Dragonfly discusses recent hot topics: Meme Cycle Ending, Market Transition Ahead

Original Article Title: Crypto Circus Never Ends: Hacks, Grifts, and Kanye's Coin?

Original Source: Unchained

Original Translation: Deep Tide TechFlow

Host:

· Haseeb Qureshi, Dragonfly Managing Partner

· Robert Leshner, CEO and Co-Founder of Superstate

· Tarun Chitra, Managing Partner at Robot Ventures

· Tom Schmidt, General Partner at Dragonfly

Release Date: February 24, 2025

Key Highlights

This episode's discussion includes:

1. Bybit Hack Incident:

· Bybit experienced the largest cryptocurrency hack in history, losing $1.5 billion, allegedly carried out by the North Korean Lazarus Group.

· The hacker exploited a multisignature technology vulnerability to swiftly move funds to the Ethereum network.

· Bybit's CEO promptly responded, pledging to meet user withdrawal requests and receiving bridge loan support from Binance and Bitget.

2. Libra Scandal:

· The Libra Meme supported by Argentine President Javier Milei plummeted 95% due to an insider trading and market manipulation scandal.

· The scandal uncovered the manipulation tactics behind the Meme coin issuance, including KOL pre-sales and bot sniping.

3. Celebrity Token Controversy:

· Kanye West had planned to launch the YZY token, but delayed it due to timing sensitivity.

· Celebrity Token Rug Pulls have been frequent, with incidents such as Dave Portnoy being accused of exit scamming in the Greed and Greed 2 projects, directly dumping tokens and causing heavy losses to investors.

· The industry's attitude toward Celebrity Tokens is gradually shifting towards disgust.

4. Decline of the Meme Market:

· The recent sentiment in the Meme Market has been gloomy, as retail investors are starting to realize the zero-sum nature of it.

· Haseeb believes that the Meme cycle has come to an end.

5. Improvement in Regulatory Environment:

· The U.S. SEC announced the dismissal of the lawsuit against Coinbase and restructured its crypto division to focus on combating digital fraud.

· Hester Peirce proposed a collaborative regulatory policy with the industry, signaling a positive stance.

· The CFTC's new nominee, Brian Quintenz, could push for a more crypto-friendly regulatory framework.

6. Infrastructure Development and Ecosystem Stability

· Solana and the Ethereum ecosystem remain unaffected by the Meme Market downturn, with developers focusing on infrastructure and application innovation.

· Developer conferences on Solana demonstrate that long-term builders are still present in the market.

The Largest Cryptocurrency Hack in History

Haseeb:

Last week, we witnessed the largest cryptocurrency hack in history, with Bybit's cold wallet being attacked, resulting in a $1.5 billion loss.

Bybit stated that they were attacked during the process of transferring funds from a cold wallet to a hot wallet. This operation is a routine fund transfer carried out by the exchange to meet user withdrawal demands. Although Bybit employed multi-signature technology and relied on Ledger's multi-signature system, the transaction content displayed on the frontend during signing differed from the actual transaction content seen on the signers' devices.

This attack method is very similar to previous hacks targeting Rexerx and Radiant Capital, leading the industry to speculate that this event may be linked to the Lazarus Group. The Lazarus Group is a hacker organization associated with the North Korean government, known for its involvement in several large-scale cryptocurrency thefts, including the Axie Infinity hack incident from a few years ago.

Bybit's Response and Industry Reaction

Haseeb:

Bybit's CEO Ben officially confirmed the hack on Twitter and stated that the company has a strong enough balance sheet to cover the losses and meet all user withdrawal requests. About 30 minutes after announcing the hack, he went live, providing a rapid public response for the first time in such a situation.

During the live stream, he reassured everyone, saying, "We are totally fine and still able to meet all withdrawal requests. Despite the liquidity crunch, we have secured a bridging loan, with on-chain evidence showing the funds coming from Binance and Bitget."

Approximately 6 hours after the hack, the outflows had stabilized, and the market seemed relatively relieved about Bybit's situation. Furthermore, we saw many people coming out in support of Bybit, including CZ and other exchange leaders. Many have drawn parallels to the FTX incident, but the difference is that Bybit was able to fulfill withdrawal requests this time.

