YCombinator crypto DeFi startup StableGains lost $42M in Anchor Protocol

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YCombinator startup StableGains held millions of dollars of customer funds within Anchor Protocol and lost it all without informing its users that their money was almost all in one risky third party product, Anchor. The Anchor Protocol once offered 19-20% APY to depositors before its parent ecosystem, Terra LUNA, lost tens of billions of dollars in market capitalization as LUNA fell below $0.01 and its stablecoin (UST) collapsed.

A pseudonymous member of the Terra Research Forum sounded an alarm about the issue. StableGains has subsequently changed information on how it mitigates risk on its homepage and in its Terms and Conditions–a tacit acknowledgment that it should have done so in the first place.

StableGains got started as part of YCombinator’s W22 batch raising $600,000. It soon raised another $3 million from venture capital firms Moonfire, Broom Ventures, and Goodwater Capital.

StableGains eventually attracted over $42 million in customer deposits for a 15% yield product. As it turned out, StableGains simply kept most of its deposits in Anchor’s UST pool earning 19-20% APY, kept one-quarter of the interest as a management fee, and then passed along its promised 15% APY to customers. None of that mattered, however, as it lost almost all of its customers’ funds when UST melted down.  It also changed its withdrawal times to the detriment of its customer base.

  • StableGains claimed that the likelihood of a de-pegging event was very unlikely. In fact, its website claimed that “1 UST can always be purchased and sold for $1.00 worth of another specific crypto asset,” referring to LUNA. This would soon prove to be incorrect, as LUNA became worthless and Terra shut down its blockchain altogether.
  • It also promised to diversify assets across several stablecoins to mitigate the risk of any particular stablecoin losing its $1 peg but instead kept almost all of those assets in one basket.
  • StableGains claimed that withdrawals would not take more than three business days even if a stablecoin needed time to regain its peg. StableGains said it used Coinbase for deposits and withdrawals, and customers could always receive the exact amount of USDC they requested.

StableGains scrubs its website squeaky clean

StableGains has subsequently edited its website to say that it only uses the “most trusted and tested stablecoins,” and extended its withdrawal times from three days to indefinite time “in extreme cases.”

Previously, it had said that it used USDC, TerraUST (UST), and Dai (DAI). After UST melted down, StableGains modified most of its website content regarding UST. It also scrubbed most references to DAI, the other stablecoin that depends on cryptocurrency valuation.

Eagle-eyed customers noticed a new clause in the Terms and Conditions that tried to deny that StableGains was liable for any losses while attempting to withdraw funds. This brand-new clause would have forced customers to agree not to sue before they withdrew funds – a seemingly obvious attempt to dodge a class-action lawsuit.

Forcing customers to sign a legal waiver in order to get their money back.

A letter from the law firm Erickson Kramer & Osborne has already requested that StableGains preserve all internal documents on customer accounts, marketing and advertising, and communications about TerraUSD. The firm has not yet filed a lawsuit.

Thousands of StableGains customers lost an estimated $42 million.

Celsius Network customers also affected

Celsius Network (CEL) also used Terra LUNA’s Anchor Protocol. Celsius users complained of losses due to the steep crash in crypto markets and UST’s meltdown. Many held significant quantities of CEL and LUNA, both of which compounded with yield as deposits.

Without providing any evidence, Celsius Network CEO Alex Mashinsky accused “unknown malefactors” of targeting his company. As of the publication of this article there is no known public attempt by Celsius to investigate this claim.

CEL began sliding in value months before UST de-pegged. It was trading at a high of $8.01 on June 2, 2021. It closed trading on May 19 at $0.82.

When some Celsius Network users threatened to leave over losses in their Celsius token holdings, Mashinsky fired back, “If you don’t think I’m sincere, if you don’t think that I’m working harder than all of you, seven days a week, then leave.”

Celsius Network managed to pull half a billion dollars out of Anchor Protocol, while other mostly smaller holders reported difficulty withdrawing their funds.

Edit 22:05 UTC, May21: Changed definition of DAI to more accurately describe its mechanics.

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