Tag: a16z

Crypto collapse: Sam Bankman-Fried goes to jail, SEC appeals Ripple ruling, Prime Trust bankrupt, the tangled tale of TrueUSD and Tron

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“i cant wait until we get julain assange out of jail using Crypto. itll make all the pedophile money laundering worth it”

— dril

Go directly to jail

Sam Bankman-Fried’s bail has been revoked for witness tampering — specifically, that he shared ex-girlfriend Caroline Ellison’s private diary with a New York Times reporter. This was the last straw for Judge Lewis Kaplan, who said the documents were “something that someone who has been in a relationship would be unlikely to share with anyone except to hurt and frighten the subject.”

Previously, Sam tried to get in touch via Signal with another witness, former FTX US lawyer Ryne Miller, about getting their stories straight — which nearly saw Sam’s bail revoked that time.

Our hero is currently at MDC Brooklyn — notoriously one of the worst jails in the federal system — but the government has asked that he be remanded at Putnam, where he’ll be allowed more computer access to prepare for his upcoming trial on October 2.

Inner City Press live-tweeted the entire hearing. Sam’s lawyer Mark Cohen immediately filed an appeal. [Twitter, archive; Doc 198, PDF; Notice of Appeal, PDF; Order; PDF] 

Prosecutors filed a superseding indictment against Sam on August 14. The new indictment contains seven of the thirteen original charges, removing anything that wasn’t explicitly in the Bahamas extradition agreement. Sam’s $100 million of political contributions are now listed as just another way he misspent customer money. The government also filed its motions in limine — pretrial motions on what evidence is admissible and so on. [Indictment, PDF; in limine, PDF; Doc 165, PDF]

Mathew Russell Lee of Inner City Press has been the man on the scene at the SDNY courthouse for Sam’s hearings. As well as live-tweeting hearings, he collects his writeups as Kindle books. His collection on Sam is just out, recounting the saga as he saw it happen from December 2022 to last week. [Amazon UK; Amazon US]

SEC appeals Ripple

The SEC has asked SDNY District Judge Analisa Torres to pause their case against Ripple so they can appeal her questionable decision on XRP sales to the 2nd US Circuit Court of Appeals. The SEC’s grounds for appeal is that there’s now a genuine intra-district judicial dispute over the issue. [Doc 887, PDF]

On July 13, Torres ruled that XRP is a security when it’s sold to sophisticated investors, but it’s not a security when sold to retail investors on exchanges – which is precisely backward from the past ninety years of US securities jurisprudence.

In the same courthouse, District Judge Jed Rakoff, who is overseeing the SEC lawsuit against Terraform Labs and its cofounder Do Kwon, flatly rejected Torres’ decision and ruled that Terraform’s LUNA and MIR coins may have been securities when sold to retail investors.

John Reed Stark notes: “For SEC lawyers like myself, Judge Jed Rakoff is arguably considered the most respected and experienced securities law jurist not only in the SDNY but perhaps in the entire U.S. federal court system.” [Twitter, archive]

The SEC proposes to file its opening brief on August 18. Ripple would have until September 1 to respond, and the SEC’s reply would be due a week later on September 8. This is quite soon, but Coinbase and Binance are both using the Ripple decision to support their defenses against their own SEC suits.

Prime Trust goes Chapter 11. You had one job!

Crypto custodian Prime Trust filed for bankruptcy protection in Delaware on August 14. Prime halted withdrawals in late June after Nevada regulators put the company into receivership as insolvent.

How did Prime fall insolvent? They lost the keys to a pile of the crypto they were supposed to be keeping safe. This happened in December 2021. You had one job, guys!

From December 2021 until March 2022, Nevada says that Prime used customer funds to buy additional crypto. But for a year and a half, Prime just lied and told everyone they still had their crypto.

Prime has between 25,000 and 50,000 creditors and liabilities of up to $500 million. The firm’s top fifty creditors have claims of $145 million — including the largest claim of $55 million. [Business Wire; Stretto] 

Knives out at TrueUSD

Archblock, formerly TrustLabs trading as TrustToken, created TUSD, a supposedly asset-backed $3 billion stablecoin. It then sold TrueUSD to Justin Sun’s Tron in late 2020 — but the connection to Tron has always been a bit murky, and TrustLabs has never been upfront about who the coin’s actual owner was.

TrustLabs said the new owner was Techteryx, “an Asia-based consortium” — though TrustLabs/Archblock still managed TUSD until July 2023. [Medium, 2020, archive; Twitter, archive]

Alameda Research was the largest redeemer of TUSD. FTX listed TUSD when they knew that TrustLabs was misrepresenting who owned it. 

TrueUSD’s main custodian was Prime Trust — and Prime was also its main fiat on-and-off ramp for the US banking system. Prime Trust was thus Justin Sun’s main link to US banking. At least until Signature, Prime’s main banking partner, collapsed in March.

We wrote previously about how the TUSD coin seems pretty clearly unbacked and was being used by someone in the vicinity of Binance to pump the price of bitcoin earlier this year.

Archblock is now doing a merger to move the company’s domicile from the US to Switzerland, for unclear reasons. [Blockhead]

Daniel Jaiyong (“Jai”) An, co-founder of TrustLabs/Archblock, is not happy with this merger and move. An is suing Archblock and its executives: Rafael Cosman, co-founder and board member; Alex De Lorraine, COO and former board member; and Tom Shields, former chairman of the board. 

The complaint was filed pro se on July 14 in Delaware, meaning An did not hire an attorney. He wrote the 58-page complaint himself — and it shows. [DLNews; complaint, PDF] 

An was in the midst of negotiating the sale of TrueUSD to Techteryx, whose contact was Justin Sun of Tron. In fact, An describes the sale as being to Tron.

So, yes — TrueUSD is run by Justin Sun, if you ever doubted it.

TrustLabs got $32 million from investors in a 2018 accredited investor ICO under SEC Regulation D for a token called TRU. Investors included Andreessen Horowitz, BlockTower Capital, Danhua Capital, Jump Capital,* ZhenFund, Distributed Global, Slow Ventures, GGV Capital, and Stanford-StartX.

*Update: Although An mentions Jump Capital in his complaint, Jump Crypto wrote us to say it wasn’t Jump Capital, but Jump Crypto, a division of Jump Trading Group, who made the investment. 

An says that by January 2020, it was clear that the plan in the TRU white paper would never pass SEC muster. He wanted to pay the investors back, as the SEC would surely require – but he says that his cofounder Cosman blocked this. The other shareholders voted An out in July 2020.

TrustLabs finally issued the TRU token in November 2020, repurposed as the native token of their TrueFi lending protocol. An alleges the other executives enriched themselves with TRU tokens — but not him.

An says the company threatened him with legal action if he informed investors what the company was doing. An then filed as a whistleblower with the SEC. He claims the company has retaliated against him for doing so.

Several paragraphs claim past criminal actions by Cosman.

An remains a shareholder in Archblock. He wants the merger blocked and $94.32 million in damages.

Data Finnovation notes that if An’s allegations are true, then FTX knew since 2020 that TrueUSD was owned by Tron — because Tron’s lawyer Can Sun was working on the deal and Can Sun later ended up working for FTX under Daniel Friedberg. Remember that FTX minted nearly all the tethers on Tron in the same time period. [Twitter, archive; Medium, 2022]

Worldcoin wants your eyeballs

Sam Altman is the founder and CEO of OpenAI, the company behind ChatGPT. Worldcoin is Altman’s proof-of-eyeball cryptocurrency.

Altman promotes Worldcoin as a way to end poverty — and not just a way for him to collect huge amounts of biometric data. In exchange for giving up your iris scan, you’ll get 25 free Worldcoins (WLD). [CoinDesk] 

Worldcoin operators use “orbs” to scan eyeballs. The operators get paid in tethers. [MIT Technology Review, 2022]

Since the Worldcoin project launched on July 24, throngs of people in Kenya have been queuing up to get their eyeballs scanned — lured by free Worldcoin tokens. 

The problem is converting WLD into actual spendable money. The Worldcoin app has no direct withdrawal option — so the Kenyan users have to trade their WLD for USDT on Binance or put their trust in random over-the-counter buyers. So Worldcoin has become a honeypot for scammers: [Rest of World] 

“There’s no regulation in the space, and the people receiving the free tokens don’t have enough information. What do you expect?” Evrard Otieno, a Nairobi-based crypto trader and software developer, told Rest of World. “It’s just another opportunity for traders to make some money in the market.”

