Ponzi-scheme

Jake Paul-endorsed SafeMoon gets hacked after introducing a bug in upgrade

A public burn function introduced in the latest upgrade allegedly allows users to burn tokens from other addresses.

SafeMoon, a project previously endorsed by celebrities and social influencers like Jake Paul and Soulja Boy, announced its liquidity pool (LP) had been compromised. Without revealing further details about the attack, SafeMoon confirmed it is undertaking steps “to resolve the issue as soon as possible.”

Like many other crypto projects in 2021, SafeMoon was backed by numerous celebrities. However, a lawsuit from February 2022 alleged that musicians such as Nick Carter, Soulja Boy, Lil Yachty, and YouTubers Jake Paul and Ben Phillips mimicked real-life Ponzi schemes by misleading investors to purchase SafeMoon (SAFEMOON) tokens under the pretext of unrealistic profits.

*Jake Paul promoting SafeMoon token in 2021. Source: Twitter*

Investigating the SafeMoon hack shows that the attacker made away with approximately 27,000 BNB (BNB), worth $8.9 million. SafeMoon has not yet responded to Cointelegraph’s request for comment. Moreover, users have been barred from posting comments on the announcement that revealed the LP compromise.

To the @SAFEMOON community: We want to inform you that our LP has been compromised.

We are taking swift action in an attempt to resolve the issue as soon as possible. Follow here for updates.

Thank you for your support as we work to address this situation.

— SafeMoon (@safemoon) March 28, 2023

Blockchain investigator PeckShield narrowed the problem to a recent software upgrade as a potential culprit that introduced the bug. A public burn function introduced in the latest upgrade allegedly allows users to burn tokens from other addresses.

Community member “DeFi Mark” explained that the attacker used the vulnerability to remove SafeMoon tokens, causing an artificial spike in the token’s price. The attacker took advantage of the situation and sold off the tokens at an inflated price.

*SafeMoon exploit overview. Source: PeckShield*

The attacker left a note along with the transaction, as shown above, which said:

“Hey relax, we are accidently frontrun an attack against you, we would like to return the fund, setup secure communication channel , lets talk.”

Until SafeMoon officially announces a resolution, investors are advised against investing in the project to avoid possible loss of funds.

Following a recent security incident related to illicit access to hot wallets, Bitcoin (BTC) ATM manufacturer General Bytes plans to reimburse customers that lost funds.

On March 17-18th, 2023, GENERAL BYTES experienced a security incident.

We released a statement urging customers to take immediate action to protect their personal information.

We urge all our customers to take immediate action to protect their funds and https://t.co/fajc61lcwR…

— GENERAL BYTES (@generalbytes) March 18, 2023

As Cointelegraph reported, the hack caused a loss of 56 BTC and 21.82 Ether (ETH), cumulatively worth nearly $1.9 million.

Magazine: Huawei NFTs, Toyota’s hackathon, North Korea vs. Blockchain: Asia Express

800 victims of ‘massive’ Bitconnect fraud to receive $17M restitution

The millions will be distributed among the select number of victims, but thousands more were impacted by the $2.4 billion fraudulent scheme.

A group of crypto fraud victims of the BitConnect investment scheme will see some respite from the multi-billion dollar fraud scheme after a court ordered they receive a share in a $17 million restitution.

The United States District Court for the Southern District of California ordered the restitution for the “massive” scheme on Jan. 12 according to a release on the same day by the Department of Justice (DOJ).

800 victims of the scheme, hailing from 40 countries will be able to take a small slice of the $17 million restitution, a term that refers to returning property or monetary value of losses to the proper owner.

The DOJ statement noted that Bitconnect was a purported crypto lending platform that touted proprietary technology including the “Bitconnect Trading Bot” and “Volatility Software” that claimed would net investors guaranteed returns.

It promised a return an average daily compounding interest of 1% or 3,700% annually.

Investors would trade in Bitcoin (BTC) receiving Bitconnect Coin (BCC) in return which could be lent out at varying rates of interest.

