YC W22 Stablegains is being sued for losing $42M in funds from 4878 customers

I publicly called out LUNA/UST on Twitter a few times a few months before the collapse [0] [1]. Just stating this so it's clear that I don't have any interest defending them.

That being said, calling these platforms "ponzis" isn't correct, the most you can say is that they were front ends for a ponzi. It would be like setting up a front-end to receive investments, and then depositing the money with Madoff. I'm not saying that it is a legitimate business, just not a ponzi.

And I'm not defending these companies either, a very light DD [2] made it obvious that the LUNA-UST mechanism was broken and the collapse was inevitable. It's really messed up that they put clients' money at risk, and that they lost it. I also think that YC is somewhat responsible for this.

What makes the situation even worse is that the collapse didn't happen from one day to the next, they actually had time to pull the money out at a 0.5%-5% loss, but they still decided to wait and see if it would repeg.

[0] https://twitter.com/josusanmartin/status/1478185473499615233

[1] https://twitter.com/josusanmartin/status/1478188494463848448

[2] This DD took me less than 1 hour: https://twitter.com/josusanmartin/status/1524323026942242818

Coinbase & Sequoia funded Indian version of the same thing has similar problems. They claim not to be using anchor while their landing page mentioned anchor before UST de pegged https://mobile.twitter.com/daglihet/status/15240042208687800...

I’m guessing they don’t have enough users and can make people whole using their seed fund.

I had $50 in Alice just to play with it.

"Due to unprecedented market conditions on the Terra blockchain - most notably risks of TerraUSD de-pegging as previously disclosed in (help.alice.co......) the UST to USD offramp is unavailable...we are unfortunately uncertain when ramp services will be resumed.

For information on alternative paths to convert to USD please see..."

the alternative paths are withdrawing to a wallet or exchange and getting 8 cents on the dollar.

Oh dear, I checked out the alice.io site and at the bottom they mention being "Trusted by the best", one of the best being Do Kwon. Awkwardddd.

The thing that has shocked me about all of this over the last year or so is how seemingly easy it is to just start issuing debit cards to people.

Maybe there's more regulation than I realise (and the emperor has more layers of clothes than Joey Tribbiani), but I'm not seeing it.

I assumed issuance of payment methods was much more strictly controlled than this due to the risk of contagion if the issuer can't meet it's obligations after the transaction (are card payments instant delivery between institutions these days? I always assumed there was a clearing period in the background).

Insurace is another site who offered insurance for the UST depeg. They had a very poor estimation for the risk and had the price at only 2% annually for the amount insured. They were covering 22.2 million worth of UST and as of a few days ago they had claims submitted totalling 7.3 million worth.

Found another one from YC, that was fast https://techcrunch.com/2022/05/23/pebble-crypto-stablecoins-...

VCs mostly fund crypto to make incredible amounts of money by pumping and dumping on retail. Take Solana as an example. 40% of their initial supply was allocated to insiders. Giving those VCs and founders the ability to dump on retail. It’s truly abhorrent behavior [1]

1. https://youtu.be/nBHH0k8EOHE

There were funds that did due diligence and built out models of the Luna/Terra/Anchor ecosystem and realized it was unstable.

You can talk to the people who built their models and they have lots of fun things to say about the ordeal.

The problem with web3 and crypto in general is that most people and energy get attracted by the potential to get rich, and being useful is an afterthought. I would be more attracted if I saw more products that tried to be useful first, and then try to make money for it afterwards. But it's harder to direct so much energy into projects like that.

VCs are unfortunately, on the whole, all too discerning when it comes to Web3. It's a meme now in the community that when a VC and tokens are involved, there's a good chance they are getting preferential treatment and using the end users as their exit liquidity. That's not necessarily the case here but "greed" has become a general theme and the motivations behind otherwise-puzzling investments become clear when viewed through that lens.

Probably not much else to invest on right at this moment, at least not at this level ("small" start-ups wanting to "change the world").

I was honestly believing that the web3 bullsh.t were just some young people who didn't know any better or some scam-artists (or both), I didn't actually think for a second that a "serious" VC like YC would put money into something like that. Looks like I was wrong.

I remember YC stating that they will "forfeit" (probably not the right legal term) their shares in companies that turn out to do unethical things. Now, let's see if they stick to their principles.

I think this is something like AI -- where people who are calling it "AI" are often sales people/hucksters (I mean this as little a pejorative sense as possible), and the people calling it "ML" are the practitioners/people you should be listening to.

Once a phrase gains mainstream adoption and starts to rapidly lose meaning, I find that people who care dearly about that thing start calling it something else.

That said -- I really struggle to find the people who are really all in on crypto in a technical sense. Where are the people building cool things and trying to push the boundaries with crypto? Surely it's still happening but just hard to find it in all the debris/trash.

