Episode 118 – How to spot a scam – Crypto Critics' Corner

Cas Piancey and Bennett Tomlin share their panel from Consensus 2023 with David Z. Morris and Hyungsuk Kang.

This episode was recorded on April 28th, 2023.

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English Transcript

00:00:05:00 - 00:00:23:22
Bennett Tomlin
Welcome back, everyone. Today's podcast is going to be a very special episode. As we mentioned last week, we get to travel down to Austin for Consensus, where we were on a panel about how to spot a scam. This panel was arranged and moderated by David Z. Morris as the creator of the Crypto Crooks podcast that you should absolutely check out.

00:00:23:28 - 00:00:37:19
Bennett Tomlin
And now, thanks to the Crypto Crooks podcast, we have the audio for that panel and we're allowed to share it with you. So without further ado, please enjoy. How to Spot a Scam A Panel from Consensus 2023.

00:00:37:24 - 00:01:01:27
David Z. Morris
All right, thanks, and thank you for being here. My name is David Z. Morris as I want to introduce my panelists. Starting with Cas Piancey on the end there and Bennett Tomlin and Casand Bennett are the hosts of Crypto Critics Corner, a fantastic and widely respected and widely listen to podcasts that digs into some of the, let's say, less sustainable elements of the crypto ecosystem.

00:01:02:11 - 00:01:27:14
David Z. Morris
And then we have a really, really special guest here, which is Hyungsuk Kang, who is currently working on the Standard protocol but is here today because he is a former employee of TerraForm Labs. And before the FBI rushes the stage and takes him away in handcuffs. He is here today because he left TerraForm in. I pardon me if I get this wrong, but in June of 2020.

00:01:27:28 - 00:01:30:22
Hyungsuk Kang
It was November 2020.

00:01:31:00 - 00:01:54:15
David Z. Morris
Okay. So because according to him, he saw what was going on and didn't like it. So we have somebody who is inside paid and got out after getting a whiff of not such great things going on in the Terra and Luna ecosystem. And to briefly give my own resume, I'm the host and creator and writer and producer of a podcast called Crypto Crooks that looks into the history of major scams.

00:01:54:21 - 00:02:17:15
David Z. Morris
It's awesome. And you should all listen to it. Hyungsuk is a very important guest on our second season about Luna. I'll ask Cas and Bennett to talk a little bit about some of the stuff that they've been ahead of the curve on, but I by looking at Terra Luna's tokenomics and with help from a lot of other people's work, I wrote an article about the Luna Death spiral two weeks before it happened.

00:02:18:06 - 00:02:43:18
David Z. Morris
So that's my pinned tweet forever is I predicted it and it went down exactly the way it was going to. So our discussion today is, you know, how we, as you know, weather skeptics, builders, journalists are able to spot the sort of bad signs of various kinds. And we'll get to all of the different stuff. But I want to start with Jung Sook, because you're you're really the star of the show here.

00:02:43:28 - 00:03:00:16
David Z. Morris
And I want you to talk a bit just briefly and sort of maybe at a high level about what you saw at TerraForm from the inside that really gave you pause and made you reconsider your your commitments there and move on and do something else.

00:03:01:01 - 00:03:11:05
Hyungsuk Kang
Sure. It took four months for me just to move from Terraform to the other jobs because it was so terrible. So I'm just going to go across that.

00:03:11:06 - 00:03:14:04
David Z. Morris
Just to clarify. He was only there for four months. Four months?

00:03:14:12 - 00:03:35:28
Hyungsuk Kang
Yeah. Because there was so many flags out there. So I'm just going to go through some chronological order. So. So at the first day of Terra, so it started just meeting with the core team member called Nicholas Partners. I think it was a great guy and that guy was just sitting on a putting his leg on a desk and then just doing nothing.