Involvement of North Korean Hacker Group and Subsequent Events

Haseeb:

This incident has been confirmed to be linked to North Korea, indicating that the future developments are unpredictable. North Korea is unlikely to move the assets directly to centralized exchanges. The stolen assets are still held on the Ethereum network, with no further transfers happening. Evidently, this is because North Korea is aware of global tracking efforts on these assets, and the scale of the funds is too significant to launder effectively through privacy protocols like Tornado Cash.

Initially, these assets existed in forms such as mETH and stETH, which are Ethereum staked through Lido and related assets. However, they swiftly exchanged these assets for Ethereum through DeFi platforms. My speculation is that this is because Ethereum is the most liquid asset and least susceptible to freezing. If you hold some small altcoin, you might face the risk of asset freezing due to governance issues, but Ethereum almost lacks that possibility.

Although this is the largest hack in cryptocurrency history in dollar terms, no one has proposed a solution through a hard fork, etc. From these hacking incidents, we can observe a pattern where when the stolen amount is very large, it becomes even harder to escape. Ironically, if you steal $20 or $30 million, it might be easier to hide; but if you steal a billion dollars, where will that money end up? Who can help you deal with it?

Robert:

I'm also unsure how they're handling these massive hacker funds. I believe there have been some online analysts tracking these events over the years, but my guess is that eventually they might try to convert these funds into commodities like Russian oil.

Tarun:

I remember Richard Heart was once sued by an entity; he was the largest holder of DAI as he received a significant amount of Ethereum from Pulse Chain. However, due to being blacklisted by many exchanges, he converted all his Ethereum into DAI. I wonder if we'll see a similar situation this time – it will be a good test to see if the attackers will trust decentralized stablecoins.

Haseeb:

I don't think they will transfer all the funds at once. Richard Heart's operation was a gradual process rather than a one-time move.

Robert:

Ultimately, it depends on the hacker's risk appetite and tolerance for financial volatility. Richard Heart exchanged Ethereum because he needed stablecoins to cover USD expenses.

Haseeb:

If I were North Korea, I'd consider how to leverage this money and attempt to move it to a place like Russia.

Robert:

They've tried bridging some assets to Bitcoin before, but there aren't many decentralized ways to move from Ethereum to Bitcoin currently.

Haseeb:

If these assets are secured by multi-signature security, and if someone discovers their protocol being used to handle $1 billion worth of Ethereum, many might choose to voluntarily report these funds, believing they should be confiscated and handed over to law enforcement through governance structures. In this scenario, almost no one would support North Korea.

Tarun:

We may see some very crazy on-chain operations as they have no choice. What I find interesting is the case of Thorchain. In the past, many hackers would exploit Thorchain to borrow or bridge to Bitcoin, but now with third-party chain validators having exited, it has become impractical to move large sums through it. The Bitcoin cross-chain bridge technology is now more imperfect than ever, which may leave them in a lurch.

Robert:

I envision this as a scene where ancient pirates bury a treasure chest. They bury the chest somewhere, draw a treasure map, and then come back thirty years later to search. North Korea may see these stolen cryptocurrencies as a "treasure" and use them again in the future.

Haseeb:

This is an interesting hypothesis. Perhaps they will propose some kind of protocol, such as those returning the assets will receive a 10% reward. But I don't know how these stolen assets can be laundered. North Korea, as an isolated country, makes any form of negotiation very difficult, which is a terrible situation for both customers and Bybit. Although I believe Bybit's financial situation is strong enough, if they cannot raise enough Ethereum to meet redemption demands, that would be a big problem.

Many speculate that Ben mentioned in the live stream whether Bybit will satisfy all redemption requests by purchasing Ethereum. Currently, they have obtained a bridge loan through Biget and Binance, which is a positive signal and a stark contrast to FTX's collapse. But if it is assumed that no one is willing to do business with North Korea, and no agreement is possible, Bybit may indeed need to buy Ethereum in the market. If that is the case, it could be bullish for the Ethereum price as it would bring about $1.5 billion in net buying demand, and with limited market liquidity, the price would naturally rise.

