Project Description

THE RUG ADAPTS

There has been a significant uptick in Defi-related node services going live and seeing tremendous gains, advertising high APY passive income generation. This quick article takes an analytical approach to help potential investors gain a more critical perspective. This is not financial advice. As always, you should do your own research, but if you’re interested, here’s ours.

A project called Ring Financial (CoinMarketCap) went live at the end of November 2021. It’s advertised as Defi-As-A-Service and a way to earn high yields without having to do all the research and hard work yourself. This makes sense since people have busy lives and time is precious. This model is similar to a hedge fund, in that you buy into a group and trust them to invest wisely for you. As such, many ‘forks’ (read copycats) have emerged, taking the model, applying a slight twist to it, and pushing out their own model. People are excited by the concept of De-Fi and earning significant passive yields, however, they should look critically at these startup projects.

Let’s dive a little deeper into the model that these DeFi popups have in common.
Step 1) You buy X amount of tokens required to make a Node.
Step 2) You use those tokens to form the Node.

  • To create the Node all your tokens are sacrificed and cannot be retrieved anymore. They are locked into the Node, which cannot be transferred or liquidated.

Step 3) The Node then generates a percentage for you for life (most of the initiatives advertise in the 5-7% range, per day).

  • You are paid back in the Token.
  • When node is created, 10% goes to liquidity pool, 20% to dev/marketing, and 70% to distribution pool
  • Most models have their blockchain medium (BNB, Avalanche, ETH) returned to team devs/marketing, while the token (RING, LVT) is given to the distribution pool (investor).

Step 4) Incentive is offered to keep money and rewards in the protocol (e.g. compounding bonus)
Step 5) Rewards have cash out fee ranging from 10-30%

Did you see any red flags up above? Think logically through this process. You buy tokens and they are essentially donated back when a node is created, then you are paid back a small percentage of those tokens each day. Works great as long as the token has value, but for the token to maintain value, it would need a heavy HODL community and an ever-growing userbase. As soon as new members stop joining and investing, the reward cash out will outpace the incoming money, lowering the price substantially. Especially when those who invested early and have a significant amount of rewards cash out.

These so-called Defi-as-a-Service (DaaS) schemes are reliant on expanding user bases. They attract people using buzzwords and tentative (false) promises. They are a new kind of rug pull. An evolution of the pump-n-dump scheme. They tout Decentralized Autonomous Organizations (DAOs) to make it seem like democratic governance, but that’s just a method to shift the blame of the token’s inevitable failure to the user, while the project team takes the base chain cryptocurrency (BNB, AVAX, ETH, etc…) and leaves investors with their worthless token.

Need some more evidence?

Below is an excerpt from Ring’s Whitepaper

Distribution of Community Contribution*
● 10% to Liquidity Pool, as 50% RING and 50% BNB
● 70% to Reward Pool, as 70% RING and 30% BNB
● 20% to Marketing / Team Pool as 100% BNB
As the project is still under development, the 30% BNB part of the reward pool is used to finance the development of the RING DeFi allocation protocol, including research and development, cybersecurity, current reward distribution system fees, and legal & compliance expenses. Link: https://www.ring.financial/public/whitepaper.pdf

All the BNB is going to the team in one form or another, including that which is earmarked for the reward pool. Marketing needs such a high percentage, because it’s the pumping mechanism.

Another red flag to watch out for is all the popups that have emerged in a matter of weeks. Ring went public 22 Nov 2021, advertising 2600% APY. Louverture, a self-proclaimed fork, came out less than one month later. They were able to scrape together an app, social media accounts, copyedit a whitepaper, and launch a token that quickly. They advertise 5700% APY and use a compounding interest scheme to encourage users to keep their rewards (and the token liquidity) trapped in the protocol. In the first week of trading, it has skyrocketed 10x from 0.0025 to 0.025. Why? Because people are buying heavily into the token and converting it into nodes, removing the token from the market. The sell power is low, while the momentum attracts new traders in droves, pushing price power up. This precedence will spawn more and more copycats and investors hoping to catch one from the start.

The weakness of these systems, obviously, is that a person buys in heavily at the start, but doesn’t turn the token into a node, and rather sells the token during the pump to make a handy profit. As more people realize this, the pump-action will diminish significantly. These pump actions will also slow as the community starts to wake up to these schemes. Why do you think the copycats schemes are pumping out so fast? The team members are always anonymous and the company looks like it only just formed. I saw another popup this week called LAVA (twitter) with what looked like a Google image of lava as the background and quickly outsourced logo of a volcano. As their social media following exploded off the coattails of Louverture’s success, their team is now scrambling to create and put out a token as quickly as possible.

We do not believe these are real DaaS schemes. They are not real nodes either. They are just using the term nodes to appeal to the crypto community and sound appealing. That’s not to say all nodal companies are involved in this scheme. There are plenty of legit node service companies. I chose to invest in $TNODE because they have a history, unique business model, an actual building, and a real team that’s not afraid to show themselves. Maybe it’s a rug too, but it feels a lot safer than these DaaS models.

These anonymous DaaS schemes that are popping up all promise to go through audits, have smart contracts certified, and use RugDoc, but that doesn’t really mean anything. A certified, audited smart contract won’t protect the value of the DaaS token from devaluing. RugDoc is looking for traditional pump-n-dump schemes, analyzing the code for ways projects can cash out or prohibit token trading. Maybe RugDoc will adapt and add this DaaS scheme to their list after these startups start collapsing and users submit enough complaints. Also, how many of these initiatives say they will use RugDoc, but never do. It’s all about creating a perception of legitimacy.

One other note to mention is that these DaaS schemes make a significant amount of money by controlling the liquidity pool. Often you will see them “lock-up” a value for liquidity. This is needed for trading to occur, but if you fully control the liquidity pool you make all the transaction fees. If trading reaches volumes in the millions per day, then they are making a handy sum in fee collection.

We are big believers in DeFi. We understand that those who have already invested in the products will try and defend them (and their investments). We know this will be called FUD. The reason we write it is to spur critical thinking and a fresh look. Cryptocurrency scams evolve. We want the crypto ecosystem and users to evolve too because we believe in the future of crypto, blockchain, and DeFi. Therefore, we want to make sure users are protected, or at least warned, of the potentials that exist with these DaaS projects. Do your own research. Read whitepapers, compare them to others. Look for the red flags. Draw out a few long-term scenarios.

Do you really think a project is going to achieve 5700% APY, or are they just doubling what the competition says to attract and sustain their pump? Maybe the devs and team behind the project has convinced themselves that their idea can actually work. Maybe they intentionally know what will happen. Either way, we hope you now have a critical look at these projects before going full send. Your mind may be imagining a future based on passive income generation. An escape from your job or an early retirement. Don’t let hope drive your decisions. That’s a lottery strategy. Do due diligence.

**This is not financial advice. This is critical crypto analysis.