00:03:35:28 - 00:03:57:04
Hyungsuk Kang
So I was just asking, so what's his role? And then he said, Is she just that that is those friend? And in the paper he was supposed to be the head of the research. So I just kind of felt weird. And then he was kind of throwing a tantrum on that. Koreans are kind of annoying because they can understand what he says.

00:03:57:04 - 00:03:58:02
Hyungsuk Kang
Yeah. So.

00:03:58:22 - 00:04:01:01
David Z. Morris
So not the most mature person perhaps.

00:04:01:01 - 00:04:21:04
Hyungsuk Kang
Yeah, it was. He was not so, like, very much like, though. Quite so. Yeah. So I went to the CTO, which is the oldest guy in the office, so at least I thought that guy would actually have a common sense. So I went to him and then says, Oh, maybe don't you think we should kick him out? And then he says that what he said was very funny.

00:04:21:04 - 00:04:32:11
Hyungsuk Kang
It was there used to be a internal lawyer hire from the company, but then when Do Kwon came in, he fired that woman.

00:04:32:29 - 00:04:34:23
David Z. Morris
So our lawyers.

00:04:35:06 - 00:05:11:11
Hyungsuk Kang
No more lawyers. So that was the first red flag. Yeah, I had to find another job, but it just takes time, so I had to build something. So it's a work ethic. So I started to work on TerraForm Labs projects, but the managing so the managing structure was composed of just one project manager who doesn't really know much about blockchain, but just try to listen to Do because that manager was just actually a kind of very friendly with Do instead of just having a real skill and infrastructure team was where I was at.

00:05:11:11 - 00:05:42:07
Hyungsuk Kang
And those were actually very much working hard. They were kind of solid developers, but they did not have any criticism on what the manager was trying to build. So unlike them, I was kind of different because I always wanted to make blockchain pretty much real thing. I wanted to be the observed as the real builders. So I used to ask a lot of questions and one of the questions I started to ask on the mirror was that mirror protocol?

00:05:42:07 - 00:06:08:07
Hyungsuk Kang
Yeah. So back then, like mirror protocols once was called the harvest Harvest was supposed to be a platform where Korean stocks are listed and pretty much it is on the blockchain. And then they use that stock to I think they were trying to become like a Robinhood in Korea using the Cosmos blockchain. But then of course the Korean legal system did not allow that.

00:06:08:07 - 00:06:45:04
Hyungsuk Kang
So they were kind of having a problem. Maybe they were trying to use Daniel Shin to just to pass with the he's you know, he's from the Samsung family. So I thought they were trying to parcel with him, but I think they kind of failed. So so I got to kind of got frustrated. And I just called the ECJ one of our one of the Tfl's internal employment and said that why not just make a makerdao structure with the synthetic stocks just like Synthetix did and then just try to make a uniswap out of it and then maybe use governance to list your assets and then when I was saying that what E.J. was doing,

00:06:45:04 - 00:06:59:00
Hyungsuk Kang
he was recording my voice and he was taking picture of my like blackboard. And then even after it died, he went to Do Kwon and said something about it. And after one week a mere white paper was born. So there was a.

00:06:59:00 - 00:07:01:28
David Z. Morris
You wrote the mirror white paper. Yeah, but intentionally unintended.

00:07:01:28 - 00:07:02:18
Hyungsuk Kang
And I saw I was like.

00:07:02:18 - 00:07:21:23
David Z. Morris
Oh, so let's let's leave it there for now. I want to hear Cas and Bennett talk. I think what I want from you guys is each of you choose one and let's stick to projects that have already failed or been prosecuted so that we don't get in trouble here. But what is your proudest intellectual moment of spotting something that was definitely a scam?

00:07:22:04 - 00:07:33:24
David Z. Morris
But also I want proudest intellectual to be like over here. But I also want funniest obvious scam to be a factor in your choice here. So. So what's the the funniest, smartest scam that you've spotted?

00:07:34:05 - 00:07:36:12
Cas Piancey
Bennett Why don't you go with the smartest, I think.

