Updates
DeFi vs The Law: Arbitrum's $71M Legal Drama
Try this question: if North Korea steals your money and gets caught mid-heist, can North Korea's creditors collect on what's left?
Aave thinks the answer is obviously no. The legal system might disagree.
That's not a hypothetical. It's a real federal court fight over $71M in frozen ETH, and an SDNY judge is about to rule on it within the next two weeks.
What happened? Here's a recap if you weren't reading my newsletters:
- April 18. An attacker exploited Kelp's LayerZero V2 rsETH bridge and minted 116,500 unbacked rsETH out of thin air. They posted it as collateral and borrowed against it across Aave, Compound, and Euler. Total direct damage: ~$292M.
- April 20. Arbitrum's Security Council froze 30,766 ETH (~$71M) of the stolen funds sitting on Arbitrum One. First time the council has ever frozen funds in response to an external hack.
- The week after. Aave, Kelp, and a few others form a coalition called "DeFi United" and raise $311M+ in days to backstop rsETH holders. Arbitrum DAO opens a Snapshot vote to send the frozen $71M to DeFi United.
- Day the vote opens. A New York law firm representing creditors holding ~$877M in unpaid federal terrorism judgments against North Korea serves a restraining notice on Arbitrum DAO. Their claim: the ETH is DPRK property under Lazarus attribution, so it's theirs under their existing judgment.
- May 5. Aave LLC files an emergency motion in SDNY to vacate the notice. The argument: stolen crypto isn't the thief's property, so it can't be garnished for the thief's debts.
Common sense says Aave wins this. Stolen property doesn't become the thief's property, and the actual victims (rsETH holders plus the lending markets that ate the bad debt) shouldn't get bumped behind a different set of victims who happen to have an older judgment.
The legal system might not see it that way, at least not immediately.
Quick 80/20 on Aave might not win the emergency motion:
Gabriel, a lawyer in our industry, fed the relevant filings into Claude and asked for a verdict on the emergency motion. Claude pegged Aave's odds of getting the notice vacated at 20-25%. Full convo here.
The short version: a restraining notice doesn't litigate ownership at the freeze stage. Courts freeze first and sort title later. Vacating early means Aave has to prove the ETH isn't DPRK property right now, on an emergency timeline, against a creditor with an existing federal judgment. That's an uphill fight even when your equitable case is strong.
This whole mess raises two questions DeFi has to answer.
#1: Court order vs DAO vote, which one moves the money?
The Snapshot vote is going to pass. By the time you read this, it probably already has. So on paper, the DAO has decided: $71M goes to DeFi United.
The court notice says the opposite: don't move it.
What happens?
In this case, I expect the multi-sig and DAO operators to sit on the funds until the court rules. They're real people with real legal exposure, and "the DAO told me to" isn't a defense.
But imagine the vote had auto-executed the transfer the moment it passed. No human in the loop. No multi-sig waiting period.
Then what? Is the DAO in contempt? Will the voters be personally liable? Does the L2 itself get sanctioned?
I don't have clean answers.
#2: Should L2s freeze hacker funds going forward?
Short answer: yes. If you can stop $71M from going to a nuclear-armed dictatorship, you do it. There's no version of this where letting Lazarus walk away with depositor funds is the principled move.
Nuanced answer: L2s shouldn't have had the option in the first place.
Arbitrum is supposed to be a decentralized, immutable infrastructure. In reality, it's a database controlled by 12 people who can vote to freeze your funds. Are they prepared to make this call every time? Because the precedent is now set.
The middle ground is gone. L2s have two coherent options:
- Go full stage-2. No security council overrides, no admin keys, no freeze button. The chain is the chain. Hacks happen, victims eat the loss, and nobody can call SDNY because there's nobody to subpoena.
- Own the responsibility. Admit you're a chain with a board of directors, take legal liability for the funds you can move, and price that risk into how the network gets run.
Those are the only honest options. @lex_node has the long-form case for stage-2 here, and it's worth the read.
SDNY's ruling on Aave's emergency motion will probably drop within 1-2 weeks.
If the court vacates the notice, rsETH holders get made whole, and L2s keep their freeze authority with a fresh layer of legal precedent. If it doesn't, the $71M stays in legal limbo, and every L2 just learned that freezing stolen funds is a one-way ticket into US courts.
The bottom line: we wanted code to be law. But law is the law.
Sponsored by ADI Chain
ADI Chain: The Institutional L2 From MENA
Meet ADI Chain: the first institutional L2 from MENA for stablecoins and RWAs.
(Btw, MENA stands for the Middle East and North Africa.)
Quick 80/20: It's an EVM L2 built using ZK Stack. Backed by International Holding Company (IHC) and First Abu Dhabi Bank, regulated by ADGM.
It's also the settlement layer for a Dirham-backed stablecoin regulated by the UAE Central Bank. ADREC is tokenizing Abu Dhabi real estate on it. OpenZeppelin audits, Chainlink, and Fireblocks round out the stack.
The big vision is to bring 1 billion people into the digital economy by 2030.
Nobody can get there alone. For that, you need institutional partners with their own distribution.
Enter Exodus, now live as the first non-custodial wallet to natively support ADI Mainnet and $ADI.
The integration also extends across Exodus's full B2B partner network, where each partner brings its own user base. ADI can plug into all of them. That's big distribution potential.
Every new chain right now is fighting over the last 1,000 degens left in the space with another perp DEX or memecoin launchpad. ADI is bringing institutions onchain instead. Different game entirely.
