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Cryptocurrency scams cost owners $7.7B in 2021, driven by DeFi-based “rug pulls”

blog.chainalysis.com

71–80 of 364 posts

Re: Cryptocurrency scams cost owners $7.7B in 2021, driven by DeFi-based “rug pulls”

#71
Maybe I'm missing something, but there's something that I don't get about DeFi.

My understanding of the idea is this:

1) Using distributed code, the operation of which is assured by code on a blockchain based system like Ethereum, lending and investment can happen without the intermediation of banks and capital markets gate keepers. The savings from cutting these layers out can be shared between the supply and demand side of capital.

2) On a temporary basis only, some element of the rewards of contributing external capital, computational power, or other resources to a particular pool of capital are "extra" on top of the core capital allocation function of the pool. These can be structured in various ways but essentially the idea is to bootstrap money into the pools through a reward system that declines over time.

3) If the core proposition, that there is gain to be had from the disintermediation, is true, then at some point pools reach a sort of "ignition" point where the pool exists for that purpose only and the temporary bonuses are no longer required. This would mean that despite structural similarities, these are not Ponzi schemes since there is an eventual state reached were a real function is being performed. Some people will stop contributing to a pool as the rewards taper, but that won't matter because most of the money is now in there to be lent out for profit.

4) If that core proposition is not true, then they are Ponzi schemes because all the growth is coming from the rewards.

My problem with (1) is that these are already relatively low margin activities so how can there be enough disintermediation to go at once you account for the default and scam risk on the side of the borrower? It isn't the case that capital is expensive right now, tech investors are giving it away like its going out of fashion, headline borrowing rates are incredibly low, PE is going crazy buying everything. It's also striking to me that the promoters of these DeFi schemes spend so much time on bringing in new lenders but very little seems to be done on the borrower side. Surely if you're building a sustainable capital allocation business, you need a pool of borrowers? Ideally one in a business where they can provide substantial collateral for their loan, support high returns, but somehow can't access other forms of finance (but not because their business is illegal). That would seem to be a rare commodity so I'm surprised not to see pools fighting over access to these borrowers.

Re: Cryptocurrency scams cost owners $7.7B in 2021, driven by DeFi-based “rug pulls”

#72
post #48

Earlier quoted context omitted.

"I would simply protect myself by not spending cash on things that are scams"

Even professional investors have a hard time telling scams apart from legit operations. Just look at the Madoff scandal. And when even the professionals fail to see scams, how is the general public supposed to do so?

Apparently I didn't make it clear enough that I wholeheartedly agree

Re: Cryptocurrency scams cost owners $7.7B in 2021, driven by DeFi-based “rug pulls”

#73
post #24

This is my biggest complaint against cryptocurrencies in general. I'm happy with my bank's fraud protection. How can crypto users protect themselves without recreating traditional banking? Bitcoin was released ~13 years ago, and wallet/transaction security has been one of the most important requirements since then (along with scalability, but let's not go there). If trillion dollar market caps and god-knows-how-many…

Normal individual transactions are secure. I can send money to Bob without worry that someone is going to somehow use the data in that transaction to steal my entire wallet. The "rug pulls" you see are from contracts written maliciously. DeFi is a ponzi scheme written into a Smart Contract, but some of them have an extra function that allows the creator to instantly steal all the money out of it.

> Normal individual transactions are secure.

For a very narrow definition. You still need a way to get Bob's wallet address, and to secure your own wallet. Just look around and you'll see plenty of experts failing to do that correctly.

> The "rug pulls" you see are from contracts written maliciously.

And the contracts, being from DeFi land, are immune from chargebacks or legal prosecution. Regular old fraud, made exponentially more damaging because of cryptocurrencies.

Re: Cryptocurrency scams cost owners $7.7B in 2021, driven by DeFi-based “rug pulls”

#74
I think "rug pulls" is not defined well.

One example of a "rug pull" is that the team provided liquidity to the AMM liquidity pool, and then removed it, leaving people with no where to trade the token. Its honestly hard for me to call that a scam, although I understand the community expectation being undermined.

First: the SEC exacerbates this reality. Tokens that don't want to be considered a security have to consider NOT providing an expectation of liquidity. The team has to avoid expectations of providing secondary market liquidity just to stay out of the crosshairs of the SEC. And even in SEC registered land, If you look at the "risk factors" section of public equities, they frequently say "there may be no market for these securities, a secondary market may never form, there is no guarantee that it will always be there", which is true in all markets!

Second: with the advent of AMMs, ANYONE can provide assets into the liquidity pool. (even the acronym of AMM don't tell you much about what this is, its just a different model of exchange that is very popular). So even if token traders had been relying on the team under an unspoken symbiosis of the team providing liquidity, the token traders now can do it themselves. This is also very common. The token traders typically follow incentives to actually do it, but they CAN without those incentives.

Third: Token traders are the community and can take over any project to try to make their investment more profitable, it just requires more risk. It happens, but the times it doesn't happen the token traders just stop engaging with the project as well.

