The Demise of Saddle Finance From a Strong Competitor to Liquidation and Shutdown of Operations

Author: Jiang Haibo, LianGuaiNews

Saddle Finance, once seen as a strong competitor to Curve, received a $11.8 million investment in two rounds of financing in 2021 from Coinbase Ventures, Alameda Research, Polychain, Framework Ventures, Nascent, Electric Capital, and others.

On August 8th, the Saddle community initiated a proposal to shut down operations and liquidate funds. According to DeFiLlama, the total value locked (TVL) in Saddle Finance is only $3.68 million, and the market value of the governance token $SDL is only $917,000. How did it develop to its current situation step by step?

Top VC support, launch and airdrop attract popularity

One important difference between Saddle and Curve is that Curve is implemented in Vyper (the programming language recently found to have vulnerabilities), while Saddle has ported the code to Solidity, which avoids the impact of the recent Curve exploit.

When it launched in January 2021, Saddle announced that it had secured $4.3 million in seed funding from top VCs such as Coinbase Ventures, Alameda Research, Polychain, and Framework Ventures. Before the launch, Saddle underwent audits by several security firms, including Certik, Quantstamp, and OpenZeppelin.

Saddle did not issue governance tokens at the launch of the project, but it was basically determined that they would be issued. For DEXs, liquidity is crucial, and projects like Curve have rewarded liquidity providers with valuable governance tokens. The combination of top VCs, audits by multiple security firms, and the expectation of airdrops attracted high attention to Saddle at its launch.

High expectations also brought some problems. At the beginning of the launch, liquidity providers flocked in. Due to the similar mechanism of Saddle and Curve, where a pool contains multiple similar assets, if liquidity is added with the same asset, it will cause an imbalance in the proportion and price of assets in the pool, resulting in high slippage for those continuing to add liquidity. A transaction on Etherscan shows that when Saddle first launched, a user exchanged 0.34 sBTC for 4.36 WBTC in Saddle’s BTC pool, which means that liquidity providers suffered permanent losses, and there were many such arbitrage examples at the beginning of the launch.

On November 17, 2021, Saddle announced the issuance of governance tokens and the launch of liquidity mining rewards, with a total of 15% of tokens airdropped to users. In mid-2022, $SDL tokens began circulating. In addition to the $SDL airdrop, other projects also rewarded early liquidity providers of Saddle, such as $KEEP rewarded by Keep Network. Keep Network, Saddle, and Fold are all projects under Thesis. This brought high popularity to Saddle during the initial launch and airdrop period.

$11 million stolen, downhill journey begins

On April 30, 2022, Saddle’s sUSDv2 pool was hacked. This pool consists of Synthetix’s sUSD and SaddleUSD-V2 LP tokens, and SaddleUSD-V2 LP tokens, similar to Curve 3pool LP tokens, include DAI, USDC, and USDT stablecoins.

According to Rekt, this is because there is a bug in the old version of the MetaSwapUtils library, which does not use “VirtualPrice” to calculate the value of LP tokens during the transaction process. The hacker used flash loans to manipulate the price of sUSD/saddleUSD-V2 and obtained more sUSD.

Saddle was stolen $11 million in this process, but $3.8 million was returned by the white hat hacker BlockSec, and BlockSec received a reward of $380,000. Saddle’s misleading official statement also caused dissatisfaction among users, such as “user funds are safe,” but it actually refers only to the portion returned by BlockSec.

As can be seen from the DeFiLlama TVL chart mentioned earlier, the liquidity in Saddle dropped from $280 million before the attack to $120 million after the attack.

In May 2022, with the collapse of UST, the liquidity in Saddle further dropped to $70 million and has been struggling since then.

Liquidation Proposal

On August 8th, the SIP proposal in the Saddle community suggested dissolving the community and distributing the remaining value of the protocol to $SDL and veSDL holders. The reasons for liquidation stated in the proposal can be summarized as follows:

  • The basic vision of Saddle has been achieved, and many core contributors intend to stop working before September 30, 2023.
  • The recent Curve hack attack indicates that the protocol may be at risk due to potential vulnerabilities.
  • The treasury value of the protocol has exceeded the circulating market value of the protocol token, and community members suggest distributing the DAO’s $ARB airdrop to token holders.
  • Continuing operation is also an option, but it requires support from the community multisig and Delos HQ multisig, which is difficult to achieve long-term coordination and management.

The main funds currently held in the treasury are $1.545 million $ARB received from Arbitrum. The proposal suggests liquidating all remaining DAO funds into $ARB and distributing them to everyone based on the weight of $SDL and veSDL held.

According to the proposal, the value of $ARB airdropped per $SDL is approximately $0.0026. As of August 10th, CoinGecko shows that the price of $SDL is $0.00209, which is lower than the expected airdrop value.

In the case where the project is almost unused and there are remaining funds in the treasury, liquidation is indeed a feasible way to end the project. In the Saddle community, most people agree with the liquidation. However, there are still some questions regarding the specific execution, such as the weight multiplier for $SDL and veSDL. The proposal suggests a 4x multiplier for veSDL and a 1x multiplier for $SDL. As for the snapshot time, the proposal states it is at Ethereum block #17870642, but it has already passed, which means that users who hold funds on centralized exchanges cannot receive the airdrop.

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