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In the face of wreckage, DeFi’s self-policing shines

Arca | Jeff Dorman | Jan 31, 2022

wonderland 1 - In the face of wreckage, DeFi’s self-policing shinesThe Chief Financial Officer of popular decentralized finance (DeFi) protocol Wonderland was revealed as a convicted scammer and former executive of Quadriga. Michael Patryn, who went by the pseudonymous handle “Sifu” and worked directly with prominent DeFi founder Dani Sestagalli, had oversight over a treasury of nearly $1 billion. Though this story is about one individual and one DAO, the ripple effects were felt across DeFi because of the interconnectedness of DeFi applications and the immense influence of a handful of really successful DeFi developers and founders (like Sesta).
In a very abridged summary, MIM, the asset-backed stablecoin of the Abracadabra protocol, has a massive MIM-UST pool on Curve—the decentralized exchange that focuses on stablecoin trading. These incentivized Curve pools accounted for most of the minting of UST (the stablecoin of the Terra Luna/Anchor protocol ecosystem), whose rapid growth ($11 bn outstanding) helped drive the price of LUNA higher over the last several months. As LPs pulled assets out, TVL across Terra Luna dropped, as did the price of LUNA, and Curve’s TVL dropped as well, while all of the tokens in the Abacadabra/Sesta ecosystem (SPELL, TIME, ICE) fell 30-70%. Meanwhile, prediction markets popped up, betting that UST will lose its peg.

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Dealers were inundated with UST put buyers, and FTX even spun up a UST perpetual future market so traders could short UST. SUSHI, a completely unrelated DEX that was in the process of integrating Sesta and his team (but had not yet begun), also became part of the collateral damage. A historical chain of events that led to billions in losses started with the doxing of an individual. He indeed committed terrible crimes, but as of this writing, he has not been accused of any wrongdoing concerning all of the assets/projects mentioned above.
But here’s where it gets positive. Bad things occasionally happen in digital assets, just like corporate fraud in traditional markets (Madoff, Enron, Worldcom, Theranos, etc.) The difference is that corporate scams are usually elaborate and go on for years before being uncovered. By contrast, in digital assets, most of these events rise and fall within weeks, and any wrongdoings are discovered immediately by amazing DeFi onchain detectives (like those that identified SiFu’s misdeeds). That cannot be understated: the onchain detectives of DeFi are doing exceedingly more positive and real-time self-policing of this industry than any regulator will be able to do.

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As a result, most of the issues within DeFi are either very easy to avoid with even a shred of due diligence or discovered immediately due to the public records of blockchain. Thus, simple rules of thumb can be:
  1. Don't buy things you don't understand
  2. Understand who the founding teams are and their motivations
  3. Be careful engaging with super early-stage products without a long track record
  4. Listen when someone uncovers some important data

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NCFA Jan 2018 resize - In the face of wreckage, DeFi’s self-policing shines The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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