In an Ethereum-based 'Initial DEX Offering,' open doesn’t always mean fair

Lending platform bZx listed its BZRX tokens, and like other Etehruem projects, it did so via the fan-favorite decentralized exchange Uniswap, adding to a wave of so-called Initial DEX Offerings, or IDOs. The bZx team seeded the listing with $500k in capital and included a bridge for presale investors to claim liquid BZRX tokens.

Different Animal

IDOs on Uniswap are unlike ICOs where investors sent funds directly into teams’ wallets at predetermined price bands, as an automated pricing model means the token price can start climbing as soon as the sale starts. Also, the liquidity pool at the core of DEXs like Uniswap, means that traders can instantly cash out.

DEX offerings are also different from listings on centralized exchanges, such as Binance, as anyone is able to list their tokens on the open Uniswap platform. In theory, just as IDOs allow anyone to list tokens, they also allow anyone to buy them. In practice though, it doesn’t always work out that way.

12x Jump

Less than 60 seconds after the Uniswap liquidity pool was seeded, BZRX price jumped 12x from it’s listing price of 0.0002 ETH to 0.0024 ETH. You’d think this was a sure win for early investors. However, when looking under the hood of what happened, the main “winners” were those running scripts to purchase BZRX in the same block it became available.

The very first purchase of 650ETH was completed in the same block liquidity was added.

“At block 10451767, the Uniswap pool is created with 1k ETH and 1M BZRX which implies $0.04 as expected,” wrote Dex.Blue co-founder Angelo Min.  “BUT in the same block, 3 addresses managed to buy ~$187k worth of BZRX driving the price to $0.15 right off the gate.”

Not only were the bots able to get in and scoop the tokens up early, but they may have spammed the network to prevent others from getting in, according to Roman Storm, Peppersec founder.

Less than 5 min later, when the team officially announced the Uniswap pool on Discord and Twitter, the price was already hovering at around $0.60. At that point, other traders piled in to buy the token, and the initial traders were able to sell, with one of the “snipers” making almost $500k of profits.

BZRX has since slumped from its high of $0.6 to $0.2.

Bots’ Advantage

The bZx team clearly communicated the token address, the listing time and made precautionary warnings about scam addresses that popped up minutes after the sale.

But there’s only so much that can be done to give less technical and experienced investors a fair chance against their automated counterparts. As highlighted by CoinFund founder Jake Brukhman following UMA’s initial listing, it’s clear small fish may get fried when using Uniswap offerings.

The listing has sparked debate over openness versus fairness: do open protocols effectively generate an equal playing ground when technical traders can front-run less experienced participants?

bZx said that the bot was doing nothing more than a trader buying low and selling high.

Moving forward, it’ll be interesting to see how teams prepare for pushback from DeFi users after seeing what happened when a sale didn’t work out in their favor. This certainly won’t be the last IDO, and it’s clear other protocols - like Mesa - are putting their hat in the ring to start the discussion on a more fair distribution model.

—By Cooper Turley

[This story was written and edited by our friends at The Defiant, and also appeared in its daily email. The content platform focuses on decentralized finance and the open economy and is sharing stories we think will interest our readers. You can subscribe to it here.]