Everyone is doing it, says ChainArgos – Cointelegraph Magazine

Polygon is facing claims that more than 400 million MATIC are missing from its stake — but most other projects haven't exactly followed their publicly announced token distribution strategies, according to blockchain data firm ChainArgos.

The CEO of the Singapore-based company, Jonathan Reiter, told Cointelegraph that he has yet to come across a company that has fully complied with the token distribution plans initially presented to investors.

“You certainly see questions about broader projects and whether or not token allocations make sense,” Reiter said.

“Essentially, every project we've looked at so far hasn't been done right.”

Making matters worse for investors, legal experts say the practice is probably not illegal in most cases, as white papers are not classified as contracts like investment prospectuses. Civil action may be possible in some cases.

ChainArgos is best known for exposing the lack of management of Binance USD (BUSD) last year, a stablecoin by Paxos with Binance branding. The world's largest cryptocurrency exchange has admitted that the stablecoin has not been backed by more than a billion dollars on several occasions.

ChainArgos sued Polygon.

ChainArgos accused Polygon in a research report of misappropriating at least 400 million MATIC tokens for its staking program. Polygon is an Ethereum scaling network whose native token, MATIC, has the 16th largest market capitalization at $7.34 billion, according to CoinGecko.

Polygon It launched in 2017 as a proof-of-stake sidechain to help scale Ethereum and is now expanding significantly into an ecosystem of zero-knowledge-proof solutions. MATIC's market cap was $20 billion at its peak.

Polygon has set aside 1.2 billion MATIC at launch on its website, or 12 percent of the total supply of 10 billion. This 12% was to be gradually transferred over time to the stock address, starting with 4% or 400 million MATIC at Binance's first exchange in April 2019 (IEO is similar to the first coin offering but will be held on the exchange).

According to the Polygon project roadmap shared by Binance, the transfer of 12% MATIC to staking addresses was to be completed by December 2021. But blockchain transactions suggest this was not the case, as only about 790 million MATIC were transferred from the Polygon Foundation. Storage address.

In its report, ChainArgos alleged that the “lost” 4% could be related to a transaction that took place in April 2019.

Polygon's staking website reports that the network has so far issued 894 million MATIC rewards — more than the 100 million the Polygon Foundation has transferred to staking addresses — prompting further questions.

Cointelegraph directly contacted three Polygon executives and the company's press office for comment on the allegations. The company did not respond.

In addition to MATIC allocated for staking, Polygon token distribution is about 3.80% of the total supply to private sales, 19% to Binance Launchpad sales, 16% to the group, 4% to advisors, 21.86% to Polygon Foundation, and 23.33% to ecosystem and market.

Enig-MATIC token allocation

Let's dive deeper into the chain to see what happened.

Upon deployment in April 2019, the entire MATIC supply was transferred to Polygon's proprietary contract. This address only sent MATIC to the Polygon Foundation contract and currently holds over 273 million MATIC.

Blockchain transaction records indicate that polygon token allocations, including transfers to staking contracts, are made at the base address.

The Polygon Foundation initially received 3.23 billion MATIC (32.3% of the total supply) from the contract awarded in April 2019.

He then transferred 300 million MATIC to 0x2f4Ee65D536c5a2Dd72004778167B30aeCb8719C (which we call 0x2f) in several transactions. Binance 33, currently the 12th-largest MATIC address with 92 million tokens, is traded almost exclusively on Polygon-linked accounts.

The foundation's address also sent 467 million MATIC to the Polygon Marketing and Ecosystem address, which gradually transferred the total of this amount to 0x2f. 767 million MATIC received by 0x2f flowed over time to “Binance 14” and “Binance”.

While the address is untagged on blockchain watchers such as EtherScan, 0x2f's transaction history shows that the account is controlled by, or closely related to, the Polygon Foundation.

If true, this means that a total of 767 million MATIC, including 300 million of those allegedly linked to the missing staking tokens, flowed into Binance exchange wallets, raising suspicions that the rewards were sold by Polygon.