Days after the Worldcoin launch, the Communications Authority of Kenya and the Office of the Data Protection Commission ordered Worldcoin to suspend operations while they reviewed the project’s privacy protections. [Twitter, archive]

Kenyan police then raided the Worldcoin Nairobi warehouse on August 5 and seized the orbs. [KahawaTungu]. 

Data watchdogs in Britain, France, and Germany are also investigating Worldcoin for similar reasons. [ICO; Reuters]

The WLD token launched at $3.58 but had crashed to a low of $1.76 by August 14. WLD trades only against USDT and mostly on Binance. [CoinDesk; CoinGecko] 

Worldcoin’s investors, who have collectively put in $125 million, include the usual suspects — Andreessen Horowitz, Coinbase Ventures, Digital Currency Group, Sam Bankman-Fried, and Reid Hoffman, the co-founder of LinkedIn. [Crunchbase]

Hex enduction hour

Hex is an ERC-20 token that doesn’t do anything. Hex was promoted widely, even internationally on billboards, by a fellow called Richard Heart (or Richard Schueler to the tax man).

Hex promised stupendous yield rates. You bought Hex with ETH, then you staked the Hex, then you got paid interest in Hex. The website called Hex the “first high-interest blockchain certificate of deposit” that “was built to be the highest appreciating asset that has ever existed in the history of man.”

To “stake” your Hex, you would send it to … the Ethereum genesis address, 0x0. That is, you would throw your Hex into a black hole from which it could never be recovered. The Hex smart contract would then pay you Hex tokens in the future, apparently.

The SEC has finally sued Heart over Hex, PulseChain (a fork of Ethereum), and PulseX (a fork of UniSwap). They allege that Heart raised over $1 billion from these three unregistered securities offerings beginning in 2019. [SEC press release; Complaint, PDF]

The SEC says that Heart misappropriated investor funds to buy luxury sports cars, Rolex watches, and a 555-carat diamond, known as “The Enigma,” which he purchased in February 2022 in a Sotheby’s auction. Sotheby’s accepted ETH for the purchase. Heart was famous for promoting Hex with photos of himself showing off his wealth.

Heart has an unfortunate past of selling email spam software in the 2000s. He even called himself the Spam King. Bennett Haselton of peacefire.org successfully sued Heart in 2002 under Washington anti-spam laws for sending junk emails with deceptive headers. [ZDNet, 2002, archive; Panama Guide, 2007, archive]

David went on Richard Heart’s livestream in early 2020. David talked about books a bit, then Richard went into his sales pitch for Hex. Richard is a very charming and likable fellow, but in that particular way that cautions you not to let a penny of your cash within a mile of him. [YouTube, 2020]

This bank failure is fine, nothing to see here

A fourth US bank fell over this year — Heartland Tri-State Bank of Elkhart in Kansas, a small bank with just $139 million in assets. David Herndon, the Kansas banking commissioner, closed Heartland on July 28 after it became insolvent because it was “apparently the victim of a huge scam.”

Herndon said he didn’t know what the scam was — but he said other banks in the state were not affected. Our psychic powers tell us he has an extremely good idea what happened. The FBI is on the case.

The FDIC had to pay $54 million out of its deposit insurance fund – more than Heartland’s entire $48 million loan portfolio. [FT, free with login]

An employee of the bank said all workers at the bank are still employed, but Shan Hanes, the president and CEO, is no longer there. The bank was handed over to Dream First Bank as a growing concern. 

Everyone has been careful to note that the bank fell due to a “huge scam” and definitely not the sort of thing that took out Silvergate Bank, Silicon Valley Bank, and Signature Bank. The “scam” was first mentioned in an August 4 story in American Banker. [Kansas Reflector; FDIC; American Banker]

Still only good news for bitcoin

The SEC is suing Binance. BAM (Binance US) wants to block further discovery and depositions, because they’ve given the SEC so much information toward the consent order they had to be beaten into. BAM demands only four depositions of BAM employees, no depositions of BAM’s CEO or CFO, and no matters outside the consent order. We suspect that Binance doesn’t have some of the perfectly reasonable stuff the SEC has asked for, such as non-existent financial accounts — so Binance is resorting to the Tether defense. John Reed Stark thinks the SEC will largely prevail. [Doc 95, PDF; Twitter, archive]

The SEC sued Bittrex in April for listing securities without registering as an exchange. Bittrex has now settled with the SEC. They will pay $14.4 million disgorgement, $4 million prejudgment interest, and a $5.6 million civil penalty. [Press release] 

CoinDesk is laying off 20 people from editorial — 45% of the editorial staff, or 16% of all staff – to prepare for its sale to the Peter Vessenes and Matt Roszak consortium. We’re pretty sure everyone at CoinDesk is furiously updating their resumes right now. [The Block; TechCrunch]

Wyoming Senator Cynthia Lummis, several lobbyists and academics, and venture capital firms a16z and Paradigm have filed amicus briefs urging the SEC to drop its lawsuit against Coinbase. These mostly repeat Coinbase’s arguments. [Doc 48, PDF; Doc 50, PDF; Doc 53, PDF; Doc 55, PDF; Doc 59, PDF; Doc 60, PDF; Doc 62, PDF]

Kai Lentit of “Programmers Are Also Human” on YouTube goes to Web3 Berlin. “Where people without jobs ask people without companies for jobs.” [YouTube]

Posted on by Amy Castor 1

A16z’s ‘State of Crypto’ report: A rehash of bad crypto market pitches

It’s been a terrible few weeks for crypto. The markets are tumbling. A major stablecoin turns out to be unstable. And the media are all reporting that the NFT market has crashed. 

Now what? You are the biggest venture capitalist firm in the crypto and NFT space. You need to keep the public believing in this nonsense, so you can dump your heavy bags. What do you do? 

You double down and regurgitate the same tired lies and propaganda you have been spewing all along in the hopes you can reel in some fresh suckers in the process. 

Andreessen Horowitz (a16z) released its 2022 State of Crypto Report on Tuesday, along with 56 slides.

The report was cobbled together by general partner Chris Dixon, content creator Robert Hackett, a former Fortune journalist, and two number crunchers, Daren Matsuoka and Eddy Lazzarin, to lend an air of actual research to the study. 

A16z has funded more than 50 crypto startups. In the NFT space, it has backed over a dozen firms, including NFT marketplace OpenSea, play-to-earn game Axie Infinity (which recently suffered a $600 million hack), investor pool PleasrDAO, and Yuga Labs, the company behind the Bored Apes Yacht Club. 

The Silicon Valley VC world is making a fortune off of the securities fraud-as-a-business model. It works like this: A crypto project comes out with a really dumb idea. The dumb idea is powered by a token! The token is an unregistered securities offering. A16z gives the project money and gets a pile of the project’s shitcoins in return. After a lockup period, it blatantly dumps the coins on the public via Coinbase, where Marc Andreessen sits on the board, along with a16z general partner Katie Haun. If the token isn’t busted by the SEC, a16z makes a bundle; if the token is busted by the SEC, a16z get all their money back as the injured investor. David Gerard explains the process in detail.  

The report compiles standard talking points for crypto VCs. You often see these points mindlessly repeated in mainstream media. You can think of Silicon Valley VCs as a pump-and-dump group. When you see Chris Dixon, Katie Haun, Alex Ohanian, Ashton Kutcher, and Guy Oseary all tweeting the same things, it’s part of a coordinated pump-and-dump. 

Here are the five primary lies a16z makes in its report:

Lie #1: ‘We’re in the middle of the fourth price-innovation cycle’

The crypto markets are crashing, but you shouldn’t worry about this. “Pay no attention to Mr. Market,” Dixon and friends write. Crashing prices are a natural part of the “price innovation cycle.” The numbers will go up in due time! 

A16z wants you to believe that the roller coaster of crypto markets is driven by technical innovation, rather than things like GBTC’s reflexive Ponzi or tens of billions of dubiously backed tethers sloshing around on unregulated off-shore crypto exchanges. 

