CoinFlex recently experienced a “liquidity crisis” and has been unable to provide its customers with their funds. Exactly what led to CoinFlex’s problems remains unclear at the moment, but it appears that Roger Ver, who has been referred to as “Bitcoin Jesus,” may have played some part..
As the controversy continues to unfold, looking at CoinFlex with a bird’s-eye view leads to some interesting and enlightening insights. Among these insights is one regarding the problematic rise in popularity of cryptocurrency projects that promise their users high APY.
What is CoinFlex?
Founded in 2019, CoinFlex is the self-proclaimed “home of crypto yields.” CoinFlex operates as a cryptocurrency exchange, boasting its “most capital efficient automated market maker in the world.”
Despite CoinFlex’s functioning exchange, however, its most attractive offering – by far – has been that of its stablecoin, flexUSD.
As a “stablecoin,” the value of flexUSD was intended to remain perpetually around $1.00 USD. flexUSD utilized USD coin – USDC – to keep its value. The biggest draw of flexUSD was its interest earning capabilities. Holders of flexUSD were to be paid interest every 8 hours. Since flexUSD should have always kept its value of approximately $1.00, it was thought to be a risk-less investment.
Some proponents of flexUSD told customers that holding the stablecoin and collecting interest on it could earn them up to 20% APY.
How did CoinFlex Fail?
On June 23, 2022, CoinFlex’s CEO Mark Lamb shocked customers when he posted this update on CoinFlex’s blog:
“Dear CoinFLEX Community,
Due to extreme market conditions last week & continued uncertainty involving a counterparty, today we are announcing that we are pausing all withdrawals. We fully expect to resume withdrawals in a better position as soon as possible. We will fully communicate with you as we find out more.
We will also be halting all FLEX Coin trading in perps and spot in the short term.
To confirm, the counterparty is not 3 Arrows Capital or any lending firm. We are confident that this situation can be repaired fully with a restoration of all functionality, namely withdrawals.”
It came out a bit later that while “extreme market conditions” may have contributed to CoinFlex’s difficulties, the “counterparty” mentioned was the main factor. Regardless of cause, however, the result was that withdrawals from CoinFlex were “paused,” meaning that CoinFlex customers could not retrieve any of their funds from the platform.
CoinFlex’s Mysterious “Counterparty”
If Mark Lamb’s explanation for CoinFlex’s troubles left you confused, you’re not alone. In fact, the verbiage in the blog post seemed intentionally vague to some. The situation has become clearer since that blog post was published, however, so we can shed a considerable amount of light on what seemed quite murky at first.
First, let’s define “counterparty” – a term that many people won’t come across too often.
Counterparty: a party to a financial transaction
Still pretty vague, isn’t it? In fact, CoinFlex’s counterparty plays a huge role in all of this. We will return to the issue of the counterparty. First, though, the best way to proceed is by discussing rvUSD.
The next update Mark Lamb posted on CoinFlex’s official blog discussed a possible “solution for re-enabling withdrawals”: the issuance of a new token called Recovery Value USD – rvUSD.
According to Lamb’s update, rvUSD is intended to be a high yield token that will only be offered to “high net worth” individuals. The goal is to sell enough rvUSD to solve CoinFlex’s liquidity problems and re-enable withdrawals.
“rv” USD… Recovery Value? Or Roger Ver?
The first mention of rvUSD came on June 27th, before the naming of CoinFlex’s troublesome “counterparty.” However, savvy internet sleuths immediately began speculating that the “rv” in rvUSD was a hint at the counterparty’s identity. They wondered, “Does ‘rv’ stand for Roger Ver? Does Roger Ver owe CoinFlex substantial sums of money?”
Public Accusations and Denials
Individuals wondering about Roger Ver’s potential involvement didn’t have to wonder for long. Most likely prompted by rampant speculation, Roger Ver posted on Twitter, denying any debts while pointing his own fingers, as well:
Recently some rumors have been spreading that I have defaulted on a debt to a counter-party. These rumors are false. Not only do I not have a debt to this counter-party, but this counter-
party owes me a substantial sum of money, and I am currently seeking the return of my funds.
