The four acts of the wave of fraud surrounding DeFi
Decentralized finance (DeFi) is a wonderful trend with huge potential to transform finance. But floating in the wake of apps like UniSwap is the now-common swarm of scams and rip-offs.
To be fair, the so-called community has been practicing the game for many years. First with altcoins, then with ICOs, now with DeFis.
Still, it’s amazing how fast the DeFi scene is eating itself: fraud and investor deception are the order of the day, and meanwhile the first class action lawsuit is rolling in. The same thing we have seen over and over again is repeating itself as if in fast motion.
Please don’t misunderstand all of this. DeFi, short for “decentralized finance,” is a glorious tech trend that extends the principle of replacing middlemen with the blockchain from money to banking: based on the decentralized currency Ether (ETH), a stablecoin (DAI) is emerging in a decentralized way, as well as an ecosystem where people can borrow or lend money and exchange hundreds of tokens for each other – all without a middleman. That’s wonderful! If you don`t have Cryptocurrencies yet, don`t miss out and open a Binance account with a coupon from here.
Not at all wonderful, but probably typically human, is what DeFi has become in many places: Another tool of the greedy, the unscrupulous, and the swindlers to bamboozle the almost equally greedy, but guileless and tardy.
A drama in four acts, perfectly ordinary and banal.
I. Please make me a token too!
The 2020 DeFi show basically started with Compound. It’s a platform where people can borrow and lend coins and tokens in a decentralized way. The Compound developers found investors, and to offer them something, they issued a token, COMP, through which you can somehow govern the Compound protocol.
This token is now distributed when people use Compound to borrow or lend money. The term “liquidity mining” made the rounds, also “yield farming,” and because the COMP token started out unusually valuable, users who lent money on Compound suddenly got a hundred percent interest a year. Or so.
The DeFi scene didn’t know it yet, but it lost its innocence (at the latest) at this point. DeFi tokens became a general recipe for developers to remunerate themselves for their work and to offer something to investors. Since then, just about every DeFi project has introduced its own token: LEND, YFI, UMA, UNI, REN, LRC, BAND, YFII, AMPL and and and … These tokens became a universal adjusting screw of the DeFi economy.
In the end, the process is pretty old news: Ripple added a token to its payment network at the time, through which Ripple Labs got very rich after all, and every smart contract project of 2016-2018 needed a token that, distributed via ICO, made no sense but financed the development.
We are seeing the same thing now with DeFis, and the usual price direction of these tokens is south. But by the time it even gets close to zero, developers and investors have long since cashed out, and the wave has reached Act II.
Recently, John McAffee, the world-renowned anti-virus billionaire, was arrested in Spain. He is accused of collecting many millions of dollars for promoting tokens and shitcoins without disclosing it to his followers. Anyone who watched McAffee on Twitter during a certain period of time knows exactly what happened. The alleged billionaire wasn’t above ripping off his fans for a few bucks.
The same principle strikes again at, you guessed it, DeFi. Those who get in early on a DeFi token – or are showered with it because they lend money and tokens with a DeFi app, or have it in abundance because they give it out – buy a few influencers who advertise full steam ahead on all social media, and then, when the price hits a great high, dumps his token mountains, whereupon all those who bought in with hope watch, first stunned but still with hope, as the prices collapse, until they finally realize with resignation that they are holding the empty sacks in their hands. Thus, the pump’n’dump has reached its completion.
In late September, 50 crypto-influencers were exposed to have conspired to pump’n’dump in a Telegram group. The influencers had missed the $MEME airdrop, which was actually a satire on DeFi tokens, but nevertheless and rather inadvertently became worth a relatively large amount. The market was just in the mood for anything DeFi. So the influencers tried an “experiment”: they created a new project, the FEW token, which they distributed to themselves via airdrop, then ponied up the price on Twitter, flogged the tokens, and left the field with nice profits.
However, someone leaked a screenshot of the Telegram discussion, which, naturally, led to an outcry in the scene. Anthony Sassano, in particular, is well known on Twitter in the Ethereum community and received proper flack. He and other members of the group did try to talk their way out of it by saying it was a “joke”; when that didn’t help, they sought absolution by burning their FEW tokens.
The scandal remained, however, and the reputations of the influencers involved are likely to be tarnished for a long time – hopefully forever. Most importantly, the incident reveals what can happen when there is no one around to leak a screenshot – and what probably happened to numerous other DeFi tokens.
Exemplary of the typical cycle of such a token could be Yearn.finance (YFI): The token went live in late July, peaked at 30 times its price in mid-September, and has been reliably dropping ever since. Investors can dare to invest in such a token, and if they grab it before the pump, they will reap handsome profits. But it’s just a game of fire where someone will always lose in the end.
III. Exit Scams and Outright Fraud
Creating tokens is a lot like printing money, and as ever, that seems to be an irresistible temptation for drowning one’s problems in a pile of fresh dough at the expense of others.
As with altcoins and ICOs, creating new tokens is at least as lucrative as hacking an exchange. The Boxmining newsletter reports at least twelve DeFi projects that have turned out to be scams, more or less directly or indirectly:
Amplify.money raised 2,500 ether, just over 8 million euros, before the website and social media accounts went offline. Burn Vault Finance, Lv.Finance, Unirock and Yfdex.finance fared similarly. Other projects like Emerald Mine moved tokens that were supposed to be in a time-lock, the next faked audits, and still others built a backdoor into smart contracts that developers exploited at the expense of investors.
These and other incidents, Boxmining writes, have “caused substantial losses,” seriously affecting “users’ appetite for and ability to believe in DeFi.” As a result, DeFi is losing steam in general, which is unfortunate, “as it has huge potential to bring financial services to the unbanked and is a direct challenge to the status quo.”
On the other hand, DeFi probably wouldn’t attract so many fraudsters if it weren’t such a powerful technology. But the relationship between honest projects and fraudsters seems to be tipping, if it hasn’t been for a long time.
IV. The class action lawsuits
Every scam wave that rides a true innovation flows in several phases. After it peaks, it is usually followed by a rude awakening for all involved, and the court mills begin to grind. This is the toughest, saddest and longest phase, which can often last years, if not decades. It seems like it’s already about to begin at DeFi.
The first to be hit is Andre Cronje, of all people. Cronje rose to stardom almost overnight in the wake of the DeFi hype – a must-follow on Twitter – and fell low after a few months of fame. The group EMN Investigation is currently raising ether to sue Cronje and his comrades Kirby and Banteg “over the EMN scandal on behalf of the victims.” You can read more about it here.
Cronje, the founder of Yearn Finance, launched Eminence Finance (EMN) with Kirby and Banteg in late September as a surprise project. Soon after launch, EMN was hacked, and the entire $15 million that investors had put into the smart contract, trusting Cronje, was lost. Cronje claimed afterward that EMN wasn’t ready and that the version he released was just a test.
“But if EMN was just a test,” writes EMN Investigation, “it had no value as a token. Yet Andre watched $15 million pour in without saying a word. And yet he hyped it on Twitter.” Shouldn’t he have warned the public that they were buying a worthless token?
Cronje has withdrawn from Twitter and other social media. The incident, EMN writes, was “at best a viral token launch gone wrong, and at worst a rug-pull.” Rug-pull means a certain type of manipulation on exchanges.
Maybe the lawsuit will never happen because no one will donate, since there is no reason to trust the potential plaintiffs. Maybe the lawsuit will happen, and maybe over the course of the next few years it will get the right guy or the wrong guy in the form of Cronje. But the fact should be that there are dozens, if not hundreds, of people in the DeFi environment who deserve such a lawsuit.