In reality, crypto markets are driven by a series of grifts designed to lure real money into the cryptoverse. In 2017, we had the ICO grift. After the SEC put its foot down, new grifts evolved, including DeFi, NFTs, fractionalized NFTs, DAOs and their governance tokens, and P2E games. 

These grifts exist for one purpose: to create the illusion that tokens have real value. They don’t. Their value is purely speculative. When you go to sell, the only money you make comes from new investors — and there is a finite supply of suckers in the world, which explains why the grifts keep evolving. 

Lie #2: ‘Web3 is much, much better for creators than Web2’

Web3 is a meaningless buzzword a16z loves to kick around. They’ve written entire papers on it. 

In the fantasy world of Web3, which only ever exists in the future, everything will run on blockchains, so you should buy tokens today because number will go up!

A16z argues that Web3 platforms, such as OpenSea have a lower “take rate” for creators than Facebook, Twitter, and Instagram. (A16z led a $100 million round in OpenSea last year. After a $300 million round in January, the platform is now valued at $13 billion.)  

OpenSea takes 2.5% of every transaction on its platform, as opposed to Facebook, Instagram, and Twitter, which take 100% of creator value, the VC firm argues. 

Some of these things don’t belong together.

Talk about comparing apples to oranges. These things aren’t the same! OpenSea is a marketplace where people buy and sell tokens. The others are social media platforms. Better comparisons? eBay charges sellers 2-12%, depending on the category. Bandcamp takes 15%, which is very low for a record shop. But also, these are just sales. OpenSea is a trading platform. Coinbase takes 0.6% commission on trades below $10,000. 

Dixon et al also claim that OpenSea is better for creators because it pays royalties. You can get a percentage of secondary sales going forward. 

This is the crux of how Yuga Labs has made untold millions. Every time a Bored Ape Yacht Club NFT sells on OpenSea, Yuga Labs pockets 2.5% of the sale price.  

Ironically, despite the fact that they are getting hysterically rich, Yuga Labs pulled the rug on the actual artist behind the monkey cartoons. Lead artist Seneca told reporters that her payment was “definitely not ideal.” In a now-deleted tweet, she wrote: “Bored Apes rugged me.”    

As for other artists getting rich on royalties on OpenSea, there is no secondary market for them to make money on. It’s mainly wash trades. 

Lie #3: ‘Crypto is having a real-world impact’

Crypto peddlers routinely talk about how crypto will help undeveloped countries. “Banking the unbanked” is a phrase that a16z uses regularly. “Crypto offers a shot at financial inclusion,” it says in its report. 

Truth: Crypto has completely failed as a payment system. It’s too slow, too volatile, and too irreversible — one fat finger mistake, and your money is gone forever. 

In El Salvador, Nayib Bukele, the country’s authoritarian president, passed a law making bitcoin legal tender. However, nobody in the country is actually using bitcoin for payments. Instead, they almost all use a wallet (Chivo wallet) that updates the balance in a central database. And they are not even using that! 

A16z lists other examples of how crypto is saving the world:

  • Flowcarbon ($GNT) is “revamping carbon credits.” Truth: Crypto traders have been searching the carbon market for older, cheaper offsets to buy and tokenize. Climate experts are specifically horrified by carbon credits on a blockchain. These tokens are akin to collateralized debt instruments.
  • Helium ($HNT) is the “first legitimate, decentralized challenge to entrenched telecom giants.” Truth: Helium is a utility token ICO scam where you mine HNT to pay for long-range/low-bandwidth wireless connectivity. To start mining, you have to buy $80 worth of gear from a Helium-approved vendor marked up to $600. Some miners report making less than $1 per day. A16z led a $111 million token token sale for Helium’s HNT in August 2021. (Update 7/30/2022: It turns out Helium has been lying all along about its partnership with Lime and Salesforce.)
  • Spruce ($SPR) is “enabling people to control their own identities, rather than ceding that power to online intermediaries, like Google and Meta, who profit off people’s information through their data-mining business models.” I’m sure everyone wants their identities stored on an immutable blockchain!

A16z also talks up DAOs (decentralized autonomous organizations), which are neither autonomous nor decentralized. As with the Apecoin DAO, decisions are made by those who hold the most $APE, meaning Yuga Labs and a16Z. (Yuga Labs recently raised $450 million in seed funding in a round led by a16z. VCs got $APE in return.)

Dixon also claims NFTs “grant people virtual property rights across profile pictures, artworks, music, in-game items, access passes, land in virtual worlds, and other digital goods.” 

This is simply false. NFTs don’t convey any rights at all. Copyrights and ownership rights are only passed along in a separate written contract — something that doesn’t need a blockchain.  

Lie #4: ‘Ethereum is the clear leader, but faces competition’

Web3 is built on the myth that the infrastructure exists to support a plethora of apps running on blockchains. A16z writes: “Ethereum dominates the Web3 conversation, but there are plenty of other blockchains now too. Developers of blockchains like Solana, Polygon, BNB Chain, Avalanche, and Fantom are angling for similar success.”

Reality: Ethereum can’t cope with any of this. In 2017, Ethereum slowed to a crawl when CryptoKitties, a game where people trade cartoon cats, became popular. Last month, when Bored Apes Yacht Club sold 55,000 NFTs representing plots of virtual land for its Otherside MMO, people ended up paying twice the cost of the land in gas fees, and the network became virtually unusable for other projects. 

Nicholas Weaver, a former researcher at the International Computer Science Institute at Berkeley and CEO at Skerry Technologies, estimates that Ethereum has 1/5000 of the compute power of a Raspberry Pi, a tiny hobbyist computer-in-a-matchbox.

Ethereum has a goal to move to a proof of stake consensus mechanism to solve these problems, but the move has been six months away for years now.   

As for these other blockchains, they are tiny projects that haven’t been tested at scale. Solana gets clogged regularly too, with shutdowns of the entire network.  

A16z writes that “with Ethereum L1 as the hub, a significant amount of value is deposited into bridges.” (Slide 17.) 

Truth: Ethereum doesn’t work, so games are resorting to bridges, which are being hacked in record numbers. The $600 million in ETH that was once on the Axie-Ronin Bridge is now in the hands of North Korea. Bridges are smart contract pinatas. 

Bridges are a honeypot for hackers.

Lie #5. ‘Yes, it’s still early’

Once again, a16Z falls back upon this B.S. argument of comparing Web3 to the internet: “We estimate there are somewhere between seven million and 50 million active Ethereum users today, based on various on-chain metrics…Analogizing to the early commercial internet, that puts us somewhere circa 1995 in terms of development.”

Crypto is 13 years old. At that age, the World Wide Web was in peak dot-com bubble, and adoption was limited by access to bandwidth, not by lack of interest or usefulness.  

I doubt any actual investors will read a16z’s State of Crypto report. It’s a string of excuses to feed the media in the hope they can keep the music playing a bit longer. At some point, I predict that most of the shitcoins that a16z is peddling will trade close to their real value, which is nothing. And Web3 will become widely recognized for what it is — a joke. 

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Posted on by Amy Castor 4

The NFT market hasn’t crashed — it was never not crashed

I wrote a story this week on the NFT market for Artnet News. You can read it here. As always, there’s more to say on the subject!

After Paul Vigna at the WSJ announced that the NFT market is “collapsing,” dozens of other media outlets have been rushing to write their own stories on how the NFT market is crashing. 

Fortune’s headline read: “The NFT bubble is showing clear signs of bursting.” Decrypt wrote: “Bored Ape Yacht Club, Other Ethereum NFT Prices Plummet as Crypto Market Crashes.” And the LA Times reported that NFTs are crashing along with SPACs, meme stocks, and other risky investments.

Vigna pulled his data from Nonfungible.com. Gauthier Zuppinger, the COO of Nonfungible.com, told me the data Vigna looked at was incomplete, “insofar as it came from the front end of our site, which was in the process of synchronizing data from Axie Infinity.” A popular P2E game, Axie-Infinity represents a large volume of active NFT wallets and transactions. To be fair, Zuppinger sent me this to show me the market isn’t quite as terrible as the WSJ reported.

However, if you look at what’s on Nonfungible’s site, which is clearly what Vigna was looking at, things look bleak. Aside from an uptick in NFT sales on April 30 when Bored Ape Yacht Club held its Otherside land sale, things have been slipping downhill since the beginning of the year.