Tom:

I noticed that the community highly praised Ben's communication style. He rapidly and directly delivers information to the public via live streams, which is very rare in the industry. He does not use those vague official terms but clearly tells everyone, "We are okay, we will solve the problem, that's how it is." This transparency is impressive.

Haseeb:

Indeed. If we compare this event to FTX, Bybit's handling of the situation can be considered exemplary, while FTX's livestream was a complete farce.

Robert:

The fundamental difference is that FTX is a malicious actor engaged in large-scale fraudulent activities, which is also the reason for their funding shortfall, whereas Bybit is a trusted victim who fell victim to a hack.

Haseeb:

I completely agree. Usually in hack events, we see the victim's initial reaction is to obfuscate, not directly address the issue, letting information spread through various channels. Bybit, however, responded quickly within 30 minutes of the event, clearly stating what happened, and proactively communicating with customers to ensure everyone is informed about the situation.

This should be the standard practice for every company when facing a hack. First and foremost, control the communication narrative. Of course, the scale of this hack event was truly unprecedented, but compared to Bybit's balance sheet, the loss from this incident is not catastrophic. The current size of the crypto market far exceeds the past, and despite this being the largest hack in history, the loss is only a few percentage points of Bybit's total assets.

Tom:

After the FTX incident, Bybit introduced a Proof of Reserve system, where users can instantly verify if their assets are included in the reserves, greatly enhancing transparency. This event did not involve any fraudulent behavior, so users do not need to worry about a major imbalance in the balance sheet.

Haseeb:

I actually wish to find some evidence that this was an insider job. Because if it was an insider job, the likelihood of asset recovery would be higher. Nevertheless, it is fortunate that the industry's foundation is strong enough to withstand this crisis and ensure that all customer interests are protected.

Hayden Davis & Libra Scandal

Haseeb:

Another major news is a coin called Libra. This project has received support from the new Argentinian President, Javier Milei, who is himself a controversial figure. This incident is being referred to as the biggest insider trading scandal since the FTX collapse. So, what exactly happened with Libra?

Javier Milei publicly promoted the Libra token through a tweet. This all happened very suddenly, with almost no warning. Subsequently, the meme coin's market cap skyrocketed to $4 billion but then quickly plummeted by 95% in a short period. During the collapse, Milei deleted his tweet. At the same time, there were reports of insiders selling off the token during the market frenzy, estimating that they made nearly $200 million in profit through this maneuver. As the event unfolded, more chaotic details gradually emerged.

The entire event revolving around this project's controversy left people perplexed. What was Milei's main stance? How did the Argentine government view this? Later, we learned that Milei himself did not directly profit from this meme coin but rather a private Argentine company launched the project, claiming it was for the benefit of the Argentine people or community, yet the whole process was very opaque.

The key figure in this event is a white man named Hayden Davis. Upon returning to Argentina, he became a meme-focused businessman. He was more of a "coordinator" rather than the project's initiator or direct promoter. In an interview, he mentioned that launching a meme involves multiple roles, and his main role was to bring all parties together, emphasizing that he did not handle funds directly or own these assets.

In Argentina's crypto circle, Hayden Davis is considered an insider. He boasted in leaked private information about paying funds to Milei's sister, Karina Milei. Karina is a prominent figure in Argentine politics. Hayden even mentioned his influence on Javier Milei in a tweet, claiming: "I control that guy. I give money to his sister, and he will sign anything I say."

Hayden controlled over $100 million withdrawn from an internal wallet. Subsequently, he did a series of interviews trying to explain the entire operation process. In a Twitter livestream, he openly admitted to conducting a "snipe" during the Libra collapse, meaning manipulating the market through bot trading. His statement was: "I don't know the true ownership of this money. I think it might belong to Argentina or the Keep Protocol company that launched this project. I don't know whose money this is and don't want it. You tell me how to handle this money; if you don't, I will dump it back into the market."

