of now-depegged Bitcoin-pegged tokens, then into about $1M in $WBTC. How did that happen? Let's take a closer look.

On November 1, at around 9:30 AM UTC, a newly-created address (0x4732) swapped 500,000 Fantom ($FTM) tokens on SpookySwap, a decentralized exchange on the Fantom blockchain, for 28.4066 $BTC. At the time, the Fantom tokens were worth $116,000, while the $BTC tokens were valued at just $60,782.20.

Why were the $BTC tokens valued this cheaply on SpookySwap? It's because the assets the trader bought were actually BTC-pegged tokens on Multichain, a defunct token bridge protocol. We'll discuss more about the nature of the depegged tokens later.

After the purchase, the trader promptly made a cross-chain transfer of the Bitcoin-pegged tokens to Ethereum, receiving 28.4066 Wrapped Bitcoin ($WBTC) tokens worth $978,630.34 in the process.

Hence, 0x4732 turned a little over $116,000 into about $1M thanks to some irregularities on Multichain and the irrational confidence to pull off such a move.

How did this lucky trader get a discount this big? To understand how this situation happened, let's look into these factors:

1. Discounted BTC and ETH on Fantom

In July, Multichain announced that it shut down its operations because it ran out of funds and its CEO and other executives were arrested by Chinese authorities. The police also confiscated the CEO's assets, including those used to process transactions on the token bridge, and obtained Multichain's assets on the Ethereum chain.

This event led to the de-pegging of tokens on the Fantom chain that were supposed to be pegged to Bitcoin and Ethereum. Right now, the price of $BTC on the wBTC/wFTM (Wrapped Fantom) pair on SpookySwap is $3,690.88, while the price of $ETH on the wETH/wFTM pair is $426.78.

It's important to note that there were originally no $USDC, $USDT, $ETH, or $WBTC tokens on the Fantom chain. Instead, Fantom utilized Multichain's technology, which involved locking these assets on Ethereum while generating corresponding tokens on the Fantom chain. If the tokens on Ethereum were stolen, like what happened when Multichain shut down, the Fantom tokens lost their collateral and thus lost their value.

Now, anyone can still buy these de-pegged $BTC and $ETH tokens on Fantom, but that alone would not generate arbitrage because Multichain is not functioning. Or is it?

2. Multichain is still functioning to some extent

Whoever 0x4732 is, the trader was bold enough to purchase significant amounts of depegged BTC on Fantom and then use the non-functional Multichain bridge to flip those tokens into something of significant value. Otherwise, these funds would have been lost.

Since Multichain relies on centralized services, the cross-chain process involves burning tokens on the Fantom network and minting AnyWBTC, its Bitcoin-pegged token, on Ethereum. This operation requires the centralized service to function correctly, or users won't receive the tokens on the target chain. Given that 0x4732 was able to pull off a major arbitrage trade, the trader must have known that Multichain's centralized service was active before conducting these transactions.

Upon further investigation, the 0xScope team found that there are arbitrage opportunities with $WBTC (to Ethereum), $USDT (to Avalanche), $ETH (to BNB Smart Chain or BSC), and $USDC (also to BSC). Our team also discovered that Multichain still has some operational chains, such as KCC, Moonriver, and Moonbeam. This seems to indicate that the Multichain team is attempting to restart its operations, as evident in some successful cross-chain transactions made on the platform despite its supposed shut-down status.

And that's how $116,000 turned into almost $1M.

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