Admittedly, the data on the NFT market is confusing. Some of the reports on Dune Analytics and DappRadar make it look like the market still has a fighting chance. Blockchain analytics firm Chainalysis published a report on May 5 on how NFT transaction activity has been “stabilizing.” 

NFTs are illiquid assets. It’s not easy to find a new sucker everyday willing to pay millions of dollars for a JPEG — not even a JPEG, but a token on a blockchain that points to a JPEG.

This is why we see situations like the one on Feb. 8, when a seller going by @0x650d on Twitter decided to “hodl” his collection of 104 CryptoPunks at the last minute. The collection was supposed to fetch $30 million at Sotheby’s — but there were no buyers.  

If you accept that the NFT market is crashing, you have to accept that the NFT market ever existed at all. 

The problem with NFT data is that most of it is coming from the NFT platforms themselves. There’s no way to confirm if what they are reporting is real. And there is good reason to suspect the secondary market doesn’t exist at all — it’s just wash trading, meaning the same money is going back and forth between the same people, to pump up the prices. 

Most of the activity on LooksRare, a marketplace that launched in January and went on to challenge power player OpenSea, turned out to be fake. In February, Chainalysis reported “significant” wash trading on NFT platforms. Their findings made international news. On May 4, the first day that Coinbase opened its NFT marketplace to the public, the platform had barely any users. This was after Coinbase boasted that 4 million were on the waitlist.

If you accept the NFT market is real, you have to be willing to accept that there are people on the planet who are willing to plunk down $350,000 for a Bored Ape NFT so they can go to a Yacht Club party in New York and a warehouse party in Brooklyn. 

You have to accept that Jimmy Fallon, Paris Hilton, Madonna, and dozens of other celebs believe that monkey JPEGs are a good investment — and they weren’t gifted these pricey tokens by friends in the entertainment industry, who also happen to be heavily invested in NFT projects. 

If you are still not convinced the NFT markets are fake, let me step you back to March 11, 2021, when all this nonsense first began, when an otherwise unknown artist named Beeple sold an NFT linked to a collage of his scrapbook at Christie’s for $69 million. It turned out that Metakovan, aka Vignesh Sundaresan, the person behind the purchase, had been pumping Beeple NFTs for months. 

Not only that, but the sale itself was a wash trade. Metakovan fractionalized a collection of previously purchased Beeple NFTs with a fungible B20 token and used the Christie’s auction to pump up the price of B20 and make millions.

“From the day the Christie’s auction began, on Feb. 25, to the close of the auction on March 11, the price of one B.20 token grew from $8.28 to $18.57,” the Washington Post wrote at the time. “The value of Metakovan’s stake in B.20 ― about 5 million tokens, according to his blog post — grew by about $51 million over that period.”

Monty Python’s John Cleese recognized the market was a joke early on. After Beeple’s “Everydays” sold, Cleese tried to sell an NFT of a scribbled drawing of the Brooklyn Bridge for $69.3 million. “I have a bridge to sell you,” he said. And yes, someone did buy that bridge — someone on OpenSea going by the pseudonym “JeffBezosForeskin” bought it for 17 ETH. He still owns it, likely because if he tried to sell it, he would get nothing. 

Crypto is crashing. Bitcoin — which is now fighting to stay above $30,000 — is down 60% since its November record. If crypto is crashing, NFTs should not be “stabilizing.” They should be writhing on the ground, gasping their last breath. 

But that won’t happen because the paramedics will soon arrive in the form of large backers. VCs, like A16z, who heavily invested in the NFT market wanted you to believe that NFTs were going to safeguard artists’ work. They told us we’d all use our NFTs in the metaverse. Reddit co-founder Alexis Ohanian, a member of the APE DAO Foundation, said a year ago: “the rise of NFTs and trading card boom is going to be HUGE for women’s sports.” His wife, tennis star Serena Williams, is one of the many celebs who mysteriously acquired a Bored Ape NFT. 

These investors will keep pumping these assets, they will keep tweeting about how stellar NFTs are, and they will fight to keep this market breathing, even if it means throwing good money after bad. 

NFTs will seemingly rise from the ashes, probably in the form of MMO games, more virtual land sales, or stories about groups of unfortunate people benefitting from NFTs. And then, predictably, NFTs will die again and ultimately return to their real value, which is nothing. 

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Posted on by Amy Castor 0

Axie-Ronin hackers and the crypto laundromat — will they succeed in cleaning 174,000 ETH?

Axie Infinity, a popular play-to-earn game, suffered a breach, losing $625 million in crypto — 173,600 ETH and 25.5 million USDC, a popular stablecoin.

It’s the biggest hack ever in the GameFi sphere and a bit of a public relations problem for P2E promoters, such as VC firm Andreessen Horowitz (a16z), who ambitiously describes P2E as “the future of games and really, the Web as we know it.”

The hack took place on Ronin, the Ethereum sidechain that Axie runs on. Ronin uses proof of authority, a modified version of proof of stake, where it only has nine validator nodes, all officially whitelisted — so it’s not even decentralized. 

Via a backdoor, the hacker got a hold of four nodes that were controlled by the game’s Vietnamese developer Sky Mavis, and a fifth node controlled by the Axie DAO.

Because Sky Mavis wants to distance itself from Axie Infinity and in-game tokens, like AXS and SLP (smooth love potion), it created a decentralized autonomous organization. 

Once the hacker controlled the majority of nodes, they were able to forge transactions, and simply remove the money from the Ronin bridge, without a hitch.

Axie said in a tweet that the hack was the result of social engineering combined with human error from December 2021, but did not elaborate. Axie promised to add new validators to the network to make it more decentralized. 

Social engineering suggests something along the lines of a phishing scam. 

This is different from other recent bridge attacks, like Wormhole, wherein the attack was a result of a vulnerability in the smart contract. 

Six days to run for the hills

Ronin reported the hack on March 29 — but according to a Ronin blog post, the theft occurred six days earlier. Sky Mavis unwittingly discovered the breach after a user reported having trouble withdrawing funds from the network. 

How on earth do you lose hundreds of millions of dollars in crypto and nobody notices for nearly a week? Axie developers not only left the door open, but they also neglected to turn on the security cameras!  

All eyes are on the stolen crypto, as internet sleuths watch to see how the hackers will pull off the next part of this massive heist: laundering the funds. Clean crypto is always worth more than dirty crypto.

As soon as you convert stolen crypto to cash in your bank account, you risk revealing your identity. (Recall the two individuals recently nabbed after trying to launder bitcoin stolen from Bitfinex in 2016.)

Stablecoins can be frozen by the issuer — in this case, Circle. So the Ronin hacker laundered them quickly as possible, sending the ill-gotten USDC to decentralized exchanges Uniswap, and 1inch, and swapping it for ether. 

Most of the stolen ETH remains in the attacker’s wallet, but so far, the Axie-Ronin hacker has sent 3,750 ETH ($12 million) to Huobi and 1,220 ETH ($4 million) to FTX, according to Dirty Bubble Media. Funds were also sent to Binance and Crypto.com. 

Tornado Cash 

Once centralized exchanges realize where the funds are coming from, they can freeze accounts and even route the money back to Ronin — if they want to, and if the funds haven’t already been chain swapped away. 

Chain swapping, or chain hopping, involves sending the funds to an exchange, swapping them for another crypto, and then quickly moving those funds to another exchange. Many offshore exchanges have lax KYC controls.

Still, why didn’t the hackers use a mixer like Tornado Cash to scramble up the ETH instead? 

A mixer takes funds from different users and jumbles them all together, making it difficult to track the movement of funds on a blockchain. 

Tornado Cash works as a series of pools, each for a different value. You deposit coins in a pool, and sometime later, you can withdraw an equal number of coins.

The problem is, once you send crypto to a mixer, you have to wait for deposits and withdrawals from other users to achieve any real anonymity. That takes time.

And, since pretty much all of the big flows are identified as dirty, any large withdrawal is likely to be dirty as well. Also, exchanges may be reluctant to touch crypto coming out of a mixer, believing it’s all just tainted money.

“Exchanges are probably starting to get wise and just blocking Tornado Cash for non-KYC accounts because it is just SO cesspool even for them,” Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, told me. 