00:07:36:29 - 00:08:00:24
Bennett Tomlin
Luna Yeah, those are those are two different categories for me. I've got answers for both going for the act. The one I felt the smartest was probably Terra is like two or three months before the collapse. I wrote a big research report where I went over the mechanism and where I raised issues with the long term stability of the protocol and about those lies regarding a transparency around like project dynamics and stuff like that.

00:08:01:05 - 00:08:16:13
Bennett Tomlin
And then like two weeks before it collapsed, Cas and I did a podcast episode going over that same thing basically and talking about it, and then it collapsed and our timing looked like we were preternaturally good at making predictions. So that was definitely the one I felt the smartest.

00:08:16:28 - 00:08:43:22
Cas Piancey
Yeah, I think the funniest for for me personally, it was probably there was a gentleman named Dong Zhao who helped create several tokens. He worked for a company called RenRenBit. He was a Chinese national kind of globetrotting around making millions and millions of dollars on on his on his cryptocurrency exchange. He also was working a lot with Bitfinex, helping them create some of their their tokens, helping to create something called Tether Yuan.

00:08:44:02 - 00:09:02:17
Cas Piancey
So he was kind of a pivotal leader in the space back in 2018. And I basically told him, he said, I'm going to be going back to China soon. And I said to him, I think that's a very bad idea because you're going to go to jail. You shouldn't do that. And he was like, You're an idiot. He responded to me and said I was an idiot.

00:09:02:28 - 00:09:07:11
Cas Piancey
And then he went back to China and he ended up in jail. So he's sitting in a jail cell now, as far as I know.

00:09:08:00 - 00:09:34:24
David Z. Morris
Yeah. Okay. I, I don't know what that's funny, but. But to each their own, I suppose so. One of the one of the things that we address at some length in the Crypto Crooks podcast is that the fraud that happens in the space is actually most of the time, not just down to a malicious founder. And there are also venture capitalists who play a role, intentionally or not, in a lot of these things.

00:09:35:08 - 00:09:48:06
David Z. Morris
And one of the most interesting things that I learned from Hyungsuk talking to him was sort of the role that venture capitalists played even inside TerraForm Labs in, frankly, silencing critics. Can you talk about that for a bit?

00:09:48:12 - 00:10:13:03
Hyungsuk Kang
Yeah, so sure. From the insiders. I heard that the second largest account that actually deposited in an anchor was hashed and that venture capital was actually making up the TVL, I believe. And even in that prosecution report, it writes that a certain VCs, even though they claim as like a victim, they were able to earn an enormous amount of profit.

00:10:13:13 - 00:10:19:19
Hyungsuk Kang
So I believe that that view I'm not sure if it's hashed, but like some of them are not.

00:10:19:19 - 00:10:20:04
David Z. Morris
Speculate.

00:10:20:04 - 00:10:30:02
Hyungsuk Kang
Too much. Let's not speculate too much. Yeah, yeah, but okay. But not they may act like a victim, but they were actually like the guy who profited from the Ponzi scheme.

00:10:30:02 - 00:10:38:00
David Z. Morris
And to be clear, that's because these VCs don't have lockups on their tokens and were able to sell at the top of the market before the crash.

00:10:39:10 - 00:11:00:23
Hyungsuk Kang
That's true. Yeah. So basically, I think it's like one of the problems of PCs in crypto right now. I think VCs are now not really kind of focusing on the revenue that the crypto project is bringing, but instead they only try to focus on the when lockup will be this able and that they can actually sell the tokens so that they can immediately bring back the money to the LPs.

00:11:00:23 - 00:11:04:09
Hyungsuk Kang
So saying that, oh, we just indexed or we just like hundred X or something. Yeah.

00:11:05:28 - 00:11:21:26
David Z. Morris
But you specifically and this is in the show you heard people citing venture capitalist as a reason that you, as a builder, should not be asking difficult questions about the protocol itself, like the big names that we're backing though.