However, the whole platform turned out to be a “textbook Ponzi scheme,” as early investors were paid with funds supplied by new investors, it wrote.

The crypto platform launched in 2016 but collapsed in 2018 after pilfering $2.4 billion from over 4,000 people from 95 countries.

The alleged founder of Bitconnect, Satish Kumbhani, was charged by the DOJ in February 2022. He is also subject to a police investigation in India and his whereabouts are currently unknown.

*Kumbhani (right) in a 2017 interview. Image:* *YouTube*

The top U.S.-based Bitconnect promotor, Glenn Arcaro, pled guilty to wire fraud conspiracy charges in September 2021 and was ordered to pay back $24 million to investors.

According to the DOJ, Arcaro and others used 15% of Bitconnect investor money for a slush fund to be used for the benefit of its owner and other promoters.

On Sep. 16, 2022, Arcaro was sentenced to 38 months in prison for his participation in Bitconnect.

800 victims of ‘massive’ Bitconnect fraud to receive $17M restitution

The millions will be distributed among the select number of victims, but thousands more were impacted by the $2.4 billion fraudulent scheme.

The United States District Court for the Southern District of California ordered the restitution for the “massive” scheme on Jan. 12, according to a release on the same day by the Department of Justice (DOJ).

Around 800 victims of the scheme from 40 countries will be able to receive a small slice of the $17 million restitution, a term that refers to returning property or the monetary value of losses to the proper owner.

It promised a return an average daily compounding interest of 1% or 3,700% annually.

Investors would trade in Bitcoin (BTC) and receive Bitconnect Coin (BCC) in return, which could be lent out at varying rates of interest.

However, the whole platform turned out to be a “textbook Ponzi scheme,” with early investors paid in funds supplied by new investors, the DOJ wrote.

The crypto platform launched in 2016 but collapsed in 2018 after pilfering $2.4 billion from over 4,000 people from 95 countries.

The alleged founder of Bitconnect, Satish Kumbhani, was charged by the DOJ in February. He is also subject to a police investigation in India and his whereabouts are currently unknown.

The top U.S.-based Bitconnect promotor, Glenn Arcaro, pleaded guilty to wire fraud conspiracy charges in September 2021 and was ordered to pay back $24 million to investors.

According to the DOJ, Arcaro and others used 15% of Bitconnect investor money ona slush fund used to benefit its owner and other promoters.

On Sept. 16, 2022, Arcaro was sentenced to 38 months in prison for his participation in Bitconnect.

Executives from $1.5B South Korean crypto exchange fraud jailed

The latest court action now takes the number of V Global execs behind bars up to seven, as the CEO was previously sentenced to a 22-year prison term.

Six executives involved in the $1.5 billion (2 trillion won) South Korean crypto exchange fraud V Global have received prison sentences of up to eight years — but three were not detained so they could fight certain charges in court.

V Global operated between July 2020 and April 2021, roping in around 50,000 investors by promising 300% returns alongside sizable payments for referring new customers.

According to a translation of Dec. 26 reports from South Korean media outlets such as Economist.co.kr, two high-ranking execs, named Mr.Yang and Mr. Oh, got eight years and three years apiece for their role in defrauding investors.

Another four unnamed execs received three-year sentences and five years of probation.

Three of the total six have not yet been detained, however, as they have claimed innocence to certain charges and have the right to defend themselves in court.

“The defendants only trusted the VGlobal management team, evaded responsibility, and once the investigation began, they destroyed evidence and interfered with the investigation,” said the judge from the 12th Criminal Division of the Suwon District Court.

The judge however, was reported to have given the defendants some leniency, as the actual amount of fraud and number of investors impacted was lower than initially thought last year.

According to Kyeongin’s reporting from February, this was due to later evidence showing that around 10,000 investors had actually made returns from V Global via payments from multilevel marketing incentives such as customer recruitment bonuses. Many are said to have then reinvested those profits back into the platform before it was shut down.

It was alleged back in June last year that the firm had paid out its customer referral bonuses, reportedly worth $1,000 a pop, to existing investors via the influx of capital from new users, in a Ponzi-like fashion.