The participation of big-name Silicon Valley VC in some obvious financial frauds is really disappointing to me.

> the thing we call web3

The thing some call web3.

Or, they knew all that but thought they would probably personally benefit anyway?

You can get rich in a gold rush selling shovels. And it doesnt really matter if there's no gold, or not enough for all the miners to make a living. And why would a shovel salesman focus on the negative like that?

If they’re unlucky they lose $500k, which is nothing. If they’re lucky they get a Coinbase. Why not.

algo stablecoins work fine when they're overcollateralized, like dai.

the industry keeps chasing undercollateralized algo stablecoins because of capital efficiency. jon wu explains to laura shin, worth a watch: https://twitter.com/laurashin/status/1525505300219961344

When you're advertising higher yearly interests than Madoff, that should raise some warnings into people's head.

No moderator touched this post. Moreover, it spent 10 hours on the front page.

Your comment makes me think you might be under a misimpression of how HN moderation works, so here's a refresher.

We moderate HN less, not more, when YC or a YC startup is the story. That doesn't mean we don't moderate at all (though in the case of this particular thread, we literally did not moderate it at all—any perception that made it seem that we did was completely mistaken). This is literally the #1 rule of HN moderation. It's the first thing that PG drilled into me when he trained me to do this job years ago. I hadn't even had a chance to grab a chair yet.

https://hn.algolia.com/?dateRange=all&page=0&prefix=false&qu...

The reason we have this rule is that the good will of the community is literally the only value HN has, and that is not worth risking.

> anti-flamewar

This is a story about a company 1) in the crypto space, that 2) lost all of it's users money, and 3) used misleading disclaimers (and potentially trying to change them after the fact)

It has already devolved in multiple threads to discussion about what is-and-is-not technically a ponzi scheme (vs other forms of scams/fraud).

This whole thing is a recipe for a giant flame war.

Wow, you're absolutely right. This story about how HN invested in an obvious Ponzi scheme (seriously, if the name Stablegains doesn't throw off alarm bells, you deserve to lose your money) fell over 10 spaces in the time it took me to click to the comments, read your comment, and click back to check.

Came here to say just this, this ranks higher than anything on the front page currently and is not very old. Usually HN algorithm allows a slow fall for high vote posts like this. This one’s quick descent right off the top 100 seems human-made.

ime mods here tend to actually stay away from negative yc stories, in order to not get into slippery paths. don’t have proof of it, but the simple fact that this is still up with 400 points is a fact.

I'm pretty sure stories get naturally downranked (even if they have a lot of points) as the number of comments begins to approach the number of upvotes. I think the idea is "anything with more comments than upvotes is probably a flame war". It may not be the best way to rank stuff, but HN is explicitly not a democracy.

They didn't plan for a black swam. I think that they only kept so much money around to do redemptions (fractional reserve) assuming that there wouldn't be a run on the bank. But then when a run on the bank happened, they were screwed as they had been locking up the funds.

I wonder what Jordan Gillespie, Kasey Cook and Kai Pedersen think now of the Stablegains product and service.

I don’t mean this as a slight against YC, but the world has changed and YC is mostly just a brand now.

YC was unique in that 15 years ago the narrative around raising money was radically different: YC was the only game in town that understood the amount of potential being ignored by traditional investors, and so they had a smorgasbord of excellent opportunities to pick from.

The world is very different now, YC demonstrated that their model worked and nowadays everyone has learned from YC…

…that means there’s no longer this vastly underserved market of brilliant teams that just need a little capital and a little faith and a little guidance, which is the market YC excelled in, nowadays everybody understands that and any competent team could raise money with their eyes closed.

Nowadays getting into YC remains perceived as prestigious but it’s not, really, compared to what it once was: the cycle sizes are huge and the quality has plummeted.

I don’t believe YC, as an organisation, is actively intending to benefit from ponzi-like companies, but YCs thesis (bet on a good team and they will do good things) is very vulnerable to a good team working on a god awful idea that has serious fallout when the market conditions have normalised insane behaviour: a decade ago, StableGains wouldn’t have made it into YC because no YC team would have thought it was sensible.

So, while YC should be held accountable, it’s ultimately a market problem, we’re in a market that values these awful predatory financial propositions, hence almost every prestigious investment organisation has some exposure to this sort of company (it’s just not blown up for all of them, yet, but soon come).

YC is just a VC firm. They avoid known risks and embrace unknown ones: that’s the whole point.

They don’t “understand” Mexico and are scared that their investment will get Pemex’d or something - and since that’s a known financial risk their backers would be like “wtf you doing?”

But “unknown” risks (even if actually quite easy to see) don’t have the same pushback from their investors. In fact, their investors may be demanding that they heavily invest in unknown risks.