00:11:21:26 - 00:12:01:21
Hyungsuk Kang
Yeah. So, so here's a thing. So as VCs have a money, so much power in this, so like here's a Korea. So we in Korea, there's only the biggest crypto VCs out there called Hash, but then they have so much power and they have so much resources, so those who are hired and these Korean blockchain companies have to watch out because if these VCs do not like them, they cannot pretty much get another job in Web3 because most of the projects or most of the companies or the connected with those VCs are going to pretty much going to reject them.

00:12:02:00 - 00:12:27:29
Hyungsuk Kang
Yeah, so I was not the case, to be honest, like because I'm pretty much good at English, so I could actually meet about three recruiters out there and then three to get a job, but not for those Native Koreans who are just kind of believes that this web3 could actually freedom. But it wasn't actually not like it's basically their jobs their lives are basically on the not VCs control.

00:12:28:03 - 00:12:47:12
David Z. Morris
Yeah wow that's bleak. I think we're going to go into kind of a bit of a more free for all segment here. And what I want is just I want to discuss and have ideas. We're all people who have have seen red flags and acted on it. So I just want to hear from everybody, like, what are the red flags that you've seen out there?

00:12:47:12 - 00:13:07:16
David Z. Morris
What do you look out for? And particularly, I think, you know, not that there's a dichotomy, but just for example, you know, are you looking more at fiscal details at financial engineering or is it more holistic stuff like character, like self-presentation, like communication, cash? You look like you're on the edge of your seat.

00:13:07:16 - 00:13:32:23
Cas Piancey
Well, I think that you're you probably know that the answer is somewhere in between, right? Like, it's not going to be one or the other. I think a prime example of this would be Celsius where I was calling that out almost from day one, because when you looked at the APY that the air that they were offering and the interest rate that they were offering on there, the yields that they were offering on holding their coin, on staking their coin, on using their platform, it was obscene.

00:13:32:23 - 00:13:50:26
Cas Piancey
Like you're talking about 20% yield, you're talking about 25% yields. That doesn't make any sense when you look at what you get when you put money in your bank. Right. But then also you can look at the founder, you can look at Alex Mashinsky and he's making these insane claims on his website where he's like, I invented voiceover Internet protocol.

00:13:50:26 - 00:14:08:16
Cas Piancey
Like I invented things that he definitely did not invent. Like 100%. You can look at it and be like, Oh, this guy's just creating a fictional universe where he made up all this, all these amazing products. So, yes, there's the obvious stuff where you can look at rates, you can look at how the platform is run in the promises they're making.

00:14:08:23 - 00:14:14:27
Cas Piancey
But you obviously have to look at the people in charge, too. And I think Do Kwon, another good example of that for me.

00:14:15:09 - 00:14:34:01
Bennett Tomlin
Often when I start to get into like the specific financial mechanisms and stuff, it's because there was some other red flag that prompted me to go there. So like in the case of Terra, it was this extravagant promise of this 20% yield. And as soon as you scratch that a little bit, you see that TerraForm Labs is paying to refill the yield reserve.

00:14:34:07 - 00:14:54:29
Bennett Tomlin
And then in order to do that, they're continuing to like, sell Luna. And so then from there, once I start to see this little bit of inconsistency, I go a little bit further and you see like the promise transparency around the project on unlocks, for example, and the reports that never came on those. And then that's a red flag because now there's like I've got this example of a public statement being made and not followed through on.

00:14:54:29 - 00:15:12:19
Bennett Tomlin
And so that's when I genuinely find it worthwhile to begin digging into the more financial side and looking at the actual mechanisms. And that for me is more about like proving out that it's a scammer fraud. Like after you've identified the red flags, that's where you really start to dig in and go, Yeah, this part does not work and cannot work that.

