A CryptoPunks NFT sells for an eye-popping $532 million – but the purchase isn’t all it seems

CryptoPunks
CryptoPunks Rokas Tenys
  • A CryptoPunks NFT sold for $US532 ($AU705) million, but it was paid for with borrowed money that was instantly repaid, Larva Labs said.
  • The CryptoPunks creator said Friday a number of NFT sales have been made using these ethereum-based flash loans.
  • The most expensive legitimate CryptoPunks NFT changed hands for $US11.8 ($AU16) million in June at Sotheby’s.
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A CryptoPunks NFT avatar sold for over $US532 ($AU705) million worth of ether this week, causing people to wonder why the value was so high, even for the world of crypto art.

There was speculation on social media about whether it was some kind of scam or security exploit, or a criminal trying to cover up dirty money.

On Friday, CryptoPunks creators Larva Labs jumped in on Twitter to explain how one of its NFTs – or non-fungible tokens – appeared to have gone for half-a-billion dollars.

Compare that with the most expensive legitimate CryptoPunks NFT, Covid Alien, which sold at a Sotheby’s auction in June for $US11.8 ($AU16) million. The record for an NFT was the $US69 ($AU91) million paid for a piece by Beeple in March.

Larva Labs’ bot put out an alert Wednesday that CryptoPunk 9998 had been bought for 124,457 ether.

CryptoPunks
CryptoPunks Larva Labs Twitter

“This transaction (and a number of others) are not a bug or an exploit, they are being done with flash loans,” Larva Labs explained.

Flash loans have become popular in decentralized finance, or DeFi, as a collateral-free, peer-to-peer way to borrow via the ethereum network. Smart contracts set out the terms of the loan, with the money expected to be repaid within seconds. Every part of the process is carried out simultaneously on the blockchain, and the borrower covers the network processing fees.

“In a nutshell, someone bought the CryptoPunk NFT with borrowed money and repaid the loan in the same transaction,” Larva Labs said.

“Some recent large bids were done the same way. The ether is offered and removed in a single transaction. So, while technically briefly valid, the bid can never be accepted.”

Larva Labs said it will add filtering to avoid generating alerts for this kind of transaction in the future.

Like most NFTs, the 10,000 existing CryptoPunk avatars are tied to digital tokens on the ethereum blockchain. That link makes the NFTs open to use of flash loans.

At the same time, flash loans have been used in scams by exploiting vulnerable DeFi protocols. Early last year, one fraudster scooped up almost $US1 ($AU1) million in ether by fooling lenders on bZX that the loan had been repaid, according to a Decrypt report. The scammer did this by temporarily pushing up the price of the stablecoin being used to repay the loan.