Rug pull, hack, or fraud? Neutrl suddenly suspends all protocol functions

Original: Odaily Planet Daily (@OdailyChina)

Author: Azuma (@azuma_eth)

On the evening of August 13, Beijing time, Neutrl, a basis trading protocol focused on altcoins, suddenly announced that it had temporarily suspended minting, redemptions, and other protocol functions due to its protocol reserves being affected.

Neutrl did not elaborate on what exactly caused the "reserves to be affected," only emphasizing that the move was taken after consulting legal counsel to protect user interests and maintain orderly processes while assessing the impact. Neutrl also stated that the team would provide users with processing instructions in due course, with more information on timelines and next steps to be announced once confirmed. 

Because the announcement came so abruptly and the official statement provided no concrete clues, community sentiment quickly turned to panic, with speculation spreading across social media.

Neutrl's Positioning and Unique Risks

Simply put, Neutrl is a basis trading protocol built around altcoins. You can think of it as an altcoin version of Ethena.

Specifically, Neutrl buys locked altcoins at a discount in the private market and then hedges the exposure using perpetual contracts to capture profits from the spread and funding rates between the two.

Afterwards, Neutrl packages the above returns into on-chain structured products and opens deposits to users, allowing them to directly participate in its arbitrage strategy — Neutrl's core products previously launched include NLP (Neutrl Liquidity Pool), among others. After users deposit assets, the protocol allocates funds to corresponding arbitrage strategies and gives users exposure to strategy yields by minting protocol tokens and other means.

In April last year, Neutrl announced the completion of a $5 million seed round, led by digital asset private market platform STIX and venture capital firm Accomplice, with participation from numerous cryptocurrency angel investors including Amber Group, SCB Limited, Figment Capital, and Nascent, as well as Ethena founder Guy Young and Joshua Lim, a derivatives trader at Arbelos Markets (recently acquired by FalconX).

Given the high degree of similarity to Ethena's model, Neutrl is also exposed to similar underlying trading platform risks, contract liquidity risks, and funding rate volatility risks. Furthermore, because the assets Neutrl focuses on are altcoins with lock-up restrictions and greater volatility, the aforementioned risks are correspondingly higher, and there is an additional layer of unpredictable counterparty risk (i.e., the possibility of default by the counterparty holding the locked altcoins).

When Neutrl launched in November last year, it attracted over $200 million in deposits thanks to relatively high protocol yields and the airdrop expectations generated by its points program. However, as risk appetite across the DeFi industry has continued to contract, Neutrl's TVL has now shrunk to approximately $53.3 million.

Speculation on Possible Cause: Counterparty Default?

As of writing, Neutrl has not disclosed the specific reason behind the "affected protocol reserves," but it is certain that legal counsel has been brought in. Additionally, no clear signs of an attack on the protocol or funds being stolen by hackers have been observed on-chain. Therefore, the community is currently speculating on possible sources of risk based on Neutrl's business model.

Among these, the most discussed possibility is the aforementioned counterparty default.

Cryptocurrency legal practitioner wassieloyer（@wassielawyer） also offered a similar conjecture on X. Neutrl may have suffered a forced default by an OTC token trading counterparty. Neutrl typically buys locked tokens at a discount while hedging with perpetual contracts; if the counterparty responsible for supplying or delivering these locked tokens suddenly defaults, Neutrl could be left with only one side of the hedge position.

However, there is a seemingly counterintuitive issue with this speculation: if Neutrl were left with only short perpetual positions due to a counterparty default, and the altcoin market has been broadly declining over the past year, this "naked short" would theoretically be profitable, not a cause of "losses to protocol reserves"...

Community Fears Team Has Fled

Compared to a "counterparty default," another more aggressive speculation is: "Has the Neutrl team itself already withdrawn liquidity ahead of time, or is it even preparing to exit scam?"

The rapid spread of this speculation is tied to the on-chain timeline surrounding the incident.

DeFi researcher Petro D. | Research（@PDmytriiev）discovered that at 19:12:23 Beijing time on August 13, an address suspected to belong to the Neutrl team withdrew approximately $3.5 million in liquidity from Curve's NUSD-USDC pool. Just 14 minutes later, Neutrl's official account posted the announcement on X, declaring a suspension of minting, redemptions, and other protocol functions due to "affected protocol reserves."

At the same time, some abnormal behavior was observed in Neutrl's community operations — comments on the official X post were disabled, replies were blocked, and the Discord chat channels were deleted. These abnormal actions further amplified community speculation that the team had "fled."

Additionally, some community members dug up the past involvement of Neutrl team members in other projects and questioned the team's historical credibility. For example, users accused team members of having previously participated in projects such as FYDE and TRSY, and alleged that those projects had dumped tokens on retail investors and ultimately gone to zero.

However, these allegations currently stem mainly from community discussions and are not sufficient to serve as direct evidence in determining the nature of this Neutrl incident.

Verification Protocol: Just for Show

Another issue exposed by this incident is that Accountable, the on-chain verification tool that was supposedly used to assess the safety of Neutrl's assets, failed to provide any early warning.

Neutrl had previously integrated Accountable's "Proof of Solvency" verification service to display the protocol's assets and liabilities, theoretically helping users determine whether the protocol had sufficient solvency. However, after this incident, DeFi researcher Ethan DeFi（@EthanDeFi_）discovered that the solvency verification page Accountable provided for Neutrl had also stopped working properly. This directly sparked user skepticism about the practical value of such "reserve proof" tools.

Ethan DeFi added that over the past three months, three protocols — Neutrl, Altura, and Main Street — which had all been shown as having healthy asset conditions on Accountable's dashboard, subsequently paused withdrawals.

In response to this situation, Perena founder Anna Perenina（@gizmothegizzer）joined the discussion, noting that simply verifying a protocol's NAV (net asset value) is not enough to prove that user funds are truly safe — if the majority of a protocol's assets are held off-chain, especially complex OTC assets, locked tokens, or other non-standardized assets, on-chain verification inherently has blind spots.

In other words, Proof of Solvency can only prove "how much money is on the books," but it cannot necessarily prove "where these assets actually are, whether they can be liquidated in time, or whether counterparties will honor their obligations." For yield protocols like Neutrl that rely on OTC trading, locked tokens, and derivatives hedging, the latter information may well be more important than a real-time NAV figure — when a protocol's core assets are themselves off-chain, simply proving the on-chain balance does not truly address the solvency risk users care most about.

The Truth Remains Elusive

As of press time, the Neutrl team has yet to disclose the specific reason for the affected protocol reserves, nor has it responded further to the many speculations circulating in the community.

Whether it is a counterparty default, fund management issues, or other undisclosed circumstances, we will have to wait for the official follow-up explanation. Odaily Planet Daily will continue to monitor the development of this event and provide timely updates once Neutrl releases more details.