The latest court action now takes the number of V Global execs behind bars up to seven, as the CEO, known as Mr. Lee, was sentenced to a 22-year prison term back in February.

$4B OneCoin scam co-founder pleads guilty, faces 60 years jail

The co-founder of the fraudulent scheme is set to be sentenced in April 2023 on charges relating to wire fraud and money laundering.

Karl Sebastian Greenwood, the co-founder of the multi-billion dollar fraudulent cryptocurrency scheme OneCoin has pleaded guilty to multiple charges brought forward by the United States Department of Justice (DOJ) and faces a maximum of 60 years in prison.

The DOJ announced on Dec. 16 that Greenwood submitted a guilty plea in a Manhattan federal court to charges of wire fraud, wire fraud conspiracy and money laundering conspiracy with each charge carrying a maximum potential sentence of 20 years in jail.

U.S. Attorney Damian Williams said Greenwood operated “one of the largest international fraud schemes ever perpetrated” and claimed he touted OneCoin as a “Bitcoin killer” when in reality the tokens were “entirely worthless.”

OneCoin was a Bulgarian company founded by Greenwood alongside “Cryptoqueen” Ruja Ignatova that marketed a cryptocurrency by the same name. Emails obtained by the DOJ between the two before its founding in 2014 allege the pair called it a “trashy coin.”

*Greenwood on stage in Jun. 2016 at OneCoin’s “COIN RUSH” event in London. Image:* *YouTube*

Outwardly it claimed to be a multi-level marketing firm with members gaining commissions for selling cryptocurrency packages apparently containing OneCoin and the ability to mine more. OneCoin could only be exchanged for fiat currency on the private Xcoinx exchange.

In reality, it was both a pyramid and a Ponzi scheme as investors could recruit others into the scheme without an actual product and later investors were paid with the money from earlier investors.

According to the DOJ Greenwood was earning around $21.2 million (€20 million) per month in his role as the “global master distributor” of the fraudulent crypto firm. Over $4 billion is believed to have been swindled by OneCoin from the three million people who invested in the packages.

Ignatova was placed on the Federal Bureau of Investigation’s top ten most wanted list in June for her role in the scheme. She remains at large and was last known to have traveled to Athens, Greece in Oct. 2017.

Williams said Greenwood’s plea “sends a clear message” the DOJ is “coming after all those who seek to exploit the cryptocurrency ecosystem through fraud, no matter how big or sophisticated you are.”

Greenwood is slated to be sentenced before District Judge Edgardo Ramos on Apr. 5, 2023.

Authorities elsewhere have charged those involved with OneCoin and Ignatova, with three associates facing charges in Germany over fraud and money laundering.

Charges laid over alleged ‘crypto mining’ Ponzis that netted $8.4M

Various creators and promotors of two allegedly fraudulent crypto companies are facing a litany of charges that could land them 20 years in jail.

United States prosecutors have laid charges in two separate cases against nine people who founded or promoted a pair of cryptocurrency companies alleged to be Ponzi schemes that netted $8.4 million from investors.

On Dec. 14 the U.S. Attorney’s Office for the Southern District of New York unsealed the indictment, alleging the purported crypto mining and trading companies IcomTech and Forcount promised investors “guaranteed daily returns” that could double their investment in six months.

In reality, prosecutors say both firms were using the money from later investors to pay earlier investors, while other funds were spent on promoting the companies and buying luxury items and real estate.

“Lavish expos” were held in the U.S. and abroad, along with presentations in small communities, that lured investors in with promises of financial freedom and wealth.

Promotors would allegedly show up at events in expensive cars, wearing luxury clothing and would boast about the money they were making from investing in the company they were promoting. Investors were given access to a “portal” to monitor their returns

IcomTech and Forcount started to fall apart when users were unable to withdraw their purported returns.

Charges brought against Forcount’s creators and promotors by the Securities and Exchange Commission (SEC) allege the outfit targeted primarily Spanish speakers and gathered over $8.4 million from “hundreds” of investors selling “memberships” offering a cut of its crypto trading and mining activities.

