Binance, the world’s largest crypto exchange, says it is investigating the Squid Game token debacle, aiming to recover lost funds and turn over its findings to law-enforcement officials.
The “play-to-earn” token, SQUID, rocketed more than 70,000% last week, to $2,861, before crashing to fractions of a penny on Monday. Owners of the token had no way to sell as liquidity froze up. The token has no official affiliation with the hit Netflix series.
It now appears to have been a pump-and-dump or “rug pull” scheme, according to Binance, the company that developed the underlying blockchain used by PancakeSwap, one of the largest decentralized exchanges, or DEXEs.
“These types of scam projects have become all too common in the DeFi space,” a spokeswoman for Binance told Barron’s.
Binance said that it had frozen and blacklisted wallet addresses associated with the developers of SQUID, and that company is “deploying blockchain analytics to identify the bad actors.”
The token’s developers appear to be using a “coin mixer” called Tornado Cash to cover their tracks, Binance said. “Our security team is currently tracing those funds,” the exchange told Barron’s.
Tornado Cash’s developers could not be reached for comment.
Binance said it was trying to trace the transactions and plans to hand over its findings to law enforcement in the “appropriate jurisdiction.” But there’s little the company can do to recover lost funds.
Developers of the token may have walked away with at least $3 million, according to the website Gizmodo. It is not known who the developers are.
The origins of the SQUID token aren’t clear. The developers of the token are anonymous. A Twitter account and website associated with it have gone dark.
On Monday, a post claiming to be from the developers said that they had quit the project.
“Squid Game Dev does not want to continue running the project as we are depressed from the scammers and are overwhelmed with stress,” said the post from Squid Game BSC on the Telegram messaging polatfirm. “Sorry again for any inconvenience been made for you.”
Crypto experts call the whole thing a “rug pull.” In such a case, developers launch a seemingly legitimate token, build support for it, and then vanish or abandon the project, leaving holders with a worthless digital asset.
SQUID primarily trades on PancakeSwap. It’s known as an automated market maker since it is essentially a collection of algorithms, or smart contracts, that set the prices and terms of a trade. Liquidity is provided by the community of users, who also help govern the system.
Anyone can launch a token on a DEX and try to build a market for it since the system runs on open-source code and is considered “permissionless”–with no central oversight or listing requirements. DEXes generally don’t have listing standards or requirements, acting like public utilities for crypto traders.
PancakeSwap runs on the Binance “smart chain,” a blockchain like Ethereum that’s used for a variety of decentralized-finance, or DeFi, applications. The PancakeSwap platform has a development team behind it. But owners of the CAKE governance tokens vote on proposals to manage the system, “letting the community have a say in how PancakeSwap develops into the future,” according to the site. Barron’s was not able to contact the development team.
Theft is a growing problem on DeFi platforms. Crypto investors lost more than $680 million to theft, hacks, and other malicious activity through the first seven months of 2021, according to CipherTrace, a blockchain analytics company. About 76%, or $471 million of the total, occurred on DeFi exchanges. Rug pull losses tallied $113 million through July.
The decentralized structure of DEXes leaves investors without much recourse if something goes awry. As PancakeSwap states on its site, “There is NO customer support for PancakeSwap.” The site advises traders to reach out to the community through Telegram if they have an issue.
Despite the crash of the Squid Game token, crypto traders don’t seem deterred by the risks of DEXes and other DeFi, platforms. The total value locked in DeFi networks was up 2.6% over the last 24 hours to $253 billion, according to DeFi Llama, a site that tracks the industry. Total value on PancakeSwap was up 12% over the last seven days, to $6.2 billion.
U.S. regulators are signaling growing concern about DeFi platforms. A White House report on stablecoins, cryptos designed to maintain a $1 value, released on Monday, highlighted the risks of DeFi, indicating that regulators are actively looking at how to police them
As for the SQUID token, it is not entirely dead. The token was trading on PancakeSwap on Wednesday, according to CoinMarketCap. Several other Squid Game-related tokens have also popped up, including SquidDao, Squidanomics, and Baby Squid Game.
Netflix has no involvement with any Squid-related cryptos. Buyer beware.
Write to Daren Fonda at firstname.lastname@example.org
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