The locking rules between the project party and the market maker are called the “handshake agreement”, but users are the ones who ultimately foot the bill.
Author: Grapefruit
In the early morning of the 5th, within a few hours, the price of the SYN token of the cross-chain protocol Synapse fell by more than 20%. The abnormal price fluctuations caught the attention of the crypto community, and many users speculated whether there was a security issue with the cross-chain bridge. Subsequently, Synapse clarified on the X (formerly Twitter) platform that the drop in the price of SYN tokens was due to the market maker (or liquidity provider) selling SYN tokens and withdrawing liquidity.
Just when everyone thought it was a normal sell-off, observant users discovered that this sell-off event was not as simple as it seemed, but rather it was related to the market maker Nima Capital. However, Nima Capital had previously agreed with Synapse in March of this year to provide liquidity to the cross-chain platform for a period of 12 months. According to the original agreement between the two parties, the liquidity would still need to be provided for nearly 7 months before it expired. So why was Nima Capital able to sell SYN tokens while withdrawing liquidity ahead of schedule?
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This morning, the official Synapse also confirmed that it was indeed Nima Capital who violated the agreement by withdrawing liquidity and selling SYN tokens.
So, how could the originally agreed lock-up period between the project party and the market maker be easily broken? Even if there was a breach of contract, why was Nima Capital still able to obtain the project party’s tokens and sell them? Could it be that these token release agreements were not written into the smart contract at all, but only existed as “handshake agreements” or verbal agreements? How can users avoid becoming the ultimate losers in such situations?
The SYN token sell-off incident
What exactly happened during the sell-off of SYN tokens?
First, in the early morning of September 5th, the sudden drop in the price of SYN tokens attracted the attention of the community users. According to CoinGecko data, SYN tokens fell from $0.4 to $0.3 at around 5 am that day, with a drop of more than 25% in a short period of time. It has now rebounded to around $0.35.
Subsequently, in response to the sharp drop in the price of SYN tokens, Synapse clarified on the X platform that the drop was due to the market maker (or liquidity provider) selling SYN tokens and withdrawing liquidity. The team is investigating unusual activities in their wallets, and there have been no security vulnerabilities in the protocol or cross-chain bridge.
In fact, before Synapse’s official response, when the SYN price started to drop, Twitter user @Speeker reminded everyone that an address starting with 0X4d sold a total of 9 million SYN tokens in batches within one minute (the value of the tokens at that time was about $3.7 million) and also withdrew over 20 million of liquidity from the stablecoin fund pool on the Synapse platform.
Analysis of data shows that the address in question appears to be Nima Capital, and it has been found that both Nima Capital and Synapse reached a relevant liquidity agreement in the community in March of this year.
According to the proposal put forward by the Synapse community in March, Nima Capital was designated as the first liquidity partner by Synapse, committing to provide $40 million in stablecoin liquidity to Synapse for a lock-up period of 12 months. During this period, Nima Capital can receive SYN token grants (reportedly 10 million tokens) and 33% of transaction fees from the SYN Foundation. The proposal was ultimately passed with a support rate of 99.2%.
However, despite there being nearly 7 months remaining until the end of the promised service period, Nima Capital withdrew its liquidity prematurely and also sold off SYN in large quantities, causing its price to decline.
Subsequently, some users reported that the official website of Nima Capital (nimacap.com) is now offline and cannot be accessed, and its official X platform account has been set to “protected”, only allowing approved followers to view it. In response to this, some users believe that Nima Capital may be facing financial problems and is selling off its assets, including cryptocurrencies. The real estate media Mansion Global reported last month that a related entity of Nima Capital sold a luxury apartment in New York for $80 million.
According to the cryptocurrency data platform RootData, Nima Capital is a family investment company that has made 24 investments in the DeFi and cryptocurrency fields. Projects include: 0x, 1inch, Liquity, Notional Finance, DexGuru, Handshake, etc. The most recent investment was in April, participating in the seed round of NFT developer Flow.