> Was YC aware of the ponzi nature of this thing and decided to dip in?

It's extremely profitable to invest in a Ponzi if you are early to the scheme.

FWIW YC has changed over the years, both with different partners and a changing startup ecosystem. Geo-based feedback 10 years ago probably isn't relevant now.

YC invested in Coinbase in 2012. I suspect the success of that investment gave them (false?) confidence in their ability to navigate the crypto landscape in 2022.

> The reason YC gave for the rejection was that Mexico was an unknown market, and they felt lending in there was too risky for them.

That's a fair and reasonable reason.

Countries have their own specificities and, very importantly, their own laws an regulations. If you're not familiar the wise move is to stay out.

This is really the crux of the issue

How many people get duped into thinking there's such a thing as "unlimited gain" and "rewards without risks"

Like what, people are just going to give you money without you doing anything?

It would be largely beneficial to everyone, if we were to provide some basic economic/financial/"how money works" lessons to everyone through the use of schools and public education..

to use an oxymoronic name like "safe moon" is a great tell that it's a scam. A coin cannot be safe - that is, riskless and stable in value -, but also go to the moon! So they probably looked up the thesaurus and found "Stable" and "Gain" as synonyms...

15% interest?

No! Surprises!

Technically "15% interest. No surprises." is correct

And the YC board looked at this and funded it. That's unbelievable, isn't it?

Not surprisingly 15% of 0 is still 0.

Trustless computing might have a future, trustless money no.

I don't see how stablecoins are fundamentally a ponzi scheme, it's really not hard to imagine a sustainable stablecoin business model - reinvest what people pay into the stablecoin, keep risk low so you don't lose your principal and end up unable to repay debtors, keep enough in reserves that the stablecoin doesn't collapse in a bank run, and cross your fingers. Now, you certainly COULD turn this entire scheme into a ponzi scheme, and I would be freaking shocked if it didn't turn out several stablecoins were Ponzi schemes, but it's totally possible for a stablecoin to sustain itself without constantly seeking new deposits in principle.

Stablecoins are literally modernised promissory notes and the people hawking them are unregulated banks. It's incredible the people selling these stablecoins are not being regulated as if they are banks.

I just wish the liability could be extended to enablers that is funders... Sometimes I think companies should not really be limited liability...

Did you need to be an accredited investor to “invest” with them? Or should they have required this?

By definition, a Ponzi scheme involves some kind of reporting fraud where you're being lied-to about how your investment was converted and how much of that converted asset there is.

I'm not saying these aren't some other kind of scam but lots of people use "Ponzi" as if it meant any kind of scam... And generally speaking "how many thingy-coins do I own" is the one thing cryptocurrencies focus on making very difficult.

TLDR: Everybody overuses "Ponzi" and it annoys me.

There's no such thing as a free lunch, and you cannot earn above inflation returns without taking on risk.

Even money market funds, which is what stablecoins are similar to for fiat currencies, are not without risk.

Anything that has DeFi yield farming on it with X% of returns per year is a textbook scam. It is neither 'stable' nor did anyone gain anything other than a loss.

It is another way for retail to hodl their bags for this lie called 'passive income' all into a loss while the VCs dump and exit scam with the founders.

Usually it's the risk premium. Which makes sense for these ponzi schemes.

Exorbitant returns - extremely high probability of ending up at the bottom of the pyramid.

This is the Economy 101 lesson that many don't know (or pretend they don't)

The only ones that can "promise" a yield are sellers of titles for a fixed period. Anything else is an estimate at best

From the line that goes up

I like the name “Feeder Ponzi” though! Has a sort of legit-not-legit sound to it.

Yeah the days of being accepted into YC meaning anything are long gone, they're investing in pretty much anything these days. On the whole I think YC is a lite version of a rugpull though I don't really mean that as some sort of scathing criticism, it's par for the course.

That's just the way most businesses operate, you build up trust and provide loads of value when you're small. Then, as you expand you take advantage of the trust-inertia to exploit the gap between how much value you are perceived to provide and how much value you actually have to provide to keep getting money (or equity) from people and giving it to yourself.

Except the whole thing about living off crypto in El Salvador was just a grift all along.

Hopefully they didn't park the investors' money in Anchor Protocol!

I didn't invest because it was only 15% gains. Sad, but true. I actually read them their material & saw it was based on Anchor Protocol. When I saw that it was based on UST, and I couldn't figure how UST was backed by anything I understood, I opted out. One of the few times in crypto where I felt "do you won research" paid off for me.

Crypto bros would forgo the middleman and get the 20% yield instead.

