Long Take: Rugging, early token liquidity, and the expected cost of holding
Gm Fintech Architects —
Today we are diving into the following topics:
Summary: We look at “rugging” in the crypto space, and the different forms it can take. In particular, we explore the impact on DeFi from Andre, the impact on LTC from Charlie, and the academic literature about insider selling in the equity markets. The simple answer is that insiders selling is bad. The complicated answer is, it depends on the time horizon and the reasons. Further, the crypto space and its early liquidity and costs of failure are uniquely set up to incentivize opportunistic selling.
Topics: crypto, decentralized finance, capital markets, venture capital, DAO
Tags: Fantom, Yearn, Solidly, Litecoin
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We joke that there’s a new investment framework out there.
There is a traditional fundamentals-based dimension, where we try to evaluate a company or project on its numbers, designs, and impact. And then there’s the crypto dimension, which either gets investors to ape into a new project based on its memetic and social power, or to experience the “rugging” of their assets into some black hole as a malicious team steals their funds.
People become each other’s “exit liquidity” — literally run for the exits, when some big disclosure undermines the public faith. Older names for this phenomenon are “the animal spirits”, “bank runs”, and other labels for totally normal crowd behavior. The crowd is merely the medium through which information spreads.
There are many different types of rugs, and not all are obvious scams. Sure, you’re clearly in the right to be upset when someone just takes your cash through fraudulent inducement, and then says “bye suckers” while getting on a private jet. If you are a venture capitalist, and the rugger is Elizabeth Holmes, the situation is still clearly the fault of the fraudulent CEO. But the world isn’t always black and white, and we see some of these issues become more grey.
What if a senior executive has burn out and quits? What if that senior executive was the founder of a project, protocol, or company? Or what if the developers have been working underpaid for 4 years, and then hit the lottery, which they immediately sell in the market, tanking the price? Or what if the builders panic-sell when some part of their company is seen to not work anymore — whether that’s OHM collapsing in speculation premium, or Chime not being able to IPO because neobank SPACs have been down 70% across the board? What if the danger created by powerful external forces, like criminals or regulators, makes it too nerve-racking to hold?
At some point, the unfairness of the rug — which needs an element of theft in it if we are being honest — blends into the usual Supply and Demand of markets. Someone wants to sell, for whatever reason, and someone else wants to buy, for some other reason. There’s nothing bad about having investment feelings, as long as they are derived from fair access to information.
We are writing this in further reaction to news of Andre Cronje, founder and developer behind the DeFi asset management protocol Yearn, AMM Solidly, and a host of other fantastic project, ghosting the scene. You can get the basics in our earlier post here.
The outcome from this “announcement” has led to a lot of people losing money by running for the exits. The value destruction happened at the level of the actual projects — despite being often supported by competent third party decentralized teams — as well as at the level of the Fantom protocol, meant to be another scaling solution for Ethereum. That makes sense; if less giga-brain apps are being launched on Fantom, then fewer users will come, who will then need less computation, which therefore devalues the native currency of the econo-computational system.
What’s a few hundred million of enterprise value between a few good friends? The skeptical response from the crypto-sphere is something like the below.