In an attempt to spin up liquidity both companies created tokens so they could try repay investors with IcomTech and Forcount launching “Icoms” and “Mindexcoin” respectively.

Seemingly the token sales failed as by 2021 both had stopped making payments to investors.

“With these two indictments, this Office is sending a message to all cryptocurrency scammers: We are coming for you,” said U.S. Attorney Damian Williams. “Stealing is stealing, even when dressed up in the jargon of cryptocurrency.”

David Carmona of Queens, New York was named in the indictment as the founder of IcomTech, and was charged with conspiracy to commit wire fraud that carries a maximum penalty of 20 years prison.

Forcount’s founder was named as Francisley da Silva, from Curitiba, Brazil and faces charges of wire fraud, wire fraud conspiracy and money laundering conspiracy which carries a maximum of 60 years in prison if convicted of all charges.

The promotors for the firms face various charges relating to wire fraud, wire fraud and money laundering conspiracy and making false statements.

Trouble in the Bahamas following FTX collapse: Report

Locals say they are having to contend with vacant apartments and the loss of job opportunities once provided by the collapsed exchange.

Following the collapse of crypto exchange FTX, which was headquartered in the island country of Bahamas, Bahamians are reportedly still trying to find a way to make sense of everything, while remaining optimistic about the future.

According to a report by the Wall Street Journal, the island country — which had encouraged cryptocurrency companies to feel at home with their “copacetic regulatory touch” — has been rocked by the implosion of FTX.

The Bahamas, which was also hard hit by Hurricane Dorian in 2019 and the pandemic shortly afterward in 2020, was already struggling to find ways to strengthen its economy which relies heavily on tourism and offshore banking for a bulk of its GDP. It appeared that the prime minister of the Bahamas, Philip Davis, and his government believed crypto could play a critical role in the island’s economic recovery.

Now, the community suggests that FTX’s sudden implosion has left a trail of unemployment on the tiny 80-square-mile New Providence Island, where FTX was located. While functioning at full capacity, FTX provided employment for locals, as it reportedly spent over “$100,000 a week on catering” and also set up a private shuttle service to transport workers around the island. FTX also hired a number of local Bahamians in areas such as logistics, events planning, and regulatory compliance, according to the WSJ.

With the collapse of FTX, many high-spending foreigners who worked for the company and once boosted the local economy have reportedly fled the island, leaving Bahamian security guards to now guard “nearly vacant buildings.”

In the aftermath of the fall of FTX, some crypto community members have said they feel no sympathy for the effects of the collapse on the tiny island country.

Hacker News user Matkoniecz commented, “Given that Bahamas help rich people and companies to evade taxes, my sympathy to negative consequences of that are limited.”

Meanwhile, Exendroinient00 shared, “Nothing wrong with inviting every scammer to do scamming on your islands,” likely in reference to the island’s laws that seem to incentivize offshore banking activities.

On Oct. 18, Cointelegraph reported that the Bahamas‘ securities regulator ordered the transfer of FTX’s digital assets to a wallet owned by the commission “for safekeeping.”

According to a statement from the Royal Bahamas Police Force sent to Reuters on Nov 13, an investigation into possible criminal misconduct over the insolvency of FTX is underway by financial investigators and Bahamian securities regulators.

How to tell if a cryptocurrency project is a Ponzi scheme

Crypto Ponzi schemes have increased over the past couple of years. This is how to spot them.

The crypto world has experienced an increase in Ponzi schemes since 2016 when the market gained mainstream prominence. Many shady investment programs are designed to take advantage of the hype behind cryptocurrency booms to beguile impressionable investors.

Ponzi schemes have become rampant in the sector primarily due to the decentralized nature of blockchain technology which enables scammers to sidestep centralized monetary authorities who would otherwise flag or freeze suspicious transactions.

The immutable nature of blockchain systems that makes fund transfers irreversible also works in the scammers’ favor by making it harder for Ponzi victims to get their money back.

