Another day, another rug pull - this time related to about $15m in funds. For those that aren’t aware of what happened yesterday, the tl;dr is that Andre Cronje deployed some new smart contracts to the Ethereum mainnet, people found them and started speculating on what they could be, the hype machine was kicked into overdrive and many people “aped in” about $15mil to buy the new token EMN (Eminance). Then, just a couple of hours later, the funds were drained by someone taking advantage of an exploit in the system. The real kicker? This project was not officially announced or detailed (besides the Twitter account) and there was no UI or website.
Andre explains what happened well in his tweet thread so I won’t go into too much more detail here (you can check out this thread for the exact breakdown of how the attack worked). What I wanted to talk about is this culture of “degen” or “apeing in” that has taken hold of many people in the community (myself included) as I believe it’s an important discussion to have.
This culture seems to have been around for quite a while in some limited way but it only really gained steam once the yield farming craze began (back in June) and since then it has basically dominated Ethereum and DeFi. Warnings like “this token has no value” are taken as a joke and just make people want to buy the token even more. Unaudited projects are launched every other day and millions pour in chasing the 1000%+ APY’s before they inevitably run out. People on Twitter fuel the fomo by talking about how much money they’re making and no one ever seems to talk about their losses.
I’ll be honest, during the last 2-3 months DeFi has felt more like a casino than a “parallel financial system” but I think this is mostly because it’s so transparent. I truly believe that if we were able to gain this much insight into how the traditional finance system is run (and the players involved), we’d definitely see the same sort of behavior. Now, of course, TradFi has many regulations around it and things like stock market circuit breakers to protect against catastrophic downside. In crypto, we don’t have anything like that - it is truly a lawless place where people can and do take on as much risk as possible.
This is made even worse given that many of the players in the crypto ecosystem are “retail investors” who are mostly less educated and less sophisticated than the “whales” (those with a lot of capital). These whales tend to wipe the floor with the uneducated investors and leave them holding the bag on these new coins (what is commonly referred to as a “rug pull”). You can even watch this on-chain and see that the whales are just jumping from farm to farm like locusts leaving only scraps in their wake.
At the end of the day, I’m not trying to lecture anyone about this and I’m certainly guilty of this behavior myself but I just wonder if this culture ends up being a net-negative for Ethereum and we regress back to a state similar to that of the 2017 ICO craze. Unfortunately, I think there’s a strong chance of that happening if we enter another bull market and there’s really nothing anyone can do to stop it (no matter how many warnings exist).
The best way to protect yourself from getting burnt in DeFi is to stick to known and trusted projects. If you want to play around with the hottest new thing, you still can, just be sure to mentally write-off any money you put into the new token or protocol - it’ll make it easier to deal with if you do end up losing that money.
Have a great day everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.