I wrote about a deeply exploitive scam called The Billion Coins. Unfortunately, that coin is still active and is still taking advantage of people. They have tried to rebrand to make themselves look more official, but are still the same group of scum.
I once wrote about a worthless token called slidebits. Now the creator himself removed the blockchain from his app.
I wrote an article presenting a bearish case for a token when I was applying to a crypto hedge fund. That token has a market cap 1/10 of it’s all time high. Though I must admit, it has not seemed to be affected by any of the issues I pointed out. Sometimes things just break your way.
LABCOIN – Labcoin was a company that claimed to be working on Bitcoin ASIC mining technology.
SANDSTORM – Sandstorm was an ‘investment fund’ which claimed to use the Bitcoins invested in it to make more money. It appears to have likely been an unsustainable high yield investment. You can find public copies of their ‘financials’ here. (archive)
There is an obsession passing through crypto over ‘yield farming’. I have very little idea what yield farming is. In order to learn what it is I am going to look into a coin that recently launched that I saw people tweeting about called Kimchi. I chose this coin as it came out the same day that I made my first batch of kimchi. This post will be a log of my trying to understand this coin.
First, I need to figure out what is yield farming. As far as I can tell yield farming works by placing your token into a Uniswap (or similar auto market maker) contract that is against a dollar equivalent (often Tether or USDC). In order to understand the impact of this I have to zoom out again and refresh my memory of how Uniswap pools work.
[Aside I learned while researching this: Tether and Binance violate the ERC-20 standard by not returning an integer boolean when transfer() is called and both instead return nothing.]
Each pool consists of two ‘ERC-20’ tokens (as discussed above they do accommodate some non standard implementations) (this also means that the contract does not natively handle Eth and instead must use WEth which is ether wrapped in an ERC-20 compliant token). When you make a swap in this pool the token you transfer is exchanged for the proportional value of the other token in the pool. Say there is 1 Eth in the pool and 100 USDC and you swap 0.05 Eth then you will receive 4.747 USDC. This amount may seem odd at first glance, but Uniswap charges a 0.3% fee on the trade which is paid out to those who have contributed their assets to the pool. (Note: this examples ignore gas fees)
So now we need to zoom out slightly more and focus in on the liquidity providers. The way these pools work is that you deposit your tokens to the contract as a liquidity provider and then are paid a liquidity token which represents your proportional ownership of the fees for that contract. This token can be transferred, traded, and lent (this is where some of the more complex interactions come into play) and to receive your payout of the liquidity fee your liquidity token must be burned. On contracts with decent volume you can receive meaningful returns from contributing your tokens to the contract and thus people are incentivized to contribute to further liquidity.
Okay now I feel like I have a strong enough understanding of these systems to actually look at the token in question Kimchi. In the past when assessing new contracts my instinct has always been to read the whitepaper, however Kimchi and many other of the ‘new’ tokens do not have whitepapers. So that stymied somewhat, however Kimchi does tell us it was forked from Sushi and Yuno. I was optimistic that one of these would have a whitepaper. They do not. Sushi however does have a Medium post. Perhaps that will help us understand their system.
The first change is that the liquidity token provided in Uniswap is replaced with a Sushi token that gives an ONGOING right to fees deposited into the contract. I emphasized that in case any securities lawyers come across this article. The way this works is that the majority of the liquidity fee is distributed to active liquidity providers in the same way that it is with Uniswap, but a small portion of it (1/6) is converted to Sushi and issued proportionally to Sushi stakers. Every block Sushi are minted and 90% are distributed to Sushi stakers and the remainder go to the ‘Dev Fund’.
Now we can shift back to Kimchi and try to figure out how it differs from Sushi. First, they mint more tokens in each block. Second, they offer preferential rewards for some pairs. Looking around on Twitter it appears that YUNO the other token they forked from had a backdoor, and Kimchi preserved that backdoor but made it impossible to exploit by tying it to a non-functional contract. https://twitter.com/emilianobonassi/status/1300925536747876354
This also means that there is no real governance or changes that can happen with Kimchi, whereas Sushi claims to be working on governance.
Now we need to zoom out one more time and look at yield farming as a whole and why these tokens are popping up in the first place. Many different DeFi products like Compound issue governance tokens to users and this has incentivized a large amount of liquidity to flow into them. Furthermore, there are people who will contribute their token to liquidity on Compound, and then use the resulting token representing their lent token on Compound as liquidity on Uniswap (or Sushi or whatever). The ability for the same collateral to be used in multiple places, and producing yields in multiple places that can then also be used to generate yield seems to be the basis of yield farming.
My fundamental and deep seated issue with all of this is that this all seems to be happening with such speed that any kind of due diligence is skipped. There are no whitepapers. There are no security audits. There is no community due diligence before money starts pouring in. Many of these contracts have admin keys that allow for the creators to mint a large amount of tokens, to remove liquidity, to change the contract in other ways. This does not seem to be the future of money, but instead a mad cash grab built with the assumption that the black swan will never happen. That the stacked yields won’t eventually succumb to abnormally large withdrawals, or exploits, or extraordinary market conditions. Inevitably they will. I hope every single person with funds committed to them are fully aware of that risk.