During the interview, he also elaborated on how memes operate, revealing many insider details that many were unaware of. He mentioned that most large meme projects, before being launched, conduct most of their token sales through private transactions at prices below market value to key opinion leaders (KOLs) and other institutional investors. For example, projects like Melania, Libra, and even TRUMP, he claimed these projects once did up to a $500 million private sale at an internal meeting in Washington, D.C.

Information about these private placement transactions is usually disseminated among insiders, but it is also leaked to other non-participants. These individuals use this information to profit through sniper attacks when the token is officially launched.

Here, we need to explain the meaning of "sniping." Sniping refers to the ability of bots to rapidly buy a token when it goes live, before regular investors can react, thus driving up the price. This is because they know in advance that the token is about to launch. When retail investors begin flooding in to make purchases, human reaction times are much slower than those of bots, allowing these snipers to sell the token at a high price, reaping profits. Since Meme coins are usually issued with a low market cap and lack an auction or initial price settlement mechanism, this operation has become very common.

According to Hayden Davis, "If you're not sniping your own token, how else are you going to make money? Can you think of any other way?" He believes that all teams involved in a token's supply chain believe that the only way to profit is by becoming an insider manipulator. These teams hope that the meme's popularity will last for one to two years, but the reality is that almost all meme lifecycles do not exceed a few days. Within these circles, there is a prevalent cynical attitude, viewing the entire cryptocurrency industry as a zero-sum game. To prevent retail investors from being sniped externally, they believe the best course of action is for the team to snipe the token first. In this way, they can use the proceeds from sniping to safeguard the token's stability and buy back the token after the snipe is completed.

On the day of the event, the Argentine stock market fell by more than 5%. Currently, the opposition party has formally charged Javier Milei. This event is referred to as "cryptogate" and is a major political and financial scandal. I believe this has caused serious damage to Argentina's reputation internationally and domestically.

Robert:

I watched a clip of Hayden's interview, and it was just outrageous. Every segment he made was more absurd than the last, and he even publicly stated on the show that "crime is good."

Haseeb:

He's just your typical "crypto kid," completely lacking any ethical considerations.

Robert:

Do you remember the "Rationality vs. Madness Comparison" we discussed about nine months ago? Hayden may be one of the craziest figures in the history of the crypto industry.

Tom:

I agree, I think Hayden comes across as very ignorant when speaking. Last week, I went skiing and met some Argentinians who were very excited about it. Because to them, this may be a situation similar to TRUMP. They see it as a huge opportunity, and when they saw Milei promoting this project, they might have thought, "Oh, this is our TRUMP moment," but it turned into a huge scandal. In reality, it's a bit like blaming someone for losing money at a casino. The casino's rule is that you're responsible for your own wins and losses.

Haseeb:

That statement is so vivid, that such a ridiculous meme would trigger such a huge chain reaction, even impacting the entire country. The scandal's fallout has also reached the entire crypto industry. It was later discovered that the team behind Kelsier Ventures was not only responsible for the Libra token but also for Melania. They also carried out a sniping operation when Melania was launched, which is actually a tactic they have repeatedly used.

The Latest Developments in the Meteora and Solana Ecosystems

Haseeb:

One interesting aspect of this story is that it also affected some people in the Solana ecosystem. Meteora is the launchpad for TRUMP and Melania. Recently, Meteora has attracted attention due to some investigations, seemingly raising controversies involving some individuals associated with the platform.

Let me explain, Meteora is a competitor to Jupiter on Solana. Jupiter is a large DeFi aggregator on Solana, while Meteora focuses on providing launch services for new tokens. Meteora's lead developer, Ben, was investigated and subsequently resigned due to allegations of potential misconduct (such as insider trading). However, I am not sure if these allegations are true or just suspicions raised by someone.

Robert:

I saw on Twitter that someone dug up Ben's history, claiming he had repeatedly violated securities laws in the past. Is this true?