This morning, Synapse issued a statement confirming that the removal of liquidity by Nima Capital constitutes a breach of contract. The liquidity proposal related to Nima Capital was approved by the Synapse DAO on March 19 of this year. According to the proposal, Nima Capital was required to provide $40 million in cross-chain liquidity for a period of 12 months in exchange for the token emission rights granted by the DAO during this period. Yesterday, Nima Capital sold the SYN tokens granted by the DAO and removed all liquidity provided to the stablecoin pool 6 months ago, violating the terms of SIP-21. The Synapse team has been trying to contact Nima, but without success.
According to data from DeFiLlama, the current Total Value Locked (TVL) of Synapse is $112 million, a decrease of about 20% from the day before yesterday.
Lock-up terms are child’s play: management loophole or unwritten agreement between the project party and the market maker?
The selling of SYN tokens by market makers seems to be due to their own financial problems, but it actually reveals the lack of constraints on token lock-ups by the Synapse official towards market makers, which also reveals some hidden unwritten agreements between the project party and the market makers.
Why doesn’t the project party have any constraints on the tokens allocated to market makers? This is also the point of controversy among community users.Originally, a lock-up period of 12 months was agreed upon, but before the 6-month mark, the market maker withdrew liquidity. Why does the official not have any constraints on the sale of SYN tokens? Why can Nima Capital still receive SYN tokens despite violating the agreement? What are the specific lock-up rules for tokens between the project party and the market maker? Why does the proposal only mention that the provided stablecoin liquidity is locked for 12 months, but there is no mention of the lock-up of SYN token grants for 12 months? Could it be that the lock-up rules between the project party and the market maker are not legally binding, and these disclosed rules are just talk? Some users even express the hope that they can have an offline contract. However, from Synapse’s current response, it appears that there are no specific agreements.
In fact, events like the Synapse incident are not accidental. The agreement between market makers and users is jokingly referred to as a “handshake agreement” – without written or legal efficiency, it only remains oral or in a handshake.
The Curve sell-off incident last month was also a case where tokens that were originally locked for six months were sold in advance. Over-the-counter (OTC) trading of CRV caused a 20% drop within a week, approaching the on-chain liquidation line. The sold CRV tokens were mostly previously sold by the founder off-chain, and the purchasing investors had promised a 6-month lock-up. However, within just a few days, some participants had transferred their tokens to centralized exchanges, raising suspicions of dumping. For example, DWF Labs transferred 2 million CRV to Binance, although they later claimed it was for trading purposes and that they would withdraw the CRV back to the chain after completing their plan, users still viewed it as a selling behavior. It was later confirmed that the CRV lock-up seemed not to be enforced through legal or smart contract means. Curve founder Egorov confirmed in a statement that buyers who violated the cooperation agreement would not suffer negative consequences. In addition, earlier this year, the Arbitrum Foundation secretly transferred 750 million ARB tokens to other wallet addresses despite the proposal not being approved.
From this perspective, there are frequent incidents of breaches between project parties and market makers or investors. This is why when the Nima Capital sell-off incident occurred, some users expressed that “another seasoned actor used DeFi governance drama to obtain tokens from the project treasury and then violated the agreement and sold the tokens.”
These behaviors seem to contradict the current vigorously promoted concepts of “decentralization” and “Code is Law.”
In response, cryptocurrency investor VeVe stated that in the case of the Synapse incident, it is currently unclear what the specific lock-up terms for the SYN token are in the agreement. For the Synapse team, the real issue at hand is the need to disclose and explain to users whether there are any relevant smart contract constraints on token lock-up, or whether modifications have been made to the agreed-upon terms for locked liquidity.
Furthermore, currently, there are indeed some unwritten rules between market makers and project parties, and their transactions have always been opaque. This is a problem for the entire industry, and there may be a specific set of rules published one day as time goes on, but not in the short term. When investors encounter such proposals, they need to actively urge or demand the project party to publicly disclose the specific lock-up mechanism and details. Of course, they can also choose not to purchase tokens that do not provide sufficient information and disclosure.
The Synapse sell-off incident also demonstrates that the “handshake agreement” is a potential time bomb for both users and project parties.
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