If you have spent any time in the DeFi space, you are probably familiar with the term rug pull. For many in the space, it is the worst-case scenario when exploring the new frontiers of DeFi. After playing around with some DeFi protocols I found one I liked that had massive returns (possibly too big in hindsight). Needless to say, it didn’t end well!
What is a Rug Pull?
CoinMarketCap defines being rug pulled as “a malicious manoeuvre in the cryptocurrency industry where crypto developers abandon a project and run away with investors’ funds”.
Doesn’t sound nice, and isn’t nice in reality either. I will add a small caveat here though. I don’t believe the intent needs to be malicious in order to qualify as a rug pull.
My Experience – Polygold
As I mentioned in my earlier DeFi post, I had been exploring some of the yield farms on Polygon. After a couple of weeks of providing liquidity to various tokens, I stumbled across Polygold finance. The website looked like most of the others, it had been checked by RogDoc and there were plans for a more in-depth audit in the future. The developer was quick to respond to my questions and outline his plans for the future. So far so good.
The yields were insane. I can’t remember the exact numbers but for the first few days, the percentage returns were double digits per day. After moving my funds out of Aave and depositing more via a FIAT onramp, I had put about €1,300 into DeFi. All of which was in Polygold at this point (I know, diversification). I was having fun. Any money I made was being pumped back into Polygold, I passed the €2,000 mark after a few days and had my retirement all planned out.
The Polygold token opened around $168 and hit a high of $244.07 the same day. When I got interested the price was fluctuating anywhere from mid $60s to $140. The price didn’t concern me too much, the yields were big enough to compensate for losses at this point. My plan was to start taking some profits off the table, but I wasn’t quite there yet.
One of the main reasons I was interested in Polygold was its tokenomics. Unlike most yield farms which reward users with the native token and try to support the price by burning tokens through various deposit fees, Polygold had a very low max supply (69,420). With a low max supply, the price of each coin should be high (relatively speaking) if the protocol is successful. I can’t remember the exact figures, but Polygold had well over $5,000,000 in TVL at one point. If we were to use the same fully diluted market cap/TVL (Total Value Locked) as Polycat Finance (0.322 at time of writing), Polygold’s market cap would have been $1,610,000. This would give a fully diluted price of $23.19.
As you can see, the token was probably overvalued at its early prices as these things tend to be. The reason I liked it though, was that due to the limited number of tokens, an increase in market cap would equate to a bigger return on a per token basis. Granted market cap/TVL ratios vary and an increase in TVL is no guarantee of an increase in market cap, but it is worth noting that if you use the same formula for Aave it is currently trading at a market cap/TVl of 0.317. Had Polygold been able to match Polycat’s TVL (currently $140 million+), the token could have been worth somewhere in the region of $460.
The other benefit of holding the Polygold token was the dividend pools. The theory was that fees earned from the protocol would be used to buy various tokens (MATIC etc.). These would be distributed to Polygold holders who were staking their native token.
While this all sounds great in hindsight, I didn’t run the above calculations until after the rug pull. The “do your own research” mantra I spout at the end of every post obviously hasn’t fully sunk in. Granted, at the time I didn’t have as much knowledge in this space as I do now (which is still a tiny amount).
The Rug Pull
On the 9th of June, the contracts were changed to reduce the minting of Polygold to zero, reduce the dividends to zero and changed the timelock to two hours. I’m not savvy enough to explain how the rug pull was done, but essentially the developer shut down the project and sold his tokens resulting in a price crash. He probably took all or most of the fees taken in until that point. Had this happened during the day, there would have been a reasonable chance that I would have spotted it and gotten out earlier as I tend to keep a close eye on my yield farms. However, this happened overnight (in Ireland at least). The end result is that when I removed my liquidity my position had gone from a value of over $2,000 to about $200.
Signs of Failure
So this is the point where I start to point out a few little indicators that would later prove that the rug pull was coming all along. Unfortunately, I’m not the DeFi equivalent of Sherlock Holmes. I cannot read solidity code either. Ultimately I did not see this coming. With a few weeks of hindsight under my belt, there are two points I could point to as potential signs of failure, but be aware that I did not consider these too deeply at the time.
- The cap of 69,420. Anyone in the crypto space will recognise these meme numbers. When I first saw them I thought that it was a funny cap to put on the tokens, but I also had a tiny amount of trepidation. Would someone who makes the token cap a joke/meme be in this for the long run? As I said earlier, this concern was brushed aside for those lovely yields.
- Alex, the developer. While Alex was engaging and open to suggestions about the protocol (he even implemented a couple of small things I had suggested), he was ultimately a one-man team. This represented a single point of failure, if Alex left or couldn’t carry on, the project was dead. Again, I brushed this concern aside due to his responsiveness and willingness to communicate.
Neither of the above were red flags to me and they didn’t raise enough of a concern for me to abandon the project.
Scarred for Life?
In my investing career to date, I have never lost 90% of an investment. Has my DeFi rug pull experience put me off the space?
In short, no. There are a couple of reasons why.
- This was money I was willing to lose. Going into this, I knew DeFi and crypto was risky/volatile. As such, I was prepared to lose 100% of what I put in. Thankfully, that didn’t happen but 90% isn’t far off.
- I learned a great deal from the experience. Not just in terms of what to look out for regarding rug pulls, but also how to use DeFi. Before I started exploring DeFi, I didn’t have a MetaMask wallet. The extent of my crypto exposure was some Dogecoin I mined in 2013 and a small Chia farm I had set up. I am a firm believer that the best way of learning is by doing. This is definitely true in the crypto space. You can read all you want about yield farms, collateralized lending and providing liquidity but until you try it out, you won’t understand fully how it all works. Side note, I still don’t understand fully how it all works!
I learned great lessons from this experience. Yes, they were expensive lessons, but they were lessons nonetheless.
Where Do I Go From Here?
I am still yield farming with the remainder of my funds, but I have not deposited any more into the DeFi space. For now, I’m happy to play with what I have. If I can grow that and recoup my investment, great. If I can’t, it’s not the end of the world. I firmly believe that crypto and DeFi, in particular, will play a huge role in the years to come and I’m happy to be learning about the space. I will continue to try to learn, by doing, reading and listening. Who knows, I may even write a few more blog posts on the topic.
If you have any interest in DeFi and haven’t been scared off by my story, bravo! If I can leave you with one suggestion it is this. When starting out, stick to the blue-chip DeFi names like Aave, Compound and UniSwap. Get your bearings before you go hunting for big yields and new projects. As the gents at Bankless are fond of saying, this is the frontier. By all means, explore and push on. But don’t sell the house in the hope of finding a gold mine.
As always, this post is not a recommendation to use the above protocols or to invest in crypto in general. It is for informational purposes only. Before investing your hard-earned money, make sure you do your research.
The Stoic Trader