As a recovering crypto bro, none of my other friends have been impacted by this entire UST/Luna meltdown at all

Why? Because crypto bros are too degen to be okay with 15% yield lol

I have a (ex-) friend who falls for every MLM scam that comes along. Naturally, she put everything into crypto. She would undoubtedly think she could make 15% with no risk. I believe a huge number of the MLM gullible are the dupes involved in these scams.

You would certainly think so ... I did. But I'm sorry to say that you are strongly overestimating the general population here.

My friends know I'm the local crypto-geek[0] so Bitcoin and other cryptocurrencies and tokens are brought up to me all the time by people who's knowledge of what any of it is begins and ends with "Last year X coin was $7.00 and this year it's $100.00, and all of the other ones have had gains like nothing else I can invest in."

I can think of at least 6 members of my extended family who are presently invested in cryptocurrency trading (many just say "Bitcoin" and don't actually have any) who are -- in every way -- technologically obliviously ignorant[1]. Half of them, however, are not otherwise uneducated people (one guy is a very well paid VP at a company everyone in my state has heard of and has an MBA from a major university ... he's just not in finance or tech). They're not thinking "well, 15% APY is insane/impossible to provide over the short term/impossible to ever guarantee unless they've invented a time machine or are breaking the law." They're looking at the percentage gains on Bitcoin or Ethereum (depending on when you acquired it, of course -- Lord knows it's taken a hit lately) and thinking "15% sounds easy for a company to pull off in this space."

Everyone in my family who invested in some crypto used some company to hold their crypto. Almost all of them used services/companies that had enough of a strong scent of "scam" that I would have dismissed them without further research. Some used more mainstream crypto-sort-of-banks. Sort-of-banks because none of the companies that my family members chose for crypto trading were FDIC or otherwise insured in a manner that made sure the numbers they see on their page could be turned into dollars in a bank account somewhere else. The surprising thing is that none of them had any idea this was the case! A few family members thought they were buying Bitcoin because they were investing in "cryptocurrency" and it turned out they were buying some strange token running on the Ethereum network.

I'll grant it's a small sample size, but in every way it's consistent ... it's a "gold rush" kind of frenzy filled, unfortunately, with a lot of fraudsters riding the wave of news around the crazy gains of crypto.

The thing that scares me the most is that a few of my family members[2] have done very well trading crypto (4x/5x/10x their yearly salary). Some lost a little, the others gained a little. The ones that did well aren't treating it like a short-term gamble, even watching the prices drop ... it's like they're holding on to the stock of a company that they deeply believe in except ... there's no company.

[0] I don't invest, I did mine Ethereum a while back/spent most of it and made a small profit but did it mostly to learn how the miner worked and how to write CUDA software. I worked SecDev for a couple of years at a global telecom and I enjoy the technology behind it all.

[1] One of them -- not elderly -- called for help reconnecting to his 4G modem (their only internet service). The instruction "reboot your computer" was not understood. I fell back to "turn it off, count to ten, turn it on again." Nope, right back where he left it. I had not seen his computer setup so I could provide no more instruction. When I arrived I discovered he was "rebooting" ... the monitor.

[2] Four, precisely, two who are distantly related through a great aunt and are working together, but are among the most irresponsible people with money I've ever known, and two who are quite good with most things financial.

Edit: Realized my tone was harsh in a few places and there was one inaccuracy.

YCombinator's board?

https://www.ycombinator.com/companies/stablegains

They were skimming yield(in return of a nice UI) on a risky yield asset with poor disclaimers and extremely reckless risk management systems

I mean, the company name alone should tell you all you need to know.

YC has been investing into a lot of blockchain startups in the last few years. They clearly think there is a market for blockchain startups.

A poor decision does not equal fraud.

I stopped following their investments in like 2015 after they funded a startup that makes vegan condoms, whatever that is.

yes I think good remark. This will hurt their brand for sure. Quick money making as it seems

Some would extend this statement to all fiat currency.

It's like a used car salesman who claims his name is 'Honest' Freddy. You'd think such flagrantly shameless self-aggrandizement would make everybody turn and run, but evidently it works on some people.

They're Stablegains, not Stableprincipal ;)

There is always some fluctuation in the market, and it is impossible to tell if after hitting .99 it will go back to 1.0 or drop to 0. Sure, you mitigate risk of the asset going to 0 with this strategy, but at the same time you bleed 1% of your investment every time the market has a small shock that brings it below 0.99

So what about 0.98 then, or any arbitrary value between 1 and 0? The lower you go, the lower the chance it will bounce back to 1, but the higher your loss if it does. Ultimately it all balances out and each of these bets is just another gamble with no outsized return.

Oh your right, they almost invented perpetual motion, but forgot to add this one doodad. If they add they doodad they will have succeeded in inventing it and surely we'll all get great gains. /s

The entire process is fundamentally flawed. No adjustment will fix a faulty premise. Please stop pushing faulty thinking like this.