Letter 2: Of Mice and Conmen
On bankruptcy, scams, and the collapsing trust in the market (and each other)
Let me tell you a story.
Two down on their luck migrant ranch workers have a dream: to settle their own plot of land. The problem? There’s little work to be had around Soledad, California, under the oppressive shadow of the Great Depression.
These men, George Milton, and Lennie Small, suffer from a a number of social disadvantages: Lennie is intellectually disabled, and both George and Lennie suffer from economic disadvantages as well. As farmhands they live simple lives and are often exploited; the system they serve thrives on abuse, and they are repeatedly victimized by it, as well as the cold and inhumane behavior of their peers.
Their dream of settling down and owning their own piece of land is repeatedly challenged, never realized (the dreams of farmhands rarely are) and the ending is, shall we say, not exactly hopeful.
I’m badly summarizing the great Steinbeck classic, Of Mice and Men. Apologies for the spoilers, but you’ve had over 80 years to read it.
While I don’t want to suggest that these stories are analogous to the space today—to do so would be disingenuous, as the novel explores a number of themes which go much deeper than uncertain economies and people being awful to each other— please indulge me as I stretch a few surface aspects of an American classic to the predicament we find ourselves in today.
Cheekiness aside, I couldn’t help but note a certain amount of parallels, as Steinbeck touches on a number of issues I’ve been thinking about concerning the space lately: most notably, our capacity for cold, selfish, cruelty, and the economic injustice of when our (perhaps over ambitious) dreams clash with the unpredictable and uncertain direction of our future.
Many people today are teetering on the edge of recession, and even as I write this, news is breaking about the US raising its interest rates for the fourth time this year, as it soars to 9.1%—the highest it has been in four decades. And looming over everything, the IMF continues to warn of the potential for an impending recession.
It’s not surprising given the circumstances that a lot of people may feel exploited, as though financial freedom and any hopes of home or land ownership are as unattainable as the dreams of George and Lennie. This dream and ambition, while motivational for some and dispiriting for others, has lead to a market society where many people are oppressed by the very system they struggle to ingratiate themselves within, and even further, are being targeted by members of their own community—some who even claim to be their friends.
Identifying the Problem
“In this world there are only two tragedies. One is not getting what one wants, and the other is getting it.” – Oscar Wilde
When thinking of a sophomore letter to follow our inaugural substack: A Rolling Stone Gathers No Moss, we turned to a perennial favorite topic at Curious Addys: security (or more accurately, lack thereof).
Even back in June, over a month before Celsius Network would file for chapter 11 bankruptcy and shake the entire crypto market, the FTC claimed over 46,000 people had been the victim of over $1 billion in crypto scams since the start of 2021. 70% of those losses were via Bitcoin; with Tether and Ether following at 10% and 9%, respectively.
The scams fell into four distinct categories, with the largest by far being investment related fraud.
Government Imposters ($40M)
Business Imposters ($93M)
Romance Scams ($185M)
Investment Related Fraud ($575M)
In the same FTC data spotlight, it was noted that reported scams had increased sixty-fold since 2018. And the trend does not appear to be slowing: Q1 of 2022 saw roughly 48% of the total reported fraud losses of 2021’s entire year.
February was noteworthy for a federal grand jury in San Diego laying down a massive indictment against Satish Kumbhani, founder of BitConnect. Satish had orchestrated a $2.4 billion dollar Ponzi scheme that involved a lending program which operated by paying BitConnect investors with funds gained from later investors. Unsurprisingly, by March, he had already fled his native India, and, to the best of my knowledge, still remains at large today.
With that, let’s take a look at five broad categories over the past year which I believe contribute in part (some minor, some major) to the climate of distrust and current liquidity vacuum that I believe stifles further growth and slows down the timeline in which crypto reaches mainstream adoption.
A Cacophony of Concerns
Part I: Petition to File for Bankruptcy
“Life is like an onion: you peel off layer after layer and then you find there is nothing in it.” - James Huneker
There have been so many market exchange crashes and bankruptcies in the past few months that it’s legitimately difficult to keep up with what’s skydiving without a parachute, and what’s already hit the ground. Let’s examine just a few notable cases from the past few months.
