- The DeFi rage quit trend continues to spread as investors and founders alike move to exit struggling projects.
- At least 12 DeFi projects have suffered rage quits in the last year.
- One group of investors is taking advantage of the turmoil to reap significant rewards.
Rage quitting is fast becoming a major scourge of DeFi projects, with at least a dozen such incidents in the last year.
Rage quitting occurs when investors in a DeFi project move to exit their stake in the enterprise by either wholly or partially liquidating the treasury. Those who rage quit effectively end their participation in the DAO.
The trend can be attributed to angry DeFi investors dissatisfied with the downward trajectory of many DeFi projects.
Many investors have accused their respective DeFi project founders on Discord servers of “slow rugging” — the process of gradually eroding a DeFi project’s treasury via bogus salaries to team members without creating any value for investors.
“The team has spent tens of millions during the last one-and-a-half years, during which almost 80% of the value has been lost,” Lilbagscientist, a pseudonymous crypto investor, told DL News during the Hector Network rage quit saga in June.
“While token holders have seen their investment go down by 97%, team members have been receiving a comfy salary,” he added.
Hector Network is one of many rage quits that has happened this year. The founders of the Fantom-based project rage quit after allegedly draining $100 million from its treasury over an 18-month period.
Why rage quits happen
DeFi, like the rest of the crypto market, peaked in November 2021.
Investment in the sector represented by total value locked, or TVL, reached $180 billion, according to DefiLlama data. This figure is now at $37 billion, a 79% decline.
The last crypto bull market saw an influx of DeFi projects, many of them copycats of existing protocols.
These copycats tried to piggyback on existing metas or trends in the DeFi world that were attractive to investors but failed to match the success of existing incumbents.
Several of these metas have since been deemed to be elaborate Ponzi schemes that offered little beyond temporary high-yield opportunities that dried up as swiftly as they emerged.
Failed projects like Hector Network now line the path of the rage quitting bushfire spreading across DeFi.
“DeFi DAOs only dissolve when a team has little value to token holders and token holders bring little value to teams,” Diogenes Casares, CEO of proprietary trading company Patagon Management, previously told DL News.
But failed DeFi projects are not the first mass value extinction event for crypto investors. Many investors from the initial coin offering, or ICO, cohort of 2016 to 2018 also saw their investments go to zero during the penultimate crypto bear winter of 2018.
The ICO graveyard is littered with dead blockchain projects such as Dentacoin that were supposed to revolutionise the dental industry.
There is, however, one major difference this time around — DeFi projects have shared ownership structures called DAOs created to administer them. DAOs were supposed to shield founders from regulators, but can now be used as pikes upon which their ambitions are impaled.
Disgruntled investors can use the DAO governance structure to push for rage quits and recoup some of their investments if things go awry. This was not possible with ICO projects.
How rage quits happen
While there are specifics that are unique to each rage quit, the general process is fairly similar across the board.
Investors, founders, or both express their desire to opt out of the project. They then vote to liquidate and share the treasury among holders of the project’s native token.
Eligible claimants usually have a timeframe to claim their share of the liquidated treasury. Those who fail to meet the deadline forfeit their share once the window closes.
Some rage quits have signalled the end of a project. This was the case with Fei Protocol in August 2022. The DeFi stablecoin issuer shared $220 million from its treasury to investors, effectively ending the project.
Other projects have survived rage quits. Concave Finance shelled out $2.1 million to settle disgruntled investors earlier this month.
This process might seem straightforward but the reality has been the exact opposite.
All DeFi rage quits thus far have been mired in controversy.
The team behind Parrot Finance, a DeFi protocol on Solana, engineered a farcical rage quit vote that was greatly tilted in its favour. The process ended with the team walking away with $47.5 million, while investors were left to share $27 million among themselves.
Parrot Finance still exists after the rage quit but as a tokenless project.
Concave’s rage quit was not without incident as the smart contract for the claims process contained a bug that saw only a handful of claimants scoop the $2.1 million settlement.
The rage quit trend has also birthed a band of savvy investors who infiltrate DAOs of failing DeFi projects in order to instigate a liquidation of the treasury.
Members of this loosely-formed group style themselves as activist investors, saying they act to return risk-free value to investors.
They have been cast as polarising characters in every rage quit that involves the group.
Their detractors label them DAO raiders who are almost as bad as the slow-rugging DeFi project founders and team members.
But to others, they are activist investors, returning value to token holders. This belief inspired their moniker of the Risk Free Value Raiders or RFV Raiders.
“‘DAO’ raiders is a hostile and demeaning term for activist investors,” Patagon’s Casares said. “These investors keep the financial systems of DeFi from clogging [and] they would not exist, if it were not for incompetence of teams.”
There are also others who hold neither a positive nor negative view of RFV Raiders.
“As for RFV Raiders, I think they’re just playing the game, if founders and insiders can drain funds they see a chance for themselves, too,” Wazz, a pseudonymous crypto analyst told DL News.
The RFV crowd is never far away from the drama and confusion that occurs during any rage quit process.
They begin by identifying failing DeFi projects — ones whose treasuries massively outweigh the market value of their native tokens.
“I identify projects with low market value compared to assets,” Adonaieth, a pseudonymous crypto investor with ties to RFV, told DL News. “I am aligned with investors who want to exit.”
This alignment sees RFV investors buy up governance tokens of these failing projects en masse. They then trigger a call for a vote to dissolve the project’s treasury once they possess sufficient governance power.
RFV groups enjoyed significant success during the early run of deploying this tactic. Rook DAO’s initial rage quit was supposed to be for $5 million, but RFV investors contributed to upping the settlement to $20 million.
DeFi founders have, however, become wise to this scheme, and some like Aragon DAO, Hector Network, and Concave Finance attempted to fend off this hostile takeover with varying degrees of success.