Note: This is an old article being moved over from Medium
After taking a broad look at stablecoins as a whole and then Dai in specific, I decided to keep the momentum going and take a deep look at the Basis Protocol. Same rules as I did for Dai, you guys are coming with me as we go through the whitepaper (I may skip things that are super boring, or I think are meaningless marketing speak). Also, always remember I do not edit, I write in one straight run through, and it is often late at night when I’m writing so my thoughts tend to…meander.
First we’re skipping all the stuff about why they think stability is important, because that is not what we are discussing today. Plus, most of it sounds like marketing speak to my ear. I am pulling out this one phrase though, just because it made me incredibly nervous when I read it for some reason. Mainly because whenever I see algorithm here, I imagine the potential for nefarious actors to manipulate it by exploiting weaknesses in the algorithm, however, I need to judge them on their implementation and not my biases.
This phrase is going to piss off the libertarians and “sound money” fans who love that Bitcoin is fixed, but I have always been nervous that Bitcoin’s deflationary nature represented a potential risk for a small number of oligarchs to end up with a disproportionate amount of wealth. (Apparently I’m okay with pissing people off tonight, sweet this is going to get interesting)
For the record it took until page 8 for them to start discussing how this works, and that upsets me. Way too much marketing speak before this. The next section is all about the quantity theory of money which is basically the ability to inflate or deflate.
Biggest problem I see here is the potential for aggregate demand to be mismeasured by one of the Oracles, or however they determine this.
Okay so here I am going to copy and paste my own previous explanation of these different coins from my stablecoins article.
The base shares are created in the genesis block and all new base coins go to them as “dividends” (holy shit I hope they spent some of that $100 million on Securities lawyers). The base coins are a separate coin from the shares that is issued to holders of the base shares when the price of the base coin exceeds peg, in theory diluting their value and bringing the value back to peg. Base bonds are issued when the value falls below peg. When this happens you can purchase a Base bond for the current value so say $.80 and then redeem it for $1.
Now where this gets even trickier is when it comes time to issue new coins is that it goes first in, first out. So it goes to the oldest bond holder first, and then continues down the line, and if there are in theory no bond holders then the coins are issued to the share holders.
Now what is the issue with this system? Economics mostly. Let’s start with what is the most obvious to me, my incentive if I am a whale and if this is liquidity is to become a large share holder, and then whenever I get a dividend to immediately sell it, purchase bonds, wait for them to redeem, and then dump again. If the market gets too big for me to do this alone, I do what all the whales are already doing in crypto and organize this process with a few other people.
Okay let’s discuss these mechanisms for a minute. First one is obviously worthless. One glitch in the feed and you could seriously hurt your monetary supply. Toss it. Second one is probably reasonable. However, both the second and the third one are going to run into the problems that the Ethereum DAO and the EOS launch have had. Mainly most people just do not vote. The incentive may help, but it makes this protocol naturally inflationary, which will require the issuing of more bonds, and I worry that the inflation could start to outrun the system.
This claim that it would require 50% of the voting coinbase is an interesting one. Namely because it is important to remember that likely much of the coinbase will not be voting (see Ethereum DAO and EOS). Thus comparing it to Bitcoin where you need objectively 51% of the hashpower to execute a double-spend attack (closer to 33% for a selfish mining attack) is very different than 50% of the voting coinbase which might be closer to 10% of the total supply. Therefore, it is much more vulnerable than they make it seem here. They think that their incentive system will help increase the percentage who are voting, but it is important to remember much of this coin is probably going to be like other stablecoins where it is held at an exchange and used primarily for short-term trading, so I do not buy that
We already discussed this above.
Already discussed this above too.
Well I kinda want that later discussion, this makes me very nervous. Also means there is always going to be a risk that bond holders are taking on, which is different than the risk-less way they pitch it.
Here we go, they are saying basically what I said. Now, there are other existential risks that occur when demand falls like they are worried about here, mainly centered around the “stability fund” they discuss alter in this paper.
I’m just imaging what would happen if the United States Government decided to start just defaulting on their debt. (The answer is the rate at which people would lend them money would skyrocket as their credit rating plummeted, and the USD would likely lose it’s place as global reserve currency, while it inflates in order to try to cover remaining debt) So basically not the analogy you want to evoke.
Intuitively to me it feels like at any point of serious expansion, arising after a long period of stability, it is going to be more beneficial to be a shareholder than a bondholder.
Okay, so contraction is interesting. We’re back to these bonds. My issue with these bonds again, is that you could potentially (though five years is a long time) be left holding a worthless bond. If I am understanding the clearing price part right, they are also basically trying to incentivize bond purchases near the peg, which is actually really clever. I quite like the thought that went into that, because it was initially counterintuitive to me. Basically, you are encouraged to put your order at a high price, because if they need more coins than that, it will actually fill at a lower price than your order, but you are guaranteed to be getting in first. Clever little bit of game theory and incentive setting. Props to the Basis team for that.