The Collapse of Luna and TerraUSD
What was once a $60 billion market cap was one of the first to fall from extraordinary heights when, on May 7th, 2022, "stablecoin" TerraUSD—meant to maintain a consistent $1 price stability—began to falter. Two days later and this dollar had plummeted to 35 cents.
TerraUSD had always been tethered to Luna, its more valuable companion token (at one point worth more than $110 each), which was not a stablecoin, but whose price was set by the market. The instability of TerraUSD shook that trust; as the trust disappeared, so too did its value: Luna collapsed to mere pennies less than a week later.
The Liquidation of 3 Arrows Capital
At its peak, hedge fund manager 3 Arrows Capital was the steward of $10 billion in assets. After taking billions in loans from at least 27 companies, 3AC failed to repay many of them, including Genesis, Voyager Digital, and more. On June 27th, they were ordered into liquidation by a British Virgin Islands court. A few days later, on July 1st, they filed for Chapter 15 Bankruptcy in New York.
Now that the company has collapsed, both Co-Founders have moved to Dubai as of last week, claiming that they're the target of a series of death threats.
The Downfall of the Celsius Network
In allowing customers to hold money and earn interest on their deposits, Celsius Network functioned not dissimilar to that of a bank. Unlike a bank however, it lured many customers to its platform thanks to its extremely generous double-digit annual return rates. This may have been more than they could handle, playing a part in the solvency crisis that ensued, which rattled the company. CN filed for bankruptcy protection on July 13th: their $25 billion dollars having seemingly evaporated to $167 million.
Pulled from this CNBC article by MacKenzie Sigalos:
“They were subsidizing it and taking losses to get clients in the door,” said Castle Island Venture’s Nic Carter. “The yields on the other end were fake and subsidized. Basically, they were pulling through returns from [Ponzi schemes].”
Most of Celsius Network’s clients will never see restitution or be made whole.
But wait, there’s more!
These are but a few of the companies that have been left reeling. If we had more time, it would also be worth exploring Caisse, Canada’s second-largest pension fund and investment manager who took a $150 million hit when they invested in Celsius. Or, we could talk about the CEO of Titanium Blockchain pleading guilty to a crypto fundraising scam to the tune of $21 million. Or incidentally, Voyager Digital is also undergoing bankruptcy, and place much of the blame on the default of 3 Arrows Capital, after failing to repay them the $650 million they were owed.
The sea is endless and we cannot see the bottom. It really cannot be overstated how much damage has been done in the past year—with most of the fallout concentrated in the past three to six months.
Back in June, FTX CEO Sam Bankman-Fried said “There are some third-tier exchanges that are already secretly insolvent”. Whether or not there are any more exchanges he was referring to left standing is anyone’s guess. But it’s highly likely that we will continue to see more stories like these throughout the year.
A Cacophony of Concerns
Part II: NFT Rug Pulls
Anyone who has spent time in the space is likely well aware of the prevalence of rug pulls. As these schemes give ammo to crypto disbelievers who view the entire space as a Ponzi, the damage these do extends far beyond the liquidity they rob from the system and the laws they may violate—the distrust it sews among the general public lingers and impedes our collective progress.
The options here are truly limitless, so here are just three wildly different and unusual case studies I’ve pulled from the field.
Pixelmon: the Rug Pull That Should Have Surprised Nobody
In the wilderness of disingenuous scammers, few rug pulls achieve legendary status. It takes a special kind of project to rock the entire space, and few can stand toe to toe with the colossal gaffe that is the Pixelmon NFT collection.
At a cost of 3 ETH, this is a cautionary tale about the dangers of FOMO. So after all was said and done and over $70m was raised from the community, how was the reveal?
Well…
The handsome fellow in the top lefthand corner is named “Kevin”, after his species name (yes, Kevin is apparently a species). Kevin became an instant meme, and has since become synonymous with Pixelmon: his likeness has appeared in many derivative and joke projects, as well as becoming the subject of fan art from around the world.
After the understandable backlash of a 3ETH buy-in and hideous art in return, the creators promised to make it right and hire all new artists to undo all 10,000 of their mistakes. Months later, and despite some nice photos shared on their Twitter feed recently, it has not yet happened. Will it ever happen? That remains to be seen.