Speaking to Cointelegraph earlier this week, Johnny Lyu, CEO of crypto exchange KuCoin, said that the sector was fertile ground for these types of schemes due to one main reason:

“The industry is full of users eager to invest their money, and there is virtually no regulation that would stop projects from hiding their malicious intentions.”

“Until clear and internationally approved financial regulation of the crypto industry is set in place, it will continue to witness the rise and collapse of Ponzi schemes,” he added.

How Ponzi schemes work

The Ponzi scheme phrase emerged in 1920 when a swindler named Charles Ponzi marketed a high-returns program to investors which supposedly leveraged postal reply coupons to achieve impressive earnings.

He promised investors returns of up to 50% within 45 days or 100% interest within 90 days. True to his word, the first group of investors got the claimed returns, but unbeknownst to them, the money they received was actually from later investors. The cycle was designed to lure new investors and enabled Ponzi to steal over $20 million.

While he wasn’t the first to use such a scheme to scam people, he was the first to use it to such a scale. Hence, the technique was named after him.

In a nutshell, a Ponzi scheme is a fake investment program that promises astronomical gains to clients but uses money collected from new investors to pay early investors. This helps the swindlers behind such operations to maintain some semblance of legitimacy and entice new investors.

That said, Ponzi schemes require a constant flow of cash to be sustainable. The ruse usually comes to an end when the number of new recruits falls or when investors choose to withdraw their money en masse.

How to spot a crypto Ponzi scheme

There has been a sharp rise in the number of Ponzi schemes in recent years in tandem with the crypto market’s uptrend. As such, it is important to know how to spot a Ponzi scheme.

The following are some of the aspects to look out for when considering whether a crypto project is a Ponzi scheme.

Promises of ridiculously high returns

Many crypto Ponzi schemes claim to reward investors with hefty returns with little risk. This, however, contradicts how investing in the real world works. In reality, every investment comes with a certain amount of risk.

Typical crypto investments fluctuate according to prevailing market conditions, so such claims should be viewed as a red flag. In many cases, investors who join such networks never get any returns on their money.

Khaleelulla Baig, the founder and CEO of KoinBasket — a crypto index trading platform — told Cointelegraph that transparency should be the topmost factor to consider before investing money in a crypto project:

“What really matters is the transparency about the project details. Most founders build their business on hope and rosy projections. Check the past track record of the founding team’s delivery track record vs. commitment.”

He also advised investors to stay away from projects with obscure fundamentals that are based on external influences.

Unregistered investment projects

It is important to confirm whether a crypto company is registered with regulatory organizations such as the United States Securities and Exchange Commission before investing any money. Registered crypto companies are usually required to submit details regarding their revenue models to their respective regulatory authorities to avoid penalties. As such, they are unlikely to participate in Ponzi schemes.

Projects registered in jurisdictions with lax crypto regulations that additionally have Ponzi-like characteristics should be avoided.

Some jurisdictions, such as the European Union, have already come up with elaborate crypto regulations designed to protect crypto investors against these types of scams. According to a recent proposal passed by European Council, crypto companies will soon be obligated to abide by Markets in Crypto Assets (MiCA) rules and will be required to have a license to operate in the region.

Putting crypto companies under MiCA will compel them to reveal their revenue models, and this will temper the rise of crypto enterprises relying on Ponzi-like plans in the bloc.

Use of sophisticated investment strategies

Ponzi schemes usually allude to complex trading strategies as part of the reason why they are able to obtain high yields with minimal risks. Many of their outlined growth strategies are usually hard to understand, but this is usually done on purpose to avoid scrutiny.

The Bitconnect Ponzi scheme that was unveiled in 2016 is an example of a Ponzi scheme that utilized this tactic to trick investors. Its operators encouraged investors to buy BCC coins and lock them on the platform to allow its “sophisticated” lending software to trade the funds. The platform claimed to provide monthly yields of up to 120% per year.

Ethereum co-founder Vitalik Buterin was among the first notable figures to raise the alarm on the project. The scheme was brought down by U.S. and British authorities, who declared it a Ponzi scheme. Its closure in 2018 triggered a BCC price drop that led to billions of dollars in losses.