However, it is possible to transfer the tokens to a separate wallet as the foundation holds these tokens on the exchange or to transfer the funds to the stock contract.

In February 2022, 0x2f received 10 million ALPHA ($3.57 million) from Alpha Venture DAO, which was then sent to Binance. A few months later, Alpha and Polygon partnered to launch the Web3 Accelerator with a second incubator program shortly after.

“Even if they sit on the exchange and then go out to another wallet, if it's a note process, in theory, that's possible. There's no way to know if it's sold on Binance,” Reuter says.

Like “Binance 33” which seems to be connected only to Polygon and still contains a large amount of MATIC, “Binance” and “Binance 14” are used to serve the clients of the exchange, including Alameda Research, which has made about 17 billion dollars through its address. , and Three Arrows Capital traded $7.3 billion, according to Arcam Intelligence.

Binance ICO abuse

Allegations about Polygon's missing 400 million MATIC may highlight a larger trend of projects not being completely honest about their token distributions, or ICOs.

For example, an investigation by Forbes last year found that Binance exaggerated the success of its summer 2017 ICO for BNB, the exchange's native cryptocurrency with a supply ceiling of 200 million tokens.

According to Forbes, Binance did not release 120 million BNB in ​​the ICO as the white paper stated, but only moved 55 million tokens, the rest of the total supply of tokens is 145 million BNB, which was not touched by Binance's deployer address more than once. One year after the conclusion of the ICO.

The investigation also revealed that Binance quietly doubled the amount allocated to investors during the ICO to 40 million BNB instead of the 20 million tokens stated in the white paper.

“If you consider a white paper to be a legally binding document, they're going to break it,” Jonas Rae, co-founder of blockchain litigation firm Lite Capital, told Cointelegraph. However, he added that crypto white papers are not legally binding documents like shareholder agreements.

“A white paper is considered to be used only for information purposes, and it represents a snapshot of the situation at time X, and it is understood that this situation changes with the project.”

Although token activity suggests a low ICO, Binance founder and former CEO Changpeng Zhao hailed the event as a success in a LinkedIn post, claiming to have raised $15 million from 20,000 users, and BNB is trading at $0.15 per token.

Forbes says the company is likely to raise $1.65 million from 2,000 users.

However, the ICO flop could be a blessing in disguise for Binance. If the Forbes investigation is correct, the company would have left 65 million unsold BNB in ​​its war chest, the price of which has risen from $0.15 to cross the high price of 686 per token in May 2021, according to CoinGecko. BNB is trading at $292.62 at the time of writing.

Improper Token Allocation Legal Status “Dark”

Polygon is not a public company and has no legal obligation to disclose its financial information to the public. But unlike traditional businesses, crypto companies' token holdings can be audited by anyone thanks to the transparent nature of the blockchain.

Winston Ma, an assistant law professor at New York University, believes that cryptocurrency issuers have an inherent responsibility to ensure the integrity of token schemes. However, he added:

“It's very boring from a legal point of view these days.”

According to Lite Capital Ray, investors can take action if they believe they have been wronged by a project that has not followed its token allocation strategy.

“They will have a claim, but they have to show financial damages for that,” he said.

Despite ChainArgos' allegations, the Polygon Network has distributed more than 894 million MATIC to at least 105 network validators through its staking program, marking the most consecutive rewards distributed to date. More than 3.535 billion MATIC ($2.6 billion) shares were held as of January 23, according to Polygon.

Ma adds that investors and regulators are becoming increasingly aware of risks such as staking in decentralized financial applications.

“In the traditional financial world, people ask for representations and warranties from partners, like in this case, issuers. Down the road, you see investors asking for representations and warranties,” says Ma.

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John Yun

Yohan Yun is a multimedia journalist who has been reporting on blockchain since 2017. He has contributed as an editor to crypto media outlet Forkast and covered Asian technology stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking and experimenting with new recipes.