Binance, which integrated the Ronin wallet in September, said that as of Tuesday, it has suspended all deposits and withdrawals on Axie Infinity’s Ronin network, and it is on the lookout for unusual transactions — but again, the hackers were already ahead of the game, so it’s unclear what good this does.

(Update, April 4: The Ronin hacker is now routing funds through Tornado Cash, according to an address associated with the hack — a combined total of 2,000 ETH, or roughly $6.9 million.)

Refunding the money

Sky Mavis needs to find a way to refund Axie players, many of whom are now sitting on unbacked WETH — the ERC20 token that represents the ETH on the Ronin network.  

If the game developer can’t refund players, it may have to retire the game or face insolvency, putting the entire P2E space to shame. Right now, the firm has no idea how it is going to come up with the money. 

“We are fully committed to reimbursing our players as soon as possible,” Aleksander Leonard Larsen, Sky Mavis COO, told Bloomberg. “We’re still working on a solution, that is an ongoing discussion.”

The stolen funds include the deposits of players and speculators and the Axie Infinity Treasury, used to create a base revenue for the AXS token. Of the ETH stolen, 56,000 belonged to the Axie Infinity Treasury, Bloomberg said.   

The real losers

Play-to-earn games are exploitive. They promise users the ability to earn money while playing. But to play, you have to first purchase expensive NFTs, which not everyone can afford. 

In the case of Axie Infinity, that means purchasing three Axies — cartoon monsters that live on the Ethereum blockchain as ERC721 tokens — at a cost of up to a thousand dollars. Players pay because they see it as an income opportunity. 

In the Philippines, many players resort to borrowing Axies, and becoming indentured servants, playing for weeks on end just to recoup their initial investment. Playing the game becomes a mindless slog for those trying to earn a living wage, so they can buy food and keep a roof over their heads. The game itself functions as a pyramid scheme. 

Many of these players sold their in-game NFTs for ETH, which they hoped to turn into cash. Only now, the WETH in their Ronin wallets is worth nothing because there is no ETH to cover it, and they have nothing to show for all the days, weeks, and months of endless game playing. They are the real losers in all of this. 

As for the P2E boosters, Axie Infinity is too important to fail. In December, Sky Mavis closed a $152-million Series B led by FTX and a16z. That was on top of a $7.5 round six months earlier with contributions from billionaire investor Mark Cuban.

A16z-backed Yuga Labs, the firm behind the popular Bored Apes Yacht Club, is also making moves into the P2E space. Its APE token will serve as the in-game currency for Animoca Brand’s Benji Bananas. The firm also recently dropped hints of another game called Otherside, where virtual land will be sold as NFTs.  

Unless the Ronin hacker has a change of heart and returns the money, it looks like a superhero may have to step in to save the day. In the world of crypto, more often than not, that means pulling more money out of thin air in the form of tokens. 

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Bored Apes Yacht Club launches Apecoin. It looks like an unregistered penny stock offering  

The Bored Ape Yacht Club project now has a fungible token called Apecoin (APE), which officially launched today.

The announcement came from Apecoin itself, in the form of a Tweet thread and a post on the new APEcoin website. 

Yuga Labs, the startup behind Bored Apes Yacht Club, is trying to distance itself from its own coin — much in the same way that Ripple tried to distance itself from XRP.  

Apecoin is like a ventriloquist’s dummy on the lap of Yuga Labs. The dummy is doing all the talking, and we are supposed to pretend that we don’t see Yuga Lab’s lips moving. 

Yuga Labs developed its Ethereum-based ERC20 token with help from blockchain developer Horizen Labs, blockchain game company Animoca Brands, and law firm Fenwick & West.  

The goal here is to create a new magic bean that can be sold for real money, without having to register that magic bean with the Securities and Exchange Commission. Yuga Labs founders think all they have to do is make sure the coin is “decentralized” and has some sort of utility, outside of “number go up.”

Yuga Labs is calling its coin “a token for culture, gaming, and commerce.” Culture is a completely meaningless word here. And I’m not sure what commerce means either. I’m guessing it means you will be able to buy things, potentially even bored ape NFTs, with the token.

There will be 1 billion Apecoins, and 150 million will be airdropped to holders of bored ape or mutant ape NFTs. They can claim their coins on Apecoin.com for up to 90 days. 

Also, starting today, the coin will be listed on several major exchanges: Coinbase, FTX, Kraken, and Gemini, according to a tweet by Guy Oseary, who represents Yuga Labs in the entertainment sector. APE will also be listed on OKX, Binance, and Binance US.

Coins tend to shoot up in price as soon as they get listed on Coinbase, the largest crypto exchange in the U.S. 

It’s decentralized, see?

Speaking through Apecoin, Yuga Labs also announced an Apecoin DAO, or decentralized autonomous organization. If you own APE, you are a member of a DAO, and you get to weigh in on important decision-making, probably things like what bands will play at the next warehouse party.

I won’t go into all the details, but if you are interested, an Apecoin forum addresses how the DAO works. 

In 2018, Bill Hinman, who was then the director of the SEC’s Division of Corporation Finance, stated that ether (ETH), the native crypto of Ethereum, was not a security because it was sufficiently decentralized. Ever since that time, token projects have been trying to copy Ethereum, and come out with something that is decentralized, even as the SEC tried to walk back how significant this statement was when Ripple tried to use it in the XRP case. 

However centralized the actual operations are, “decentralized” only ever meant “you can’t sue me, bro.”

DAOs are supposed to be decentralized, but they never are. Similarly, the Apecoin DAO will have its own central gatekeeper: the Ape Foundation.  

The Ape Foundation is based in the Cayman Islands, and it maintains the Apecoin.com website and the Apecoin Twitter account.

Members include Alexis Ohanian, founder of Reddit; Amy Wu, who leads a venture fund at crypto exchange FTX; Maaria Bajwa, a venture investor at Sound Ventures; Yat Siu, cofounder of Animoca Brands, and Dean Steinbeck, cofounder of Horizen Labs. 

All of these members own one or more bored ape NFTs. Advisors and contributors in token projects are generally paid in magic beans, so I suspect they got plenty of APE for their efforts, too.

Anyone who was around the crypto space in 2016 remembers the earliest DAO — called “The DAO.” After the project stupendously crashed and burned, the SEC came out with an investigative report, saying the DAO’s tokens were securities. Still, that hasn’t stopped thousands of DAOs from launching this year. There is even a website now that tracks DAOs.

In 2017, we had initial coin offerings. In 2022, DAO governance tokens are stepping in to take their place — and they resemble offerings of securities in all the same way ICO tokens do. 

Play-to-earn

Yuga Labs knows it is not enough for Apecoin to simply be a governance token. It needs more utility than that, so the coin will be incorporated in a game app — and that’s where Animoca Brands comes in. 

The game developer converted its mobile game Benji Bananas to play-to-earn for the occasion. By playing Benji Bananas you earn tokens that can be swapped for ApeCoin starting in Q2 2022. The game is available on the App Store and Google Play.

Benji Bananas is an action game, where you make Benji the monkey swing from vine to vine through the jungle, collecting bananas. If you want to play, you have to first buy a Benji Pass, which is an NFT. Animoca offers more details in a Medium post. 

Play-to-earn games have been criticized as a growing cancer in the gaming space, where they transform games into a grinding, difficult slog. They are known to target vulnerable populations in countries like the Philippines, where people use the game as a way to earn a living. If players lose money or the in-game token drops in value, they risk sinking ever deeper into debt, having to take out loans from other players to stay in the game.

Somehow, I don’t think a banana game will be the biggest use case for Apecoins. Like most ERC20 tokens, the biggest use case will be speculating on its price: buying APE and hoping it goes up in value.

One for you, three for me

Yuga is creating 1 billion APE. A portion will be unlocked over a period of four years, starting on March 17, 2022. The distribution looks like this: 

  • 470 million to the DAO treasury 
  • 150 million to bored/mutant ape holders 
  • 150 million to Yuga Labs 
  • 140 million to launch contributors
  • 80 million to Yuga Labs founders  
  • 10 million to charity 

Notice how many APE Yuga Labs is setting aside for itself, and for all its contributors. The firm is happy to distance itself from the Apecoin project, but not the piles of APE it is getting.