High level of centralization

Ponzi schemes are usually run on centralized platforms. One crypto Ponzi that was based on a highly centralized network is the OneCoin Ponzi scheme. The pyramid scheme, which ran between 2014 and 2019, defrauded investors out of some $5 billion. The project relied on its own internal servers to run the ploy and lacked a blockchain system.

Subsequently, OneCoin could only be traded on the OneCoin Exchange, its native marketplace. The tokens could be exchanged for cash, with fund transfers being made via wire.

The OneCoin marketplace also had daily withdrawal limits that prevented investors from withdrawing all their funds at once.

The scheme went down in 2019 following the arrest of some key members of the operation. However, there is an outstanding federal arrest warrant for OneCoin founder Ruja Ignatova, who is still at large.

Multilevel marketing

KuCoin’s Lyu noted that the ominous red flags hadn’t changed much over the years and multilevel marketing was still at the heart of many Ponzi schemes:

“Complex earning schemes involving multiple tiers of users, referral programs, percentages, sliding scales, and other tricks are all signs of a Ponzi scheme that feeds the upper tiers using the funds injected by the lower tiers without actually doing any business.”

Multilevel marketing is a controversial marketing technique that requires participants to generate revenues by marketing certain products and services and recruiting others to join the network. Commissions earned by new recruits are shared with the up-line members.

One Ponzi scheme that recently made headlines for making use of this hierarchical system is GainBitcoin. The pyramid scheme headed by Amit Bhardwaj had seven primary recruiters who were based in India and on different continents around the world. Each of them was tasked with recruiting investors into the network.

The scheme guaranteed users 10% monthly returns on their Bitcoin (BTC) deposits for 18 months.

The scheme is alleged to have collected between 385,000 and 600,000 BTC from investors.

Ponzi schemes have been used by scammers for over a hundred years. However, they have been able to thrive in the crypto industry due to the lack of elaborate regulations governing the sector.

Because the crypto world is susceptible to these types of schemes, it is important to exercise caution before investing in any novel project.

How to identify and avoid a crypto pump-and-dump scheme?

Educating oneself about the crypto ecosystem is crucial for investors to pursue during a bear market while awaiting a bull cycle. That being said, having a good understanding of crypto investment entails keeping an eye out for fraudulent projects that threaten to drain assets overnight, a.k.a. pump-and-dump schemes.

Pump-and-dump in crypto is an orchestrated fraud that involves misleading investors into purchasing artificially inflated tokens — typically marketed and hyped by paying celebrities and social influencers. SafeMoon token is one of the most prominent examples of an alleged pump-and-dump scheme involving A-list celebrities, including Nick Carter, Soulja Boy, Lil Yachty and YouTubers Jake Paul and Ben Phillips.

Once the investors have purchased tokens at inflated prices, the people owning the biggest pile of tokens sell out, resulting in an immediate crash in the token’s prices. While fraudsters disguise pump-and-dump schemes under the pretext of creating the next batch of crypto millionaires, knowledgable investors have the upper hand in identifying and avoiding their involvement.

Pump-and-dump schemes are usually accompanied by false promises around three broad categories — solving real-world use cases, guaranteed exorbitant returns and unwithered backing from celebrities and influencers.

The long-term success of a cryptocurrency is heavily dependent on the use cases it serves. As a result, people supporting pump-and-dump projects often suffice their involvement by highlighting the use cases the token aims to serve. In addition, such schemes typically rope in celebrities by upfront payments in cash and the project’s in-house tokens.

Celebrities then market the fraudulent tokens to trusting fans, usually with promises of high investment returns. In the case of SafeMoon, celebrities were accused of a slow rug pull, implying a slow sell-off of holdings as the trading volume from retail investors remained inflated.

Binance, the biggest crypto exchange in terms of trading volume, also warned investors from taking investment advice from celebrities and influencers.

Superstars ≠ crypto experts.

Music artist @JBALVIN says “do your own research”.