Tendies, Phunks, and Zunks: Rug Pulls (or “Learnings”) of a Successful Founder
On May 9th, seemingly out of nowhere, the founder of the wildly successful NFT collection Azuki dropped a tweet containing a link to an article he wrote on Mirror, in which he admitted that he was the founder of two CryptoPunk derivatives (CryptoPhunks and CryptoZunks) and the third, a project called Tendies. He framed their creation in the light of learnings which helped him better understand the space and develop Azuki, and he ended the post with a rally to keep building.
Some in the space found the admission refreshing and appreciated his honesty. Some people felt otherwise:
This spawned a minor debate in the space over what constitutes a rug, and whether or not Zagabond was a wise business leader for cutting the cord at the first sign of things not working out.
Regardless of which side of the fence you’re on, three communities were effectively abandoned in relative short order, and one has to wonder whether Azuki would have suffered the same fate had they not had immediate success. We’ll probably never know. However, even Zagabond recognized that mistakes were made.
Rugs or learnings, Zagabond never made any effort to disclose his past or be honest or transparent in any way, until (allegedly) news of what he did was going to be revealed.
I have a number of friends who support his actions; I also have a number of friends who find what he did reprehensible. One thing is for certain though: Zagabond’s conduct should cause us to pause and reflect on what sort of values we wish to embody in the space, and the kind of projects we choose to support.
Raccoon Secret Society: the Rug Pull That Claimed the Moral High Ground (While Rug Pulling).
Back in September, 2021, a project by the name of Raccoon Secret Society, a project with moderate hype, began to make the rounds for all the wrong reasons: they had changed the setBaseUri function of their smart contract to turn everyone’s raccoons into the same pile of bones.
This was, in their words, done to expose the vulnerability of NFT smart contracts and demonstrate how contract owners had entirely too much power to change the collection even after it goes live. And while there are some valid points in that argument worth discussing, the means in which they went about making their point understandably did them no favors.
After the community uproar, the devs updated the setBaseURI again to a new and zombified edition of their original art. It looked considerably worse. After burning all bridges, talk of a comic book that went nowhere, and losing all credibility in their own community, they abandoned the project and supposedly turned it over to the public (I have doubts about this as well, as the “community backed” project stopped posting at all by the end of November, 2021).
What could have prompted an actual, genuine discussion (the bones stunt), was seemingly just empty excuses, as the devs abandoned their own claimed moral principles to rug pull after all.
*All credit for this story goes to our friend Ethspresso, who told me about RSS, and still holds an NFT from the collection!*
A Cacophony of Concerns
Part III: Government-Backed Hacker Groups
Axie Infinity, the most successful crypto game of all time, made headline news back in March when it was compromised, after a senior engineer who thought they were applying for a job unwittingly enabled a hacking group from North Korea to make off with $540 million in Ronin (the Ethereum-based sidechain Axie uses).
If that wasn’t mind-boggling enough, the exploit was almost certainly sanctioned by the government of North Korea itself. Furthermore, Lazarus, the hacker group which carried out the attack, are the same group who hacked Sony in 2014.
A Cacophony of Concerns
Part IV: Social Engineering Scams
Most people who lose money in the space are technically not “hacked”. The vast majority of people in the NFT space who get scammed have been socially engineered. Social engineering is the act of tricking another party into gaining their trust, usually then followed up by directing them to interact with something malicious that does the real damage.
We could (and likely will in time) write a series of articles about all the ways that scams can go down, but rather than the usual “whoops, I signed something I shouldn’t have” scam, I wanted to share a slightly more dramatic example of how people are exploiting each other in the space.
A man from Summerville, South Carolina lost $20,000 after being socially engineered by someone who had been grooming him for over a year and a half. The scammer built a false friendship with the man, and eventually, when he got their trust, convinced them to invest in a phony Australian company.
Investing $2,500 at first, the Summerville man was happy to have “earned” $50 in a day. He was then convinced to invest significantly more—to the sum of $20,000 in Bitcoin. It wasn’t until he tried to make a withdrawal that he realized he had been scammed.
