The Intelligent Insurer #43 — Memecoin project failure highlights unique DeFi dangers
SHIB competitor SnowdogDAO is alleged to have been involved in the largest rug pull in the history of the Avalanche blockchain. $30 million in SDOG tokens was stolen from the victims and the project team has noted that just 7% of token holders will be able to liquidate their SDOG at a reasonable price.
In the latest Intelligent Insurer, we examine the details of this rug pull and its impact on protocol users. We also highlight the risks that investors have been exposed to and consider how they can protect themselves from similar circumstances moving forward. However, we’ll first highlight the progress we’ve made via our weekly software development update.
Insured Finance software development update
Our next-generation digital asset insurance platform continues to take shape and we made immense progress this past week. We completed the release of our new landing page and tokens faucet and continue to rigorously test our platform for bugs and errors.
- We continued gathering and summarizing feedback from our user tests this week and expect to implement improvements shortly.
- We completed setting up the environment for our regression tests and began testing our platform.
- Our smart contract auditing efforts received a major boost thanks to us completing documentation that will assist auditors in certifying our platform for user safety.
Over the next week, we’ll continue prioritizing testing our platform in preparation for our Beta release and simplifying payout processes via Chainlink. We’re positive that our digital asset insurance platform will be a game changer for the DeFi industry and continue to prioritize user safety and platform improvements to this end.
Snowdog buyback leads to missing $30 million
SnowdagDAO, with its native token SDOG, was the first memecoin to launch on the Avalanche Network. The project was designed as an eight-day experiment aimed at raising awareness of the team’s Snowbank project. The memecoin was designed to expire after eight days with the dev team financing a buyback. This buyback was to be financed by assets acquired by the Snowbank treasury through mint sales.
The project team announced some measures via its Twitter handle prior to the buyback. These measures ensured that the event would be fair and that bots would not be deployed to “steal the buyback”. To achieve this, the project team claimed to have built their Automated Market Maker (AMM) on Uniswap v2. A ChallengeKey, which is a mathematical challenge that could only be solved by real users, was added to this AMM so that only users using the front end manually would be able to swap tokens.
On November 26th, 2021, the buyback exercise went ahead but created huge losses for the protocol’s users and raised suspicion of a pre-planned rug pull by the project’s dev team. $30 million was stolen from users, representing the largest ever rugpull on Avalanche.
Largest ever rugpull on Avalanche
On activating the buyback, users encountered technical issues that prevented them from executing their trades successfully. Many of them complained, showing proof of inability to conclude trades, despite following procedures.
As the complaints continued, a user raised an alarm, alleging that a rug pull had been executed by the project insiders. The user accused the project team of delaying the verification of the project’s Snowswap contract until the insiders finished their trades. As verification, they pointed towards huge sell-offs from addresses on the network, indicating a dump was taking place.
The first (alleged) insider trade involved $10 million SDOG tokens that were converted to other cryptocurrencies, while another alleged insider liquidated $7 million SDOG tokens shortly afterward. Other smaller trades followed a pattern that suggested deliberate malpractice by the project’s team. Following this incident, the price of SDOG crashed by over 90% in a short period, according to data from CoinmarketCap.
Snowbank, the entity behind the SnowdogDAO project, released an official message using its Medium blog. In the post, the SnowdogDAO protocol was described as an “8-days Game Theory Experiment”, suggesting that it was simply an experiment that went awry. However, users were not convinced, insisting that the experiment was a smokescreen for a pre-planned and well executed rugpull. The project’s Medium account has since been suspended.
Users need digital asset insurance
Situations like this are not new in the DeFi industry. Unfortunately for users who fall victim to setups like this, projects that are designed for rug pulls are not easy to identify until after the fact. In many cases, it’s tough to distinguish between genuine and fraudulent operations. Rug pulls cannot be prevented by regular security measures like sophisticated passwords and 2FAs. Decentralized digital asset insurance solutions are the best means of protection against these kinds of risks.
Solutions like Insured Finance provide DeFi and digital asset users with the required safety to operate in an uncertain environment. Any victim of the SnowdogDAO rug pull with an Insured Finance contract would have been compensated. Situations like these and many others highlight the uncertainty that exists in the DeFi space, despite the immense promise.
About Insured Finance
Insured Finance is a decentralized, peer-to-peer insurance marketplace. Users can request customized insurance on a wide variety of digital assets, thereby ensuring full protection. Those fulfilling requests can earn premiums and earn a competitive return on their capital. Claims are fully collateralized and settled instantly.