Erebor Bank's Free Stablecoin Offer Exploited by Traders
Erebor Bank, backed by Palmer Luckey and aiming for an $8 billion valuation, recently offered its customers free conversions of USDC and USDT to dollars at face value. The move was meant to attract crypto firms, but it ended up being exploited by professional trading companies like Wintermute and Galaxy Digital.
These firms took advantage of small price gaps in the stablecoins' values, buying them below $1 and then redeeming them for the full dollar amount at Erebor's face-value conversions. This left Erebor to absorb the cost of the difference, which added up quickly given the millions of dollars involved.
Following the discovery of this loophole, Erebor responded by introducing fees, volume limits, and deposit requirements to curb arbitrage risk and protect its adoption and funding prospects.