Narratives
Telegram Took Its Chain Back. Now What?
Why's $TON up so much?
Telegram replaces the TON Foundation as the driving force behind TON and becomes its largest validator. The focus shifts to tech superiority.
Pavel Durov posted that on his Telegram channel on May 4. Telegram backed it up onchain, staking 2.2M TON for ~25% of validator share.
The market loved it. TON ran from $1.37 to $2.21 in 48 hours, +62%. Trading volume jumped 623%. Memecoin sector cap (NOT, DOGS, the smaller stuff) climbed +67% in a day. The apps across TON also saw a notable increase in TVL.
Wait, wasn't Telegram already running TON?
If you've used a TON wallet, you opened it inside Telegram. If you tapped a hamster, you tapped it inside Telegram. So why has a Swiss "TON Foundation" sat between them this whole time? Because the SEC.
In 2018, Telegram raised $1.7B for the Gram presale, the second-largest ICO ever. The SEC sued in 2019, won the preliminary injunction in March 2020, and by June 2020, Telegram had returned $1.2B to investors and paid an $18.5Mcivil penalty to dissolve the project.
A community group forked the codebase. The TON Foundation has run dev ever since. Telegram, on paper, walked away. In practice, TON mini-apps have run through Telegram's product surface for years.
The Foundation existed to give Telegram legal distance. Six years later, the SEC and administration are much friendlier, and that pretense is over.
What's actually changing? Pavel Durov has announced the "Make TON Great Again" (MTONGA) roadmap.
It's a seven-step roadmap that's being unveiled progressively.
- Step 1: TON blockchain upgraded for 10x speed, 6x block rate, and sub-second transactions (April 2026).
- Step 2: Transaction fees cut by 6x to ~$0.0005 (implemented this week).
- Step 3 is Telegram replacing TON Foundation as the primary driver. They'll release new ton.org, new dev tools, and new performance upgrades. It'll be completed in 2-3 weeks.
We don't know exactly what the rest of the steps are; we'll know it when Pavel reveals it on his Telegram/X.
I get why the market is excited about this. Vibes seem to have shifted a bit more positive. And this series of announcements has captured a lot of attention.
Personally, I haven't aped into $TON. Why?
1. The Telegram thesis was already known.
TON has been "the Telegram chain" since at least the 2024 run. Telegram officially taking the lead makes the relationship louder, not deeper. The market repriced attention, not fundamentals.
To be fair, Telegram is a top-tier team that'll out-execute TON Foundation. We'll have to see how much of a difference they can make.
2. Onchain metrics aren't reflecting the price action.
The chart below is denominated in $TON. It's the best way to factor out the influence of price on onchain metrics. And except for DEX volume, it isn't showing any significant increase.
3. The tech isn't the moat people are pretending. Their TPS & speed are great. But it has a couple of problems: custom VM and custom language (FunC, with Tolk on the way), default async-sharded execution, and a learning curve that turns most EVM devs around at the door.
Bread had a good take: this is going to play out like Ordinals. It'll attract attention, price, and developers. But once devs try to build good onchain products, they'll run into friction. Then people will go back to using established networks like Ethereum and Solana.
So, it's a good narrative trade. Memes don't care about fundamentals or tech. Ride the meta if that's your style.
🚀 DeFi Catalysts
HyperLiquid's HIP-4 is now live on mainnet. It's the update that'll enable "outcome markets", a different framing of prediction markets.
Jito announced they're building a trading platform for advanced traders called JTX. They've explicitly excluded hobbyist traders from the target customer.
KelpDAO is migrating the rsETH infrastructure to Chainlink CCIP after the LayerZero Exploit.
Paul Sztorc is creating a new Bitcoin Fork called "eCash" with many changes, including confiscating Satoshi coins. BTC holders will get new coins they can dump.
Outcome Markets, the first prediction market platform native to Hyperliquid, launched on mainnet.
Trade.xyz introduced Pre-IPO Perpetuals (IPOP). They'll trade on share price rather than market cap, and convert to standard XYZ perpetuals after the IPO.
Strata launched the Saturn Credit market. It offers senior (srUSDat) and junior (jrUSDat) tranches of USDat for 7 and 13% APY.
PumpFun introduced Charity Coins in partnership with Donate.gg, which enables secure, trusted & compliant donations to over 10,000 charities.
Carrot is a Solana protocol that provides managed products. They're shutting down due to losses from the Drift hack.
Syndicate Labs experienced a private key compromise. ~18.5M SYND and ~$50,000 of tokens from customer chains were moved.
Royco Dawn has added seven tranched yield-bearing stablecoins ahead of its launch.
📰 Industry News
Saylor made a statement that he might sell some Bitcoin to pay the dividend just to send a message to the market. Analysts aren't expecting the sale though.
Coinbase has made a strategic investment in Centrifuge and designated it as a Preferred Tokenization Infrastructure platform.
MegaETH was accused of having a backroom deal with Binance when they had publicly taken a principled position against paying listing fees.
🐦⬛ X Hits
- HIP-4 Deep Dive
- 30 prompts for LlamaAI
- Biggest blocker for fixed-rate lending
- Introduction to the Agentic finance
- Canton vs Prividum: a tech trade-offs comparison
😂 Meme
Until next time,
Edgy
Today's email was written by Edgy and Yayya.
DISCLAIMER: I'm NOT a financial advisor. This content is for education and information purposes only. Crypto and DeFi are risky and speculative. Please do your research before investing.
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