00:15:12:22 - 00:15:38:13
David Z. Morris
That's a really good point that you do have to dig further. And and I also, I think you identified something that a lot of people will just hand way of very quickly, which is, you know, public statements that are not followed through on. And I think the current owner of Twitter has has done that a few times. And I think that's also an example of people, you know, maybe not seeing that red flag willfully jokes, whether luna or anything else, just in general in crypto, what have you found has been bad signs.

00:15:39:04 - 00:16:07:13
Hyungsuk Kang
So another bad sign. Let's talk about the basis cash before USD has been launched. So there was a time when Do Kwon was just look so sad and just starts to like yell at is Meyer saying the ampleforth to scam or base money scam and then I was wondering what they were doing and pretty sure he was researching on algorithmic stablecoin and then he proposed like an internal hackathon.

00:16:07:13 - 00:16:31:19
Hyungsuk Kang
So at that time I was, you know, I was complaining so hard on anchor and mirror that it could not be sustainable. Maybe just working on just for a day to make a product would actually satisfy me actually working here. So I just kind of accepted that. But when I made that basis cash as what he says from the basis white paper, I found out that there is a certain problem where.

00:16:32:03 - 00:16:33:04
David Z. Morris
That's one way to put it.

00:16:33:04 - 00:17:04:29
Hyungsuk Kang
Yeah, that's we know the whole story but yeah, well yeah, I told about that problem but then he, he told me that like, oh he, he didn't really said anything about it, but then he just came in and suddenly came in, says like we're trying to make a recursive real farm. Like what it was like. So what he actually did on building this basis, cash, was he was trying to draw some new farm where you stay basis cash, you get basic shares, you get basis share, and then you get basis cash.

00:17:05:08 - 00:17:25:14
Hyungsuk Kang
And then he was just trying to like sort of trying to find a way just to trap users money instead of just thinking about the sustainability at all. So after hearing those, I was like, Oh, no, no, no, I'm not going to launch this. So I just told the other teams that I'm not going to be involved in this and it just didn't do that.

00:17:25:14 - 00:17:53:29
Hyungsuk Kang
But after two months they launched the basis cash for UI because one of the existing team members just couldn't even write a UI, so they had to do something. So after watching that, I was like, Oh, what happened? And then so I was always asking, So did you solve the problem where basis cash would actually eventually just increase and then you did not think about contracting and supply?

00:17:55:04 - 00:18:03:09
Hyungsuk Kang
But they say that they did even they didn't even launch it because the founder wasn't on at that time. But I always knew, well.

00:18:03:21 - 00:18:15:10
Bennett Tomlin
Yeah, sorry to interject, but basis cash is just such a funny example to me because like the basis team had already recognized that problem and decided not to launch like when you guys were working on basis. Cash Oh.

00:18:15:10 - 00:18:15:23
Hyungsuk Kang
Wow.

00:18:15:29 - 00:18:17:03
David Z. Morris
So yeah.

00:18:17:22 - 00:18:44:07
Hyungsuk Kang
I remember one token was saying that we're going to revive this basis and we call it basis cash. Oh, wow. Yeah, that's stupid. Yeah, that that is really stupid. Why would you actually say that? Yeah, I mean, you quite are. So that guy. Yeah, it was always a problem and just said after, like, basis cash was going well.

00:18:44:18 - 00:19:04:22
Hyungsuk Kang
He said he just had a medium article called announcing USD, you know USD these fast and die without even thinking about the risk and anything. And then I was like saying when I watched that I was like, this is the most prolonged exit scam and they were like that. The employees were they're like, Oh, you're just from like an unknown university.

00:19:04:22 - 00:19:24:09
Hyungsuk Kang
When this guy from Stanford or like, you know, this guy's from like what you graduated from with, like, whatever, Like, you know that the annual shit is backing it. And like, I kept telling this to the other employees when I got out of the company, but these employees were saying that I'm going to sell my body because those guys are going to be rich and maybe I'll be rich too.