From the article by Erin Morgan:
“[They said] ‘if you want to get your money, bring us more people. If you bring us more people then you can get a percentage of what they’re investing — but you’re not getting your money.’ — that’s when I was like it’s official, I am being scammed,” Harrell said.
While that is perhaps an extreme example, it does happen. False friendship scams tend to be particularly damaging, as a friend can usually convince someone to invest far more than a stranger would be able to.
That being said, I must reiterate that the “setApprovalForAll” unintended signing is the bread and butter of the space, as it requires less work on the scammer’s part and only a few seconds for their target to slip up.
A Cacophony of Concerns
Part V: Premint Compromised
On July 17th, 2022, popular allowlist manager Premint was hacked. Essentially, a scammer had inserted malicious code into their website which prompted users to sign a transaction which would allow those scammers to drain their wallets.
This was understandably quite alarming, as allowlist managers have become a staple for project creators and collectors alike, and without confidence in the security of your allowlist manager, even the act of trying to register for a mint becomes nerve-wracking: nobody wants to gamble the contents of their wallet every time they try to sign up for something.
Unfortunately, what transpired has still shaken a lot of people in the space about whether or not it is safe to use allowlist managers at all. And it’s a valid concern—if you can’t trust that your allowlist manager is safe, then it’s all over before it’s even begun.
On a personal note, this is why we’ve made security a pillar of our free allowlist manager, Hey Mint.
TL;DR — we are the only platform that currently allows never having to connect your wallet at all to sign up for an allowlist, as well as a host of other security features like: creators verifying their identity through Stripe Identity, designating a burner wallet for minting, and easy reporting of any project that seems suspicious, and more!
Red Flags
With all this in mind, what are some steps you can take to protect yourself in the space? Some red flags worth looking out for include:
The promise of returns: not only does nobody know what’s a guaranteed money maker, but the SEC will probably want to have a word with them at some point
Crypto Bro talk meant to hype you up to think emotionally rather than logically: “to the moon”, “LFG!”, “10 ETH floor!”, “No paper hands!”, etc
Friends (especially estranged ones or people you haven’t spoken to in some time) who reach out to you with “an opportunity”
Almost anything that is a “limited-time offer” or time sensitive.
Funds being locked, or you not having complete control over your finances at all times
Any message you receive from literally anyone that appears in your DMs on Discord or Twitter
Random links to click, .PDFs to open, executable files, or bookmarks to place
These are just some of things you should be looking out for when it comes to personal security. I promise we will explore this subject much more thoroughly in the future.
Final Thoughts
If we want people to think of crypto as more than Ponzinomics, then it’s important that the space becomes more than that.
It’s time to support those who are actually building things of substance in the space, and stop giving into FOMO and jumping into projects with grandiose claims, but nothing to support it.
It’s not just the exchanges and investment groups being hit. Users are being hit on a daily basis, often the victim of targeted attempts of social engineering. Always keep in mind your red flags, and if anything gives you less than complete confidence in it—bail.
As I was editing this article, I read that federal authorities charged a former Coinbase employee and the two people he tipped off in the first insider-trading case for crypto.
It just doesn’t stop.
Celsius owes its users literally billions of dollars. The idea of a service that manages your money being able to deny you access to it is both ludicrous and unacceptable. And yes, while this is part of the risk we take in the early days of a decentralized future where we’re responsible for every single action we take and have almost no safeguards—even still—surely this is a sign that this is not the way.
Alternatives are needed.
In the meantime, people need to be vigilant, less trusting in the “stability” of stablecoins, keeping their guard up, and looking out for one another. One person burned in the space is the same as everyone burned in the space.
We’re fighting for a decentralized future free from centralized control. We’ve prided ourselves that in a free market of ideas, the greatest will surely rise to the top. The fundamental problem right now is that we want a decentralized reality, but are too accustomed to centralized solutions.
If we want web3 to be the shining beacon we all claim it is, we need to stop repeating the mistakes of the past and prove that there’s a better way of doing things.
Written by: Brad Jaeger
Director of Content @ Curious Addys (say hi on Twitter!)
A ton of knowledge and diamonds in just one article, really enjoyed reading!