Quite frankly, I do not think I am qualified to analyze this part. My one fear is the fitting of GBM parameters to those assets, which generally trend up. I am still worried about potential Black Swan events, but I am not qualified to judge this model setup.
This seems true, if the price is expected to return to peg. Though I am not sure about people taking short positions, because of the cost. There is also the key point here that as long as there is sufficient liquidity, that will come in later when they discuss the “stability fund”.
I just realized they do not discuss their “stability fund” in their whitepaper. In some of their other documents, they say that they will use money raised to provide a stability fund that will provide off chain stability in price. So just like the other stablecoins, they are trading their own coin to maintain the peg. One of the biggest peg breaks for Dai was when their bot doing this trading failed. They also need this to provide the liquidity neccessary for price responsiveness, but in order to maintain the fund they will continually need money coming in. That is….dangerous.
Overall, I would not trust Basis, or any other stablecoin I have analyzed so far. Remember, I wrote this late at night, and in one straight shot without editing, so if you catch any errors please let me know.
Sometimes life has a weird way of working out for me, like I was bored on Twitter looking for something to write about and then suddenly a scam decided to start spamming my mentions. I love when the scammers come to me! Saves me a step in my research process. This is a pretty blatant and awful scam too. So what is the Billion Coins Scam? It is basically a multi-level marketing scam applied to cryptocurrencies. (Note: I will not be linking to their sites in this piece because I do not want to raise their search engine ranking, instead I will embed screenshots.)
So the very first red flag for me was that it required an upfront wallet setup fee. This is very unusual in the cryptocurrency space. Then saw their claims of free transaction fees and I got really suspicious. After you pay this fee you can then be gifted 25,000 Kringles. (Actually cookie rewards but redeemable for Kringles.) Then things get well let’s call it crazy, but honestly that is being too nice.
This is a claim they frequently make, however, their Twitter account decided to contradict them and said this:
This kind of fundamental disagreement always puts me on edge when I am looking for scams.
This is where I get that sinking feeling in my gut that tells me this is without a doubt a scam. This kind of thing has been tried before. Anything that can only go up is without a doubt a scam and you should avoid anyone selling it. Then I kept reading and started to feel very sick to my stomach.
This chart is complicated but let me explain how it works to the best of my ability. This chart is an attempt to incentivize people to evangelize for this project. It dictates the price at which coins can be bought and sold at on any single day. The idea is that increases every single day, and you need to continue to recruit people in order to maximize the growth rate. It also encourages original stakeholders to sell their original tokens in order to “cash in.” This is classic multi-level marketing structure and it tries to avoid any free market input.
Any attempt to sell your tokens for less than the agreed on price and you lose access to your wallet. Any disparaging remarks on social media mean that that you will no longer be able to use your wallet. So what happens when there are no people willing to take anymore tokens at whatever price they end up at? You are left with worthless, illiquid crap, that a centralized authority can freeze at any time. This isn’t just a scam it’s fundamentally antithetical to the point of cryptocurrencies. The fundamental issue with any pyramid scheme is eventually the world runs out of fools.
Even this part confuses me, if they are guaranteed to always increase in value then as a holder I want to be purchasing as many as possible! However, the truth is if you do that they are not pulling in enough of the wallet fees.
Yes you should definitely do this! Sign up babies! Spam your friends! Get everyone involved in your pyramid scheme. Make sure they keep collecting your wallet fees, you are not the one who will end up profiting from this.
Hard for me to imagine why these places would block your email? You are obviously on the up and up. Nothing to see here.
This is not decentralized. We have already established the admin team can censor. They are lying.
Tell me if you think they have made it over 1,000,000,000 users. (Protip: they haven’t and they won’t.)
This video is where they say that people flow is cash flow. This is classic multi level marketing. Stop watching after that it is revolting.
They also cannot even maintain consistency as to at what price this locks in at.
This story starts to go completely off the rails when you follow the connections of Dan Lutz who is closely affiliated with this scam.
So who is Dan Lutz? Well he is a frequent scammer, and in this video where he is interviewed by Tracy Davison and claims to have met M1.
Now who is Tracy Davison and who is M1? Tracy Davison is another known scammer who promoted a Ponzi scam the SEC brought down. And who is M1? Well strap in because things go absolutely insane here.
There is a cult that is led by “M1” called Swissindo who claim to be able to pay off debt thanks to a vast fortune of gold and platinum, and he claims to be the one true world leader, with the blood of every royal family running through him. (Yes it is that crazy.) It’s also a lie that is used to prey on the most societally vulnerable people.
Also piles of gold sound familiar to me, let’s check and see….
There we go, they did claim to me they had a bunch of gold. In my opinion this scam is closely connected to Swissindo and all of these scams are awful because they take advantage of desperate people who feel like they are out of options.
These scams are preying on people, and selling them a dream that they cannot deliver. It is evil to so wantonly attempt to profit off another’s hopes and desperation.
Just know if you are one of the creators or promoters of a scam like this, working to intentionally defraud people I hate you. And if you are a scammer do not be stupid enough to serve yourself up on a silver platter by saying dumb-ass shit to me on Twitter.
h/t to Kyle Gibson for helping with the research for this.