How can this be distinguished from other "rug pulls"? I don't think it is possible.

Re: Cryptocurrency scams cost owners $7.7B in 2021, driven by DeFi-based “rug pulls”

#75
post #44

And there are many ponzis out there. Celsius Network ($25billion) being the biggest one. Read more: https://rorodi.substack.com/p/the-biggest-crypto-lending-com...

There are definitely ponzi schemes in defi, but I'm not sure celsius is one just because they pay what seem on face to be impossible rates. Gemini, which is regulated and based out of NYC, offers 8% on GUSD, their USD stablecoin. My understanding is returns on this come from a huge demand for crypto lending from institutions participating in the "basis trade", and a limited supply of USD lending available to them for it due to custodianship and regulator issues with cryptocurrencies. https://www.bloomberg.com/news/articles/2021-03-27/crypto-sh...

Re: Cryptocurrency scams cost owners $7.7B in 2021, driven by DeFi-based “rug pulls”

#76

The “I have no sympathy for the victims” comments are crass. But there is a legitimate question of how much law enforcement these crimes deserve. Arizona has a stupid motorists law [1]. If a car “becomes stranded after driving around barricades to enter a flooded stretch of roadway,” the driver “may be charged for the cost of their rescue.” A similar concept for crypto may be necessary. Law enforcement will pursue. B…

The flipside of that is that the effective capital markets we have depend on a level of trust which could easily be eroded. There were weeks this year where I saw advertisements all over London for DeFi products and cryptocurrency trading portals. I don't think the majority of people putting money in there had any idea whatsoever what they were doing.

Re: Cryptocurrency scams cost owners $7.7B in 2021, driven by DeFi-based “rug pulls”

#77
post #24

This is my biggest complaint against cryptocurrencies in general. I'm happy with my bank's fraud protection. How can crypto users protect themselves without recreating traditional banking? Bitcoin was released ~13 years ago, and wallet/transaction security has been one of the most important requirements since then (along with scalability, but let's not go there). If trillion dollar market caps and god-knows-how-many…

This is my favorite story about crypto fraud protection:

The Winklevosses came up with an elaborate system to store and secure their own private keys. They cut up printouts of their private keys into pieces and then distributed them in envelopes to safe deposit boxes around the country, so if one envelope were stolen the thief would not have the entire key.

https://www.nytimes.com/2017/12/19/technology/bitcoin-winkle...

Re: Cryptocurrency scams cost owners $7.7B in 2021, driven by DeFi-based “rug pulls”

#78
post #24

This is my biggest complaint against cryptocurrencies in general. I'm happy with my bank's fraud protection. How can crypto users protect themselves without recreating traditional banking? Bitcoin was released ~13 years ago, and wallet/transaction security has been one of the most important requirements since then (along with scalability, but let's not go there). If trillion dollar market caps and god-knows-how-many…

>How can crypto users protect themselves without recreating traditional banking? They could just invest in well-established projects with proven technology instead of obvious scams in hopes of a "moon shot". This has very little to do with Bitcoin and other legitimate projects, which are a far cry from useless fly-by-night ERC-20 tokens with stupid animal names

Bitcoin/Ethereum is what allowed these scams to be executed, not be reverted, and to go unpunished.

If you want to push for those technologies, you have to explain how to give consumers a minimum level of protection.

Re: Cryptocurrency scams cost owners $7.7B in 2021, driven by DeFi-based “rug pulls”

#79
post #13

The DotCom Bubble/scam led to investor losses in excess of $5 trillion.

So it seems like you are saying DotComs were a scam? Which is obviously insane. I believe we are seeing something similar in crypto. Yes to bubble, and yes there are scams, but wow it seems like there are a lot of people here that think the entire thing is a scam. There are a lot of insanely smart people working on this that are obviously not doing scams, maybe you should take a deeper look?

Agreed. Super-smart people made these systems possible. Sad to see many people associate crypto with scams and illegal stuff. Well, I've bought a tshirt with Ether and VPN subscription to access Wikipedia and YouTube, from a country that blocks many common VPNs. Super, illegal.

Let them keep saying crypto is scam, people who believe in it will win in the long run anyway.

Re: Cryptocurrency scams cost owners $7.7B in 2021, driven by DeFi-based “rug pulls”

#80
post #70
post #24

This is my biggest complaint against cryptocurrencies in general. I'm happy with my bank's fraud protection. How can crypto users protect themselves without recreating traditional banking? Bitcoin was released ~13 years ago, and wallet/transaction security has been one of the most important requirements since then (along with scalability, but let's not go there). If trillion dollar market caps and god-knows-how-many…

Use a trusted exchange if you are worried about that. Holding crypto in a wallet is the equivalent of keeping cash in your wallet. No bank in the world will care if someone steals your wallet.

yeah, but then you recreated traditional banking, just as they said. It's almost like there are reasons, as to why things are like they are right now.
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