00:19:24:28 - 00:19:49:08
David Z. Morris
And getting rich is definitely one way to start or the promise of getting rich is definitely one way to kind of silence criticism and attract people to you. But Doc one and you mentioned Alex Moshinsky Both also have or had pretty intense cults of personality around them. And in Tolkien's case it was, you know, this like relentless bullying online, a little bit of that from Wyszynski as well.

00:19:49:16 - 00:20:12:26
David Z. Morris
I guess I'm just curious for everybody's take on why at the risk of being, you know, condescending, why a lot of retail crypto investors are so attracted to this particular personality type and and also maybe why that personality type, that so confrontational, so loud, so ugly also sometimes doesn't run the most clean projects.

00:20:13:07 - 00:20:41:17
Cas Piancey
I mean, I think it's not just it's we're talking about confidence, right? So we're talking about I mean, that's literally what a con man is, a confidence game. So, yeah, we're talking about this exceedingly confident person. And we can look at if you look at someone like SBF, like he also had this confidence. I remember hearing I don't remember if it was that no names, some VC firm just saying like, Oh, it's so incredible that SBF is playing video games while he's having these meetings with us.

00:20:41:17 - 00:21:05:09
Cas Piancey
And I remember thinking, Why is that incredible? Like, don't you want his attention? Don't you want him to be paying attention to you and answering your questions? And I was like, Oh, I guess not. But I think what happens is then you start getting all of these venture capitalists, hedge funds, etc., and once they're backing you, why wouldn't retail be like, Oh, that's a trusted All these trusted money people are backing this person, so why wouldn't they jump in?

00:21:06:03 - 00:21:24:17
Bennett Tomlin
I think the other part of it too, is so much of crypto is filled with ambiguity and uncertainty. Like many of the most interesting questions in crypto, at least to me, like the long term security budget of Bitcoin are still active questions with like debate around them and like that's on the most serious projects. There's still these fundamental debates.

00:21:24:25 - 00:21:43:16
Bennett Tomlin
And so when you have these people with this confidence, they present this world without that ambiguity, without that confusion. And so if you're a person who's been mired in that confusion, it feels like a clear path. It feels like this person has seen the thing that I've been trying to see, and this is my way to get there.

00:21:43:27 - 00:22:08:06
David Z. Morris
I think we are just about out of time here, so I will thank my panelists. I will quickly put out a plug for Crypto Crooks. Again, the podcast. I say without any humility that it is really good. And also I will mention if you are, you know, whether you're a protocol or whatever kind of project with a with a media budget and would be interested in working with us, please get in touch.

00:22:08:12 - 00:22:18:29
David Z. Morris
We do have some opportunities there. Eddie, any last couple of words anybody wants to chime in to, you know, what would you say to people who are trying to not get ripped off? What's the like five words.

00:22:19:17 - 00:22:21:15
Cas Piancey
That do your own research?

00:22:22:01 - 00:22:24:15
David Z. Morris
Don't say, come on, man, don't.

00:22:24:15 - 00:22:25:16
Bennett Tomlin
Trust, verify.

00:22:27:09 - 00:22:27:29
David Z. Morris
A little better.

00:22:27:29 - 00:22:51:08
Bennett Tomlin
We're being glib. But like we were talking about this backstage, the three of us, before we came out here in that, like grifters are going to try to grift fraudsters. These are going to try to commit fraud. The best thing you can do is try to go into as many of these things as you can with like a baseline level of skepticism and willingness to kind of pay attention to what is being said and not just how it's being said.

00:22:51:25 - 00:23:00:14
David Z. Morris
Yeah, be skeptical out there, people. Thanks, everybody, for coming. And thanks to my panelists and thank you all for being a consensus. 2023. We love you.

Episode 118 – How to spot a scam

Bennett and Cas at Consensus 2023: How to Spot a Scam – Crypto Critics' Corner

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