Tarun:

I'm also not sure if these accusations are true. Ben is one of the co-founders of Meteora, which was originally part of Jupiter. I've actually known Ben before the rise of the crypto industry; back then, he was running a startup in the insurance sector. I even interviewed him in 2012. He didn't get into the crypto space until 2021. The Meteora platform has been around for a while but struggled to find the right market fit. However, with FTX's collapse, Jupiter started to rise rapidly as it became the primary platform for trading Solana tokens. At that time, besides FTX, most exchanges did not support the trading of SPL tokens. Meteora then evolved into a platform focused on early project launches.

Unlike Pump.Fun, the Meteora platform allows project issuers to have some control over the liquidity pool. This design did make frontrunning to some extent easier. However, I see Ben's situation more like a founder being ousted by the board rather than a regular developer being fired. If you view this as a corporate governance case, a founder's ousting usually involves more complex power struggles.

The Decline of Meme Trends

Haseeb:

I think this story has cast a shadow over the entire Meme space. Following the Libra incident, TRUMP and Melania's launch gave people a negative impression of Meme coins. After these events, people seemed to realize the nature of the Meme influencers revealed by Hayden in the interview and how the game of these massive Meme coin issuances was detrimental to retail investors. This shift has changed the atmosphere of the crypto space, leading people to question how Meme coins operate and whether retail investors can still participate in this so-called "casino".

Robert:

People once thought the Meme game was winnable, but now that the truth is out, they see the ugly reality behind it and realize it's a completely rigged game. They are victims and can never win.

Haseeb:

In absolute numbers, Pump.Fun's trading volume is still strong; however, overall, market volatility is decreasing. The sentiment has now completely turned against Meme, whereas before, people would say tech coins, VC coins are essentially all Meme, now that view seems to have lost its effectiveness, and everyone is starting to realize the need to rebuild real projects.

Tarun:

I believe this indicates that Meme coins with less control seem to be able to survive, while Meme coins requiring significant liquidity management face more challenges. Therefore, we see that Pump.Fun's trading volume has not dropped significantly.

Robert:

I see this as a turning point. Meme coins attracted a lot of funds, and now as the allure of Meme coins wanes, these funds will flow into other vertical markets within the crypto space.

Tom:

I agree with Tarun's view. People enjoy a fair and transparent game, and when they feel they can no longer profit from it, the market will naturally collapse. Just like the previous ICO and NFT crazes, if people no longer feel excited and see no opportunity, then the entire market will be affected.

Haseeb:

Indeed, the difference between projects like Pump.Fun and some governance-oriented launches is quite interesting. Libra can be seen as a celebrity coin, even though not explicitly, but in practice, its association with Milei makes it a celebrity coin.

Celebrity Token Projects Controversy and Hypocrisy

Haseeb:

I think it's safe to say that the craze around these celebrity tokens is over, or rapidly cooling down. I recently heard that Kanye West also seems to be planning to release a Meme, which is a celebrity token, but he seems to realize that now is not a good time to launch.

I heard he originally planned to launch it on Monday, but then postponed it to Friday. It's said that the team is discussing whether it's too close to the Milei event, and apparently, they are adjusting somewhat based on the news cycle. What I find funny is that this new token is called the YZY Token.

Even more absurdly, Yeezy's CFO accidentally leaked this plan to CoinDesk. He sent an email from Yeezy's official email, detailing the token's plan and requesting CoinDesk to keep it confidential, but CoinDesk refused this request and directly published the story.

Regarding the tokenomics, 70% of the tokens will be held by Kanye himself, 10% will be used for liquidity, and 20% will be allocated to investors, with this 20% already sold to investors.

Robert:

Just a few days ago, he tweeted that celebrity coins are exploitative and worthless to the community. Yet, in a few days, news broke that he is launching his own token, showcasing extreme hypocrisy.

Haseeb:

As an industry, we must unite and not support such tokens. As long as everyone refrains from buying, we can put an end to this phenomenon once and for all.

Robert:

The issue is, once a token is released, it gets heavily bought up, then dumped by some, resulting in only a few benefiting.

Haseeb:

We have seen similar cases before, like Dave Portnoy launching a token called Greed, where he held 35% of the supply and then dumped it all at once, causing a price collapse.

