Truth made of lies with magnifying glass

Arbitrum, Wintermute and more DeFi lies

Arbitrum made its long-promised transition into a decentralized autonomous organization (DAO) last week, whereby holders of the ARB token would supposedly have a commensurate say in how the blockchain is governed.

It took all of seven days for this veneer of decentralization to crumble. The Arbitrum Foundation, in charge of the blockchain, made the DAO’s first proposal: that $1 billion worth of ARB gets allocated back to the foundation to fund admin costs and a ‘special grant’ program. ARB holders were not in favor and voted down the proposal and used their ARB allocations to vote it down. However, it turns out the Arbitrum Foundation had already started spending the proposed $1 billion allocation before the proposal was ever put to the vote.

When Arbitrum was called out on this, they told the community that the proposal was only ever intended to ratify decisions already made by the Arbitrum Foundation.

In other words, Arbitrum is happy to leave its decisions in the hands of its token holders, but only as long as the Arbitrum Foundation agrees with them. In practical terms, it’s about as decentralized as Ethereum is.

Arbitrum’s ties to questionable market maker

The episode also shined a spotlight on Arbitrum’s market maker: Wintermute, a London-based digital asset hedge fund that received $40 million of ARB from Arbitrum as part of the $1 billion allocation.

Wintermute was in a good spot when heading into last year’s FTX disaster. It exploded onto the scene in 2021 (going from a profit of around $23 million at the end of 2020 to over $500 million by December 2021). In September of 2022, it was named by Justin Sun’s Tron as the official market maker of choice for the DeFi ecosystem.

As a result, Winermute was well-placed to be heralded as the next big thing in the wake of the FTX explosion in November. Forbes ran a piece on the fund and its founders in 2022, which read:

“With Sam Bankman-Fried’s hedge fund gone, crypto trading firm Wintermute emerges,” declared the headline.

“By deftly navigating crypto’s frontier markets and winning big on the collapse of Terra’s stable coin, Wintermute has grown into one of the world’s leading crypto trading firms. Now it must navigate a market littered with carcasses and landmines.”

As it turns out, the FTX comparison is unfortunate because it might be all too accurate.

Wintermute’s early success and growth were fueled by the Terra-Luna collapse. As Forbes tells it, Wintermute foresaw the collapse and the effects it would have on the wider industry: they designed an arbitration strategy in anticipation of the day when UST would depeg, whereby the firm would buy up discounted UST and then quickly redeem them for $1 worth of Luna, the UST sister token. It would immediately sell these on the market in order to net 10-15% on each trade, ultimately pocketing ‘tens of millions’ in profits. The scheme was even supported by Terra-Luna architect Do Kwon, who loaned Wintermute millions of UST to fund trading in hopes it would help with liquidity.

Naturally, this strategy meant that Wintermute was buying vast quantities of UST while all its holders rushed for the exits, ‘greasing the skids’ (as Forbes puts it) of the ultimate UST death spiral.

Forbes draws a direct line between this disaster profiteering and the whizz-kid capabilities of Wintermute’s founder and CEO, Evgeny Gaevoy. To borrow from Forbes’ comparison, if there is a Sam Bankman-Fried to be found within Wintermute, it will be Evgeny Gaevoy.

The Forbes article even talks about Gaevoy in the same way many outlets were gushing about Sam Bankman-Fried while he privately ran an Enron-sized scam out of FTX and Alameda. It quotes venture capitalist Jeremy Liew, who led Wintermute’s Series A funding round in 2022:

“[Gaevoy] ‘s very smart… it’s almost like the cliché of the extremely smart Russian mathematician type.”

In particular, Forbes draws a link between Gaevoy’s penchant for numbers and the wildly successful arbitrage strategy that precipitated the firm’s rapid rise to prominence.

Gaevoy even runs Wintermute alongside his wife, Marina Gurevich, who serves as the fund’s COO.

All that’s missing is an exchange of Wintermute’s own; the FTX to their Alameda. It turns out that’s in the pipeline already: the Forbes profile has Gaevoy on record with Wintermute’s ambition to launch an exchange ‘aiming to fill the void left by FTX,’ as though the FTX fraud wasn’t a sign that running a hedge fund out of the front door and an exchange out of the back door is a red flag.

Perhaps Gaevoy could get Gurevich to stay behind and run Wintermute while he gets the exchange up and running—sound familiar to anyone?

Even Tron’s anointment of Wintermute as the so-called market maker of choice for DeFi is beginning to look bad. Last month, Tron founder Justin Sun was charged by the SEC for illegally selling unregistered securities as well as wash trading in order to buoy asset prices. Never mind that in September 2022, Wintermute’s own DeFi operation lost $160 million of client funds as the result of a hack.

So, we have a twice-scandalized DeFi market maker who made its bones taking in UST from Do Kwon to artificially buoy UST liquidity in its death throes, now taking in vast quantities of ARB to play ‘market maker’ for Arbitrum, who has just been busted for lying about being decentralized (after the ARB tokens have already been circulated among the general public, mind you). That’s a lot of smoke surrounding a company that already has a lot in common with FTX.

Notorious digital asset researcher certainly agrees, and thinks that all this smoke signals another FTX-style scandal is right around the corner:

In fact, after it was revealed that 40 million of the to-be-allocated ARB tokens had already been distributed, but before anyone knew who to, Bitfinex’ed correctly guessed that the recipient would be ‘market maker’ Wintermute.

Bitfinex’ed is far from the first to air their suspicions over Wintermute. In December, an anonymous Twitter trader took aim at Wintermute and, in particular, its management, saying that the firm is a ‘shitshow,’ ‘staff with real experience come for a month and are quickly gone’ and ‘leadership is not liked by the staff.’ The thread got little attention then and has since been scrubbed from Twitter—an archived version is available here.

For both Arbitrum and Wintermute, the next few weeks and months will be highly revealing. How will the ARB token holders respond to Arbitrum’s decision to force the $4 billion allocation proposal through against their wishes? What tricks might Arbitrum pull to react if the ARB token continues to sell off, and will the ARB community sanction them? And where does Wintermute go from here, having already been given the SBF treatment in the media and now market-making for what appears to be yet another DeFi scam?

Whatever the answer to these questions, if Wintermute announces the launch of its own derivatives exchange soon, we’ll have a pretty good idea of what comes next.

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