Flare Finance is claimed to be a privately funded project building on the Songbird Network and Flare Network. Their media suggests that it is being built as “institutional-grade DeFi” including a coherent suite of products thought of to be DeFi primitives including decentralized exchange, loans, farming, insurance, and wrapping protocols. These products utilize successful projects on other chains forked onto the two networks named above. The difference is they aim to bring them all under one roof of governance with the governance tokens able to earn yield in the fees collected from all of the protocols.
The forking of protocols is nothing new and is commonplace among alternative layer one blockchains. As an aside, I believe the idea to house these under one set of governance could have synergistic effects between them rather than each having separate governance and tokens if built independently. I also think driving protocol revenue to governance token holders is a good idea to drive demand for those tokens.
Flare Finance launched their first iteration of these protocols on Songbird Network, which is to be the canary network to the future Flare Network. Canary networks are opined as experimental playgrounds using real-world value to test out protocols in ways that a normal test net cannot. This is because test nets require no real-world value, so user behavior operates differently than when actual value is at play like on a canary network.
Over the past month or possibly more, Songbird community members discovered an incorporated entity in the Netherlands by the name of Flare Finance, B.V. There are three directors listed by the names of Anthony Rene Colon, Jr., Nikitas Christodoulakis, and Bretton Lee Wayne Whervin. Please see the link below to confirm this.
In an AMA held on 3/9/22, Nikitas and Bretton disclosed that these are the founders of Flare Finance, which had previously been a pseudo-anonymous organization. The discovery of the individuals alone is not particularly noteworthy. However, the CEO and Co-Founder of the project, Anthony Rene Colon, Jr. (aka Crypto Frenchie), has been found out to have had previous litigation against him for felonies per public California court records, allegedly. Please see a recording of the AMA below.
Additionally, in the AMA, Nikitas and Bretton confirmed the identity of Colon and that there was or is some type of litigation against this individual. They claim to not know what exactly the charges are for and that their first knowledge of them came when the Songbird community members began bringing this up. I personally have reviewed the court documents in question upon writing of this but will not comment further or post them as I am not sure of the legal ramifications.
The AMA also revealed some of the past work between Bretton and Anthony. My understanding is they at least worked on two projects together by the names of Muse Protocol and Bitcoin Air. Muse was to be a decentralized music and royalty service. While Bitcoin Air was supposed to be a fork of Bitcoin utilizing a stablecoin issuance methodology like that of LUNA/UST from the Terra project. Both projects no longer exist. Bretton describes what they are and what happened briefly in the AMA. Please see below for all links I have found about these projects.
My understanding is that Bitcoin Air was a combined fork of Bitcoin and Peercoin. The tokens involved with the project were airdropped in a similar manner to other blockchain forks like Bitcoin Cash. I have not seen any evidence to this point that a sale of tokens occurred with Bitcoin Air.
Muse Protocol had a planned ICO that Bretton said never occurred as they ended up shuttering the project. There is conflicting evidence posted online by community members on whether this has occurred. A website that tracks ICOs makes it seem like maybe the ICO did occur. However, I found the token in question on the Tron block explorer and it seems like the vast majority of tokens never were allocated per their announcement infographic. All links for this are shared below. I am not a professional block explorer researcher so will leave all this up to the reader. Several addresses matchup with the original allocations including the public sale which looks to have never been distributed.
Also, during the AMA, the team stated that after having internal deliberations with shareholders and legal advisors on the Colon situation that he has stepped down from his position as CEO. This means Bretton and Nikitas would be the only remaining founders on the team. I have included some links below to help any people to find more information on the legal proceedings in question if they wish.
I also will point anyone interested in other information to this twitter account below who can do much deeper digging than I am capable of. He has also been very helpful in informing on what all actually transpired so I could put this out.
Certainly, it is bad that one of the Co-Founders has had serious legal troubles in the past especially when dealing with people’s money. For anyone not totally aware of the situation, I hope the above is helpful in forming your decisions on what you want to do going forward.
Alright now that the allegations and team history have been addressed, I will be diving into what has transpired with the actual protocol. This will include my opinions on all that has happened and outlook going forward.
To date, three protocols have been launched on Flare Finance’s iteration on Songbird Network. These are FlareLoans, FlareX, and FlareFarm. I have used all three extensively over the course of a few months. FlareX seems to work correctly as intended. I have been quoted accurate rates for swaps and the returns/losses on providing liquidity have been around my expectations from models I created to track it. FlareFarm also seems to work correctly as I have staked LP tokens for DFLR and assets like SGB for SFIN. FlareLoans never improperly liquidated or redeemed me based on the metrics available to me at any given time either.