A few weeks ago, the Financial Times wrote that Andreessen Horowitz (a16z) was in investment talks with Yuga Labs, which was seeking to sell a multi-million dollar stake in a new funding round. 

We don’t know yet if that deal has gone through, but I suspect if and when it does, a16z will get a large allotment of Apecoin. The venture capital firm has two directors sitting on Coinbase’s board, so they likely played a key role in getting the token listed. (Note how a16z’s shitcoin bag gets listed on Coinbase routinely.)

This is a win-win deal for a16z. If the SEC steps in and deems Apecoin an unregistered security, which I can totally see happening, a16z is not assuming any risk. Yuga Labs is taking on all of the risks. A16z simply gets tokens they can dump on the general population — a quick return on their investment. 

The founders of Yuga Labs imagine they can create a token out of thin air, pay themselves 80 million APE — and another 150 million for their company — and regulators are going to sit back and not blink an eye.

I would be curious to know if Yuga Labs even reached out to the SEC before launching APE.

In 2019, the SEC published a framework for analyzing whether a digital asset is an investment contract and, therefore, a security. The “not a security” path for most tokens is a fraught one. 

We’ve already seen several ICO projects pay the price of selling unregistered securities. Telegram had to return $1.2 billion to investors and pay $18.5 million in penalties. Block.one had to pay a $24 million penalty. Similarly, these companies also argued their tokens were decentralized and had utility. 

Yuga Labs is unwilling to learn lessons from the past. They think they know better. And a16z encourages this stuff directly because they know the game is rigged in their favor.

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Artnet News: ‘The Creators of Bored Ape Yacht Club Want to Become the Amazon of the NFT Space. Can They Pull It Off?’

My latest story on the Bored Apes Yacht Club was published in Artnet News today. It’s paywalled but worth subscribing to Artnet News if you want to read it!

I spent a few weeks working on this nearly 2,000-word story, and Artnet News editor Julia Halperin really helped me pull it together. We had the story ready to go on Friday when suddenly, Yuga Labs announced they had just acquired the IP to CryptoPunks and Meebits from Larva Labs. So of course, that meant lots of last-minute editing along with a new headline.

Usually, you make big announcements at the beginning or middle of the week, not when people are clearing off their desks and getting geared up for the weekend. 

But then the floor price of Bored Apes was dropping, slipping below $200,000 in ETH—and Yuga Labs needed to act quickly. 

Yuga Labs is giving Punk and Meebits owners the IP for their avatars, so they can create derivatives and hopefully further the branding and marketing of the project.

They’ll probably also get to attend yacht parties and warehouse concerts, and benefit from all of the other perks and freebies, like NFT airdrops.

Token projects have been promising real-world utility since the ICO era of 2017, and NFT projects are no different. The goal is to somehow justify the insane prices of these things. 

When NFTs became “the next big thing” in early 2021, many people started asking: “What good are these? All they do is point to a JPEG on the internet. I can copy and download that JPEG myself.”

In response to the criticism, many NFT projects now promise utility, and BAYC is no different. Owning a bored ape is a key to a club. It’s culture. It’s a digital identity, or whatever Yuga Labs can think of next.

Ultimately, it’s about marketing. High-value NFTs are illiquid. It’s very difficult to find a 1:1 buyer for a $200,000 bored ape, outside of celebrities. So the goal is to keep bored apes in the public eye and to keep bored ape holders from selling off their NFTs.

In the meantime, Yuga is working on a fungible token that will likely “democratize” their high-priced NFTs. All the better for a16z, if they proceed with reported plans to invest millions into the project.

The Silicon Valley VC firm could potentially get ERC20 tokens in return for their investment, and see quick returns if the coin lists on Coinbase. A16z has two directors sitting on the Coinbase board.

A fungible token combines the best of both worlds — the scarcity of a collectible NFT with the liquidy of an ERC20 token. But it’s complicated, you see. Too often these things resemble securities offerings.

Yuga Labs knows the big money is temporary. Until they work out the legalities of a fungible token, they need to do everything possible to keep the price of Bored Apes Yacht Club tokens up. 

So far, the plan is working. Soon after the announcement on Friday, the floor price of Bored Apes went up again. As of today, the cheapest bored ape NFT is $227,000 (90 ETH), according to CryptoSlam.

Posted on by Amy Castor 0

NEWS: Wormhole hit by exploit, BAYC and its tangled celebrity web, HitPiece’s dirty dealings 

Software is inherently unforgiving. Stupid mistakes render stupid consequences. Recently, this led to one of the largest thefts in a DeFi protocol.

Wormhole, a bridge for connecting Ethereum and Solana and other DeFi blockchains, was hit by a hacker, who stole $326 million in cryptocurrency.

An exploit in the code allowed the attacker to mint 120,000 wETH (wrapped ether) on the Solana blockchain out of thin air. The hacker then exchanged 93,750 wETH for ETH on Ethereum and the rest for SOL, the native token of Solana, and USDC. (Elliptic, Cointelegraph)

Cross-chain bridges allow you to stake crypto (generally, ETH) so you can spend it like the native crypto on another blockchain. In the case of Wormhole, wrapped ETH, an ERC-20 token that represents ETH one-to-one, serves as a sort of I.O.U. The hack resulted in Wormhole sitting on lots of unbacked wETH. 

Wormhole developers offered the hacker a $10 million bug bounty for the return of the funds. Why the hacker would want to relinquish $326 million for $10 million, I’m not sure.

Security researcher Sam Sun explained how the thief carried out the heist: “Wormhole didn’t properly validate all input accounts, which allowed the attacker to spoof guardian signatures and mint 120,000 ETH on Solana, of which they bridged 93,750 back to Ethereum.” (Twitter)

How did the hacker even know about this vulnerability? According to DedmundFitzgrld: “The fix was pushed to GitHub a couple weeks ago but not deployed. So the attacker found the exploit by scanning the commits to GitHub. The vulnerability was out there for all to see.” (Twitter)

Jump, a high-frequency trading group with crypto ambitions, stepped in to save the day. The Chicago-based firm somehow came up with the funds to replace all of the 120,000 ETH. Apparently, it had a spare $326 million sitting around? (Twitter, Fortune)

What do we know about Jump? Last August, it bought Certus One, which helped develop the Wormhole bridge. Jump also executes some crypto orders for Robinhood. 

Jump holds a heavy bag of Solano tokens. It can’t risk a lack of confidence in the market, so it likely borrowed a pile of ETH to fix the problem. Who did it borrow the funds from? One guess: Tether, who last year issued the firm $1.1 billion in USDT, according to one analysis. 

Qubit also hacked

Days before Wormhole was hacked, Qubit Finance was breached for $80 million in crypto. Similar to Wormhole, Qubit operates a bridge between Ethereum and the Binance Smart Chain network.

In this case, the hacker was able to exploit a security flaw in Qubit’s smart contract code that let them send in a deposit of 0 ETH and withdraw almost $80 million in Binance Coin in return. (Verge)

Qubit has been trying to convince the bank robbers to return the money. They started by offering a bounty of $250,000, and eventually upped it to $2 million — still, a piddling amount compared to what the hackers stole.  

Now, they are resorting to threats:

“If you don’t come forward to claim the generous bounty and return the funds, you will face lasting consequences that vastly outweigh the benefits of holding onto funds that you can’t readily access,” Qubit said in a tweet.

Bored Ape founders revealed

Buzzfeed just identified the two main founders of BAYC — Greg Solano, a 32-year-old writer and editor, and Wylie Aronow, a 35-year-old originally from Florida. The pair don’t have any dark pasts, as far as anyone knows. (Buzzfeed)

“These 2 amazing partners of mine,” Guy Oseary tweeted with a pic of them at Apefest. Oseary is the music industry veteran who represents them. He also represents NFT project World of Women. And he is a buddy of Jimmy Fallon, so that explains a few things.

Oseary says the founders were “doxxed against their will,” which is a bizarre statement given you are talking about the founders of a multi-billion-dollar enterprise.

As Buzzfeed puts it: “This reveals a unique problem with the idea of a billion-dollar company run by an unknown person: How do you hold them accountable if you don’t know who they are?”