He then launched Greed 2. After the Greed collapse, the new token briefly reached a market cap of $20 million, only to crash again as he sold off once more. He mentioned in Twitter Spaces that this process was a lesson to his followers, that memes are purely exploitative, and criticized those who traded as lazy, only interested in making a quick buck rather than seeking real employment.

Tarun:

This is actually financial domination (fin dom), even more evident than what we discussed earlier.

Haseeb:

I recently shared a similar sentiment on Twitter, where I believe the Meme cycle has come to an end. I mentioned on a show that this is akin to a casino, with different slot machines owned by different people, an unsustainable model where every slot machine owner will do everything to extract profits from the players.

Regulatory Updates and the Future of the Cryptocurrency Industry

Haseeb:

The recent negative news has left me feeling very tired. People are tired of those meme coins with no real value and are starting to look at more promising projects, which may be one of the reasons for the crypto market rebound last week. However, today's market has seen some downturn, impacting the cryptocurrency space. Nevertheless, there has been positive news on the regulatory front.

We have been talking about this year possibly being a turning point for cryptocurrency regulation, and now we are finally seeing substantial progress. The biggest news this morning is that the U.S. Securities and Exchange Commission (SEC) is dropping its lawsuit against Coinbase. This is undoubtedly a major positive development for the entire industry, indicating that the anticipated changes are taking place.

The SEC had previously sued Coinbase alleging that it was operating as an unregistered securities broker and exchange, facilitating the trading of unregistered securities. However, these allegations are now being dropped, and we may also see other similar cases brought by the SEC being dropped. Previously, there was speculation that the cases might be settled through narrowing down the scope or reaching a settlement, but completely dropping the cases is clearly a more positive signal. This indicates that the SEC is beginning to support the development of constructive participants and is willing to work with them to create a healthy digital asset ecosystem.

Furthermore, we also see Brian Quintenz nominated as the new head of the U.S. Commodity Futures Trading Commission (CFTC). The CFTC could become a key regulatory agency for cryptocurrencies in the future. Quintenz, who was previously the head of crypto policy at A16Z Crypto, has been advocating against excessive regulatory overreach for the past four years. This is undoubtedly an exciting day and signals that the future of the crypto industry may see more positive changes.

Robert:

First, the SEC has restructured its crypto division, originally targeting constructive participants, into a team focused on combating digital fraud. This means that the SEC will now focus more on combating actual misconduct rather than continuing to pursue rule-abiding businesses. This is the change the industry has been expecting for the past four years.

Second, SEC Commissioner Hester Peirce released a statement outlining the changes they hope to drive. They aim to collaborate with the cryptocurrency industry's policy teams to advance the overall health of the industry. The document covers various areas such as broker-dealer rules, custody rules, trading rules, and safe harbor rules. They express their desire to engage with the industry in dialogue and jointly develop effective policies. This constructive attitude is a stark contrast to the rigid stance seen just a few weeks ago.

Haseeb:

I hope that in this context, we will see more favorable policies in place, so that benign participants like Coinbase will no longer be subject to unnecessary attacks. At the same time, regulatory agencies can allocate more resources to combat actual wrongdoing. In the past, the reason we fell into the quagmire of Memes was largely because under Gary Gensler's leadership, regulatory agencies spent all their time and resources on using case law to target the largest market participants, while neglecting to regulate misconduct in public forums.

Tarun:

This week I attended a Solana developer conference, and participants hardly discussed Memes at all. This indicates that a portion of the ecosystem is still focused on infrastructure and application development, and they are not too concerned about short-term market fluctuations. I believe any successful ecosystem needs such builders.

Haseeb:

Currently, sentiment in the infrastructure sector is relatively stable; we have not seen significant capital outflows from Solana, nor have we observed a significant difference in trading volume on DEXs between Ethereum and Solana. The volatility of both has shown relative consistency.

Tom:

I think this situation may end up like the launch of the last Meme coin, where no one wants to foot the bill. This subdued market sentiment may cause others to hesitate. But if Yeezy is indeed the last celebrity coin, I could accept that.

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