However, the main issue with the protocols I have faced is that I have not always received the appropriate amount of SGB from the FTSO delegation rewards each epoch. In some cases, the team was able to get me my appropriate allocation of rewards after informing them. Eventually though, the problems started to persist more and more to the point where I stopped asking and decided to take a different approach outlined in this tweet thread below.
In the past couple of epochs, Flare Finance has been unable to appropriately distribute FTSO rewards amongst the accounts depositing SGB in any of their smart contracts. The team has said they are actively working on a fix and will distribute the missing epochs once it is fully audited. We will have to see how this works out and how much longer it takes. If you are frustrated by this, you have a simple choice to take back control of your own delegations within the wallet you use rather than Flare Finance smart contracts.
The biggest issue with the project in my opinion is residing from the FlareLoans stablecoin issuance protocol. While this was necessary to have to launch any of the other products on Songbird, it has given users the most grief. FlareLoans is a fork of Liquity protocol on Ethereum, which has actually been successful since its launch in Spring 2021. However, Liquity launched during positive market conditions and in an extremely robust DeFi ecosystem on Ethereum.
FlareLoans worked fine at first although there have always been complaints due to what I see as a lack of understanding on how it works related to the redemption mechanism to maintain the peg of the stablecoin, CAND. The EXFI airdrop and suddenly poor crypto market conditions resulted in immense volatility and downward spiral for this protocol. Additionally, the lack of arbitrage routes to maintain the peg caused problems to pervade here more than they would for other protocols on other networks.
Light FTSO pointed out in a thread linked below how the FlareLoans product was being used to move the price of SGB and then eventually EXFI. I contested this claim in another tweet linked below. The reason I felt this way was it was described as an exploit which I believed to be helpful to the DEX markets as it was the only way to conduct arbitrage at the time and tighten the DEX/CEX spreads.
The way this arbitrage would work is as follows:
- User recognizes that SGB/CAND price on the DEX is discounted at more than 10% compared to the price of SGB/USDT on a CEX.
- User opens a collateral position right around the minimum 110% collateral to borrow as much CAND as possible (team has since raised this to 120% making this arbitrage harder to conduct).
- Since the spread between asset prices on the DEX/CEX is more than 10% and the buffer required on FlareLoans is only 10% above the loan value, the user can realize a profit.
- From here, the user would purchase SGB with the borrowed CAND on the DEX at a cheaper price than a CEX. This results in the price of SGB increasing on the DEX.
- Then the user would transfer the SGB to an exchange like Bitrue to sell the SGB for USDT at a higher price than on the DEX.
- The user profits when the spread between the CEX/DEX is greater than 10% as their loan will get liquidated resulting in a 10% loss. However, if the spread is like 20%, then they would have a net profit of 10% less trading and transaction fees.
- This action moves the price of SGB on the DEX up and the price of SGB on the CEX down thus completing the arbitrage trade.
As a side note, this is something that happens in all crypto markets and what keeps prices from various entities in line with each other. I do not know who was conducting these arbitrage trades. I will continually refute this is the sole reason the SGB price decreased. It may have contributed but I think bigger factors include slow development of other core protocols to be launched on Songbird Network, the EXFI snapshot volatility, BTC price topping out and falling more than 50%, and others.
I think the biggest issue with the FlareLoans platform is the fact that it bugged out when the stability pool ran out of CAND to liquidate loans with. This has resulted in a large portion of CAND being severely undercollateralized and thus not able to maintain a peg anywhere close to $1.00. With CAND being way off its peg, it’s pretty much impossible for a DeFi ecosystem to function properly until its either rectified or another robust stablecoin is introduced to alleviate the stress.
I don’t even know how you can solve the issue with CAND unless SGB/EXFI has significant enough price appreciation to recapitalize it or if there is a capital injection of some kind. I wasn’t particularly satisfied with the team’s answers on how it will be solved either. For me, it is extremely risky to be exposed to CAND at this time. However, there is a play here if you think CAND will return to its peg. Please see the exchange link below for the current trading price of CAND.
Ultimately, I do not know what will happen with the Flare Finance iteration on Songbird Network. There is an immense number of problems that maybe worked through or maybe not. Many projects have failed in this space just like startups do in the real world. Some are malicious and some are not.
In hindsight, it seems like the team has taken on way too much, way too fast. If I were in charge and had a second chance at launching, this is how I would go about it.
- FlareLoans should not go live until there are sufficient exchanges listing assets involved.