On 2.13 when big names try to give you crypto advice — sound #CryptoCelebAlert and grab 1/2222 NFTs of basketball star @JimmyButler!

Learn more ⬇️https://t.co/3rC7r0uJ8M pic.twitter.com/Hml8AN2aEs

— Binance (@binance) February 7, 2022

In the next bull cycle, traditional and crypto investors across the globe will amp up efforts to recoup losses from the ongoing bear market. Knowing this information, fraudsters will try and find opportunities to dupe unwary investors by presenting unrealistic gains. As a result, do your own research (DYOR) stands as one of the best pieces of advice in crypto.

Elon Musk was recently accused of manipulating crypto prices by prominent South African billionaire businesswoman Magda Wierzycka.

Wierzycka believes that Musk’s social media activity and its implications on the price of Bitcoin (BTC) should have made him the subject of an investigation by the U.S. Securities and Exchange Commission. She believes that Musk knowingly pumped up the price of Bitcoin via tweets, including those mentioning Tesla’s $1.5 billion BTC purchase, then “sold a big part of his exposure at the peak.”

Analysts identify 3 critical flaws that brought DeFi down

Poor risk management, insufficient revenue and the overuse of leverage are the core reasons why DeFi is crumbling.

The cryptocurrency market has had a rough go this year and the collapse of multiple projects and funds sparked a contagion effect that has affected just about everyone in the space.

The dust has yet to settle, but a steady flow of details is allowing investors to piece together a picture that highlights the systemic risks of decentralized finance and poor risk management.

Here’s a look at what several experts are saying about the reasons behind the DeFi crash and their perspectives on what needs to be done for the sector to make a comeback.

Failure to generate sustainable revenue

One of the most frequently cited reasons for DeFi protocols struggling is their inability to generate sustainable income that adds meaningful value to the platform’s ecosystem.

Fundamental Design Principles for DeFi:

– If the protocol doesn’t work without a reward token, it’s a Ponzi scheme

A reward token should not be necessary for a protocol to function. That means the protocol is not a revenue generating business.

— Joseph Delong* (@josephdelong) May 23, 2022

In their attempt to attract users, high yields were offered at an unsustainable rate, while there was insufficient inflow to offset payouts and provide underlying value for the platform’s native token.

This essentially means that there was no real value backing the token, which was used to payout the high yields offered to users.

As users began to realize that their assets weren’t really earning the yields they were promised, they would remove their liquidity and sell the reward tokens. This, in turn, caused a decline in the token price, along with a drop in the total value locked (TVL), which further incited panic for users of the protocol who would likewise pull their liquidity and lock in the value of any rewards received.

Tokenomics or Ponzinomics?

A second flaw highlighted by multiple experts is the poorly designed tokenomic structure of many DeFi protocols that often have an extremely high inflation rate which was used to lure liquidity.

High rewards are nice, but if the value of the token being paid out as a reward isn’t really there, then users are basically taking a lot of risk by relinquishing control of their funds for little to no reward.

This largely ties in with DeFi’s revenue generation issue, and the inability to build sustainable treasuries. High inflation increases token supply, and if token value is not maintained, liquidity leaves the ecosystem.

Overleveraged users

The overuse of leverage is another endemic DeFi problem and this flaw became crystal clear as Celsius, 3AC and other platforms invested in DeFi began to unravel last month.

Users who staked these inflationary tokens to over-leverage their positions got liquidated as prices dipped due to market sell-offs.

This led to a death spiral for the protocol. @Wonderland_fi is one such protocol where users leveraged $TIME to borrow $MIM and got liquidated

— Magik Invest ✨ (@magikinvestxyz) June 28, 2022

These liquidations only exasperated the downtrend that many tokens were already experiencing, triggering a death spiral that spread to CeFi and DeFi platforms and a few centralized crypto exchanges.

In this sense, the onus really falls on the users for being over-leveraged without a solid game plan on what to do in the eventuality of a market downturn. While it can be a challenge to think about these things during the height of a bull market, it should always be something in the back of a trader’s mind because the cryptocurrency ecosystem is well known for its whipsaw volatility.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.