A16z mulls buying a chunk of BAYC

Yuga Labs, the startup behind Bored Apes Yacht Club, is in talks with Andreessen-Horowitz (a16z), who is considering buying a major stake in the startup, which would value it at $5 billion. (FT) 

I’m losing count of all of the NFT projects a16z is funneling money into — over a dozen, for sure. The VC firm is a major force behind the frothy NFT market. 

Celebrities are shilling Bored Apes left and right to the point where it is downright nauseating and rumor has it the Bored Apes will make an appearance in the Super Bowl halftime show on Feb. 13.

The problem with investing in high-value NFTs is they are not easy to dump on retail. You have to find that special buyer with loads of disposable ETH. Fungible tokens, on the other hand, are much more liquid — especially if you can get them listed on Coinbase. 

This is why DAOs (with their ERC-20 governance tokens) and fractionalized NFTs are becoming the thing. It’s like the 2017 initial coin offering craze all over again. Only now we’re talking about Web3 and “democratizing” companies and JPEGs.

Sometime soon, expect Yuga Labs to issue an ERC-20 token with a huge pre-mine for investors. The token will likely represent its NFTs in some way or else give holders special access to future Yuga Lab NFTs — something like that. Bored Apes have been heavily pumped, so at this point, it’s just a matter of creating a fungible token to lure in suckers at a much greater scale. At the end of the day, it is all about creating the illusion of exclusivity or having access to something special.

Yuga Labs has talked about issuing ERC-20 tokens in the past, saying the plan was to work with law firm Fenwick and West and Horizon Labs — issuers of the ZEN token, which is already listed on Coinbase. So this is nothing new. It’s been in the works all along.

What a tangled Web we weave

We’ve been wondering a lot about why celebs are hyping Bored Apes. Who is talking them into this? What’s the deal? 

Max Read did the smart thing — he followed the money trail, and mapped out the celebrity NFT complex. Jimmy Fallon (who was shilling his Bored Ape on National TV) is represented by talent and sports agency Creative Artists Agency. Lo and behold, CAA is an investor in OpenSea and recently signed a deal to represent the NFT collector 0xb1, who owns NFTs from Bored Ape Yacht Club and World of Women. There’s more. Lots more. Take a look at the map. (Substack)

Last week Justin Beiber bought a Bored Ape NFT for $1.3 million (500 ETH), as one of several purchases he made on OpenSea within a short period. As Dirty Bubble Media explains, all of the NFTs were gifted. They were bought by the InBetweeners project, a collection of NFTs owned by artist Gianpiero D’Alessandro, who has designed merchandise for Bieber, Snoop Dogg, and others. 

Bieber never disclosed any financial relationship between himself and the inBetweeners project. As Dirty Bubble points out, this is a big no-no, according to FTC rules. (Substack)

Gwyneth Paltrow also has a Bored Ape, thanks again to MoonPay Concierge. Every time someone buys a Bored Ape via MoonPay, they seemingly have to announce it on social media. (Twitter)

HitPiece and its shady founder

A new project called HitPiece appeared out of nowhere and started scraping Spotify and “staking” songs as NFTs — without the artists’ permission. 

Naturally, artists found out and started hurling obscenities at the project via social media. 

“Yo a bunch of industrial scene acts (including me) have NFTs for sale on the site hitpiece.com I did not put it online and I assume you probably didn’t either, fucked up,” Choke Chain tweeted.

“Each HitPiece NFT is a One of One NFT for each unique song recording. Members build their Hitlist of their favorite songs, get on leaderboards, and receive in real life value such as access and experiences with Artists,” Hitpiece said on its website. (NNE)

The brains — or lack of brains — behind HitPiece turns out to be music industry guy, Rory Felton, who has a history of shady dealings. (Twitter thread) 

Felton launched HitPiece in December along with music exec and former rapper Michael Barrin (aka “MC Serch”), and venture capitalists Ryan Singer and Blake Modersitzki. (Festival News)

Anyhow, Hitpiece.com has been taken down. If you go to the website, all you get now is a message that says, “We Started The Conversation And We’re Listening,” whatever that means. (archive)

Gamers hate NFTs!

Gamers want nothing to do with NFTs. They see NFTs as a cash grab and forcefully push back on any game company’s efforts to incorporate NFTs in anything.

Clueless to that trend, GameStop has teamed with Immutable X to launch an NFT marketplace. They’re also creating a $100 million fund for grants to build on the platforms. While Gamestonk investors might think this is great, it should thoroughly piss of GameStop customers. (Verge)

Team17, the outfit behind the many Worms games, pulled the plug on its MegaWorms NFT project (they wanted to create NFTs of all the Worms games characters) only 24 hours after announcing the project, due to extreme backlash from customers, fans, and teamsters. (IGN)

Notice the editor’s note on the IGN story: “The subject of NFTs is currently a very controversial topic in the gaming community. IGN urges community members to be respectful when engaging in conversation around this subject and does not endorse harassment of any kind.“

Electronic Arts, another game publisher, is also backtracking from earlier NFT enthusiasm. (Eurogamer) 

Other NFT news

Nike sues online sneaker reseller StockX for selling NFTs of Nike shoes. (Reuters) 

How did OpenSea take over the NFT trade and become a multibillion dollar company? (Hint: they got lots of help from a16z.) (Verge)

One of the founders of Larva Labs, the project behind CryptoPunks, sold all of his v1 Punks for 260 ETH. In response, Larva Labs released an official statement saying the v1 Punks are worthless, because the project re-released all the Punks in 2017 to fix a bug.

The NFT community feels differently. They are saying that v1 Punks are the originals! What’s on the blockchain, stays on the blockchain. (NFT evening)

Coachella is selling lifetime festival passes for the first time — but you have to buy an NFT to get one. The music festival launched an NFT marketplace built by FTX US, with three collections of NFTs going on sale on Feb. 4th. (Verge)

This is part of a trend, I mentioned before. NFTs are being used to give people special access to clubs, events, restaurants, breweries, and whatnot. Wanna be part of the exclusive group? Buy our NFTs.

Tampa Bay Buccaneers quarterback Tom Brady is retiring after 22 seasons with the NFL. His business ventures, including NFT platform Autograph, will keep him busy moving forward. (Fortune)

Last year, a16z-backed Meta4 Capital created a new fund to invest up to $100 million in NFTs. In a twitter thread, Meta4Capital justifies spending money on “historically significant” or “iconic” NFTs, as if any of this means anything. It doesn’t. At the end of the day, an NFT is just a number in a database.

A racist project called “Meta Slave” offered NFTs made from photographs of Black people (all algorithmically-generated). After a swift backlash, the project rebranded to also feature “white, Asian, etc.” NFTs. The project’s Twitter and Instagram accounts have been deactivated. The collection has also been removed from OpenSea where the NFTs were being auctioned. (Vice)

Artist bayneko airdropped NFTs of microscope pictures of SARS-COV-2 to all 96,186 users of NFT platform Hic et Nunc (HEN) who hold at least one NFT. The NFT description read: “Your wallet has been infected by SARS-CoV-2, the virus responsible for COVID-19… in an act symbolic of the invasive and ubiquitous nature of the virus and its psychological effects.” (Twitter thread)

Elsewhere in cryptoland

Quote of the day: “So much dumb stuff happens in crypto, and if you are a smart intermediary that dumb stuff is your profit margin. Crypto markets are lightly regulated and brutally Darwinian, and every day the smart find exciting new ways to take money from the dumb. The returns to smart are very high.” ~ Matt Levine (Bloomberg)

On that note, another day, another rug pull. Realux promised to democratize real estate at a “very low cost in a very easy way” using a complex system of tokens backed by real estate investments. After collecting everyone’s money, the project shut down and its creators vanished. (Motherboard)

Riot Blockchain, a large crypto miner located just outside of Austin shut down ahead of a cold blast. Bitcoin miners have been drawn to Texas because of the state’s cheap electricity. They’ve been lobbying Governor Greg Abbott to make things even easier for them. (Bloomberg)

How Facebook’s Diem died. A post mortem. (Washington Post)

Jeremy Allaire’s Circle, the company behind USDC, is running ads in everything. (Twitter)

The IRS is coming for you. Intuit CEO Sasan Goodarzi warned that Americans who invested in crypto or NFTs, and actively traded equities on commission-free websites, could be dumbfounded when they learn how much they own in taxes because “they were in essence gambling with their money.” (Bloomberg)

In a podcast, Sohale Mortazavi talks about his piece for Jacobin that went viral: “Cryptocurrency Is a Giant Ponzi Scheme.” (Youtube)

The CEO of US-based crypto exchange Cryptsy, Paul Vernon, was indicted on 17 counts, including tax evasion, wire fraud, money laundering, computer fraud, tampering with records, documents, and other objects, and destruction of records in a federal investigation. (IRS) 

This has been a long time coming. Cryptsy shut down in 2016, after announcing 13,000 BTC and 30,000 LTC were stolen two years prior. It was later discovered that “Big Vern” stole the money.