- FlareLoans should not go live until there is another proven stablecoin either bridged or issued natively on the network.
- FlareLoans should not list any collateral assets until they have sufficient liquidity and lessened volatility which takes time.
- FlareX, FlareFarm, APY Cloud, and Governance Staking Pool should be the priority before anything else is introduced to the ecosystem. The team has proved that farming, liquidity providing, and swapping has worked appropriately. Additionally, the APY Cloud and Governance Staking Pool should be in place before any governance tokens are generated otherwise there is nothing substantive to support their value.
- The governance tokens should come out at much more realistic valuations unlike SFIN dropping at a fully diluted value of billions.
- The snapshot and airdrop of the secondary governance token should either be conducted much later than a month or two after network launch or done in some other manner.
- The team should investigate newer forms of liquidity mining like token lockups of governance tokens for higher yields.
Now all of this is easy to say for myself after watching everything unfold for months. I certainly didn’t realize every which way things could go wrong. Also, let’s say that the team took the path to launching on Songbird Network I laid out above. They would still have not launched a single thing. Now think about how pissed people are at Flare Network for taking their time to get it right. This certainly would have been thrown at Flare Finance for waiting as well. We have a two-way street here between the builders and the community. We are both at fault for different reasons.
Based on all the above, my trust and some of the communities is broken in Flare Finance. I will not put any significant amount of capital on Flare Finance in the future until trust is rebuilt (if it even can be) and all the protocol level issues are fixed for a long enough period. Additionally, I will need to see all security audits, decentralized governance, and open-source code implemented.
When I participated heavily in the protocol, I knew of these risks and was willing to take them to earn DFLR. The markets, geopolitical issues, and revelations about one of the founders has significantly lowered my risk tolerance to the point I am tapped out. I understand the risks of anything I deploy capital into and own my failures and successes. I never risk more than I can bear to lose either. I think these are highly important especially in an industry as risky and volatile as cryptocurrency.
In my quest to give back to the XRP community that had given me so much, I wanted to share research and education about exciting opportunities available to us with the inception of Flare Network. I did not understand until recently how much trust was being put into me by those in the community which care to pay attention to what I share. In hindsight, I probably never should have talked about an anonymous project publicly even if I felt they were genuine. I think we can chalk that up to naivety, ignorance, or whatever you want to call it.
When Mickey started his channel and I eventually joined him, we thought Flare Network would be live in June 2021. Certainly, it hasn’t happened yet and I still don’t know when it will. I am still very much excited about Flare Network as I believe they are building tech integral to the future of the blockchain space. Ultimately, I cannot know how successful it will be. I do think holders of F-Assets have a unique opportunity to get into the ground floor of a potentially huge blockchain by participating in the minting of F-Assets and FTSO delegations. Anything else on top of it is just gravy.
Back to Flare Finance, Nikitas and Bretton have denied knowing about Colon’s past until the past month or so. I have not seen any evidence that they directly knew about it, but it also doesn’t mean that they haven’t known about it. I won’t accuse them of anything I cannot prove. There is also an argument that anyone building products having to do with money should do enough due diligence to insure who they are working with is above board. I leave the judgements on this up to the reader.
Ultimately, I am not aware that Flare Finance has stolen any money from anyone in the Flare/Songbird Community. Certainly, if they were going to rug pull, they could have done so when there was more than $100M in value within their smart contracts. I can still see a path forward for the team, but it will require a lot of time and repairing of trust to do so. Certainly, they will not regain it with many people. If you have problems with them, then just vote with your wallet and don’t allow your value to be used in any of their products. This is one of best parts about blockchain, which gives us the ability to make decisions and act within a moment’s notice.
Now, for me, people throw accusations against me every single day online at this point. I cannot know if it’s out of frustration, tiredness, or if they truly feel I have wronged them in some way. I also cannot refute that this has been affecting me for a while now. My intentions have always been the best and I have never taken money from a single project to promote them. I also feel like I have always shared the risks at hand, but that doesn’t mean my message has ever gotten through. Certainly, if I combed through all I have done publicly online, I probably wish I would have gone about things differently. But here we are with lessons learned.
Thanks for reading this essay of a piece but it includes everything I have been thinking about for a while now. I planned to write something along these lines later as things played out further but the revelations about Flare Finance demanded I address this more quickly. I am worn down and need to re-evaluate how and if I will continue to be a public part of our communities in the way I am today. Best wishes to everyone in these crazy and uncertain times.
~ Patty XRP (@theREALpattyxrp)