You’ll notice that up to this point, CoinFlex’s blog posts and Ver’s tweet have left room for deniability on both sides. The term “counterparty” has been used by both CoinFlex and Ver, but neither side has used names.
Less than an hour later, Mark Lamb posted on Twitter, removing all doubt:
Roger Ver owes CoinFLEX $47 Million USDC. We have a written contract with him obligating him to personally guarantee any negative equity on his CoinFLEX account and top up margin regularly. He has been in default of this agreement and we have served a notice of default.
Latest CoinFlex Updates
Following revelations that the “counterparty” named in CoinFlex’s public blog was indeed Roger Ver, the company continued releasing information and plans to rectify its difficult situation. The first small step towards making things right included allowing 10% withdrawals.
On July 12, 2022, it came out that CoinFlex was pursuing legal action against Roger Ver. The amount of damages was revealed to be $84 million and CoinFlex sought assistance from the Honk Kong International Arbitration Center for the purposes of reclaiming lost capital from Ver.
Matters got worse for CoinFlex at the beginning of August when the company publicly announced that it was cutting staff in order to “become more cost-efficient” during its period of serious financial difficulties.
Were CoinFlex’s Issues Inevitable?
It must be acknowledged that the events leading up to CoinFlex’s liquidity issues are still in question. CoinFlex has publicly blamed Roger Ver for essentially failing to pay back money that was loaned to him. Ver still disputes this.
If we accept CoinFlex’s version of events, though, does it give the company a viable excuse for its liquidity issues? Many people don’t think so. In fact, a popular criticism leveled at CoinFlex currently is that it’s rather irresponsible to offer a loan so big that a default on that loan would cause such dire consequences – both for the company and its individuals. Of course, it’s difficult to argue with this logic, especially with the benefit of hindsight and considering the events that have transpired.
Even without Ver or any large loans involved, though, many others maintain that CoinFlex’s issues were inevitable because its promises were unsustainable.
Are High APY Promises Always False?
One of the largest accusations pointed at CoinFlex is that it was a ponzi scheme from the beginning. This accusation is built on the claim that holders of flexUSD would be making up to 20% APY. While high APY promises have become quite common in the cryptocurrency space, especially with deFi projects, many state that they are simply not sustainable and almost always red flags for projects that will inevitably fail.
Where will High APY Come from?
Projects that offer customers and investors high APY explain their methods of creating value in a variety of ways. The important question that needs to be answered is “Where does the money come from?” The higher the APY promised, the more money needs to be created for distributions. The general rule, then, is that the higher the APY promised, the less chance there is of sustainability and the higher chance there is of failure.
Was CoinFlex’s High APY Promise False?
CoinFlex explained that returns (distributed three times daily) for flexUSD would come from interest paid from traders. Essentially, holders of flexUSD were acting as lenders for traders on CoinFlex’s platform.
The one factor that stops many people from accusing CoinFlex of making unsustainable promises is that the APY used to tempt investors into buying flexUSD was never claimed to be astronomical. In some instances, CoinFlex explained that flexUSD holders could make “up to 20% APY.” In other situations, it was stated that it was possible to make “10+ % APY.”
These figures are still high as far as APY promises go, but they’re far less egregious than many other APY promises in the cryptocurrency space.
Sustainability: The Real Question
When researching and validating projects with high APY promises, the real factor to look for is sustainability. The truth is that high yields are absolutely possible for any number of projects with various ideas in the short term. In fact, many of the projects that have given investors the absolute highest yields have done so with the most dubious premises – but only for a limited time.
High APY becomes more and more difficult when longer time periods are involved. As such, any project with high APY promises must be evaluated for sustainability, especially.
Buying into questionable projects for high gains in the short term is essentially gambling. If your goal is to invest in a promising project for the long term, however, high APY promises should be looked at with a healthy dose of suspicion.
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