According to the indictment: “Between May 2013 through May 2015, Vernon used his control over Cryptsy’s accounts, known as wallets, to steal over one million dollars from Cryptsy’s cryptocurrency wallets. Once Vernon stole his customers’ funds from Cryptsy’s wallets, he deposited the funds into a personal cryptocurrency wallet and then transferred the same funds into his personal bank account.”

Sam Bankman’s FTX got a $400 billion funding round, valuing the company at $32 billion, as investors, including Softbank and Canada’s Ontario Teachers’ Pension Plan, hog piled into the madness. (I mentioned earlier that the exchange’s US arm also got a $400 million round.) (Bloomberg)

Taylor Monohan’s MyCrypto joined the Metamask team. ConsenSys acquired MyCrypto for an undisclosed sum and plans to merge MyCrypto with the MetaMask wallet. (Taylor appeared in the QuadrigaCX documentary “Dead Man’s Switch” along with me and David Gerard.) (Coindesk)

On the subject of QuadrigaCX — my review of Jennifer Robertson’s “Bitcoin Widow” was reprinted and is getting lots of attention. (Saltwire)

Steven Kimber, the Halifax author who helped author “Bitcoin Widow,” was interviewed on CBC radio about the book. He spent 50 hours listening to Robertson, he said. (CBC radio)

Douglas Johnston, a Winnipeg lawyer and writer, also reviewed “Bitcoin Widow.” His review was more critical than others. “This is autobiography, so it’s told in the first person. But Robertson puts herself at the forefront of far too much of the narrative.” (Winnipeg Free Press)

Also on the subject of Quadriga, Michael Patryn, the fraudster who was recently voted off his latest Ponzi scheme Wonderland, has been laundering his crypto. According to his wallet, he has been sending thousands of ETH through mixer Tornado Cash. (Coindesk, Etherscan)

Crypto risks destabilizing emerging markets, says the International Monetary Fund. (FT)

Binance builds a $1 million insurance fund. (Bloomberg)

El Salvador’s Chivo wallet keeps breaking. (The Block)

Silvergate Bank is paying $50 million in cash and 1,221,217 shares to buy Facebook Diem’s “intellectual property.” Silvergate wants to do a stablecoin running on the Diem blockchain. (press release, CNBC)

USDC, the second biggest stablecoin next to Tether, crossed 50 billion in circulation. (Circle)

Meanwhile, Tether is still sitting at 78 billion USDT. No new prints in 2022 yet. (Tether)

Bitcoin has climbed back to $41,500 despite no new Tether prints. (It was down to as low as $34,000 recently.) Retailers who bought BTC for $69,000 in November are still hurting.

Corey Doctorow on the great crypto crash event looming in the future: “If you think Coinbase is looking shaky and take your money out, you’d better hope they last for at least three more months, or you might have to give the money back to the bankruptcy trustees.” (Twitter thread)

Australian billionaire Andrew Forrest launched a criminal case against Facebook, alleging the company failed to prevent scam ads that used his image, and breached Australian AML laws over the spread of crypto fraud. (BBC)

The search for a crypto use case continues. (One Zero)

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Posted on by Amy Castor 0

BitClout’s social media experiment is one bad idea on top of another

BitClout, a social-media-on-the-blockchain project, is selling a type of token (called “creator coins”) tied to influential Twitter accounts—without account holders’ permission.

And folks are getting understandably pissed off. 

At first, I thought these creator coins were NFTish due to their artificial scarcity and being a way to trade influence. But it turns out they are more HYIPish.

Creator coins are fungible, similar to ERC-20 tokens on Ethereum. And each BitClout creator coin has its own supply. Elon Musk’s creator coin is worth $84,000, for instance, and there are currently 434 of them in circulation.

The BitClout “one-pager” tells us a little bit more about how these creator coins work:

“Creator coins are naturally scarce, with fewer than 100 to 1,500 coins in existence for each profile. This is because as more people buy a profile’s creator coin, the price of the coin goes up automatically at a faster and faster rate. This means that, eventually, it could take billions of dollars to mint even one more coin.”

According to the paper, if you want to buy new coins associated with a creator, the profile will “happily mint them out of thin air” and sell them to you according to a price curve.

Like a lot of things in this project, the formula for calculating the price of creator coins is complicated and hard to follow:

Price in BitClout = .003 * creator_coins_in_circulation^2
Price in USD = .003 * creator_coins_in_circulation^2 * bitclout_price_in_usd

Essentially, what you need to know is, the price of the creator coins goes up exponentially based on demand, thus, you are encouraged to buy early and hold on to your coins for as long as possible. However, the only value in the coins comes from new investors. The coins themselves are intrinsically worthless.

It all sounds very much like a Ponzi scheme, where folks who get in at the ground level are able to cash out, but the news is not so good for late investors. (Eventually, you run out of suckers, and someone gets stuck holding the bag.)

BitClout token

BitClout also has its own blockchain and its own BitClout token (BTCLT). The project actually did a premine of 2 million BTCLT for founders and investors.

If there is an expectation of profits from an investment in a common enterprise based on the efforts of others, that’s generally a good sign something is a security, according to our friend Howey.

The project mints creator coins of Twitter profiles and assigns them dollar values, but you can only buy creator coins with BTCLT. And if you want BTCLT, you have to buy it with bitcoin via the BitClout website.

Your money goes in, but how does it get back out again? The BitClout token so far is not listed on any major exchange. But there is good reason to believe that could change soon, based on the influencers behind the project.

Big-name investors

BitClout controls a wallet containing nearly $190 million worth of bitcoin, most of it raised from notable VCs, including Andreessen Horowitz (a16z), Coinbase Ventures, Digital Currency Group, and the Winklevoss twins.

Social Capital CEO Chamath Palihapitiya was recently on a podcast discussing how BitClout is funded by him and others.  

Aside from Coinbase Ventures itself backing the project, a16z is one of the major investors behind Coinbase, so I’m sure there is a plan here somewhere to get that token listed pronto. And it’s not like Coinbase isn’t already listing a slew of coins that resemble securities.

Diamondhands

BitClout’s pseudonymous founder, who refers to himself as “Diamondhands”—meaning someone who is willing to take risks and hold on to an asset to the bitter end—is allegedly Nadar Al-Naji, the former Basis founder. And we all know how well that project went. 

Basis was a “price-stable cryptocurrency with an algorithmic central bank,” according to its white paper. After raising $133 million, Al-Naji eventually shut Basis down blaming regulatory constraints. He ended up returning 90% of the money. (Andressen Horowitz was also an investor in Basis, by the way.)

Basis and BitClout share a lot in common. Both projects are totally confusing. And they both appear to have the same founding team and the same investors. “We are investors. Same team behind Basis [from] a few years back,” Tyler Winklevoss of Gemini Capital told Decrypt.

You could be forgiven for thinking this is just grifters jumping between grifts.

Robert Stevens wrote up a great report in Decrypt describing how BitClout works and where the funds are getting shuffled off to. Brady Dale also penned a good story in Coindesk.

By the way, I love how Diamondhands told Coindesk that BitClout is not a company, it’s a blockchain. As if that will spare it from an SEC enforcement action. Everything about this project is dumb and bad.

Anyhow, last week crypto law firm Anderson Kill sent a warning letter to Nadar Al-Naji on behalf of Brandon Curtis, the product lead for decentralized token exchange Radar Relay, for using Curtis’ private information without his consent. I have no idea why VCs are pumping money into this project.

Updated on March 29 to add Tyler Winklevoss’ quote from Decrypt.

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Posted on by Amy Castor 2