Original title: Babylon Finance is shutting down

Author: Ramon Recuero

Compilation of the original text: Chasey,WhoKnows DAO 

Babylon Finance is a community-led asset management protocol. Users can use Babylon to create an investment group (Garden) and jointly participate in the investment of DeFi projects. It is built on the Ethereum chain, self-governed by the community, and has the characteristics of no supervision, transparency, and no permission. Its token is BABL.

Too long not to read the version

On August 31, Ramon Recuero, the founder of Babylon, issued a document stating that the agreement will officially cease operations in mid-November this year, mainly because the hacker attack on the Rari/FEI lending pool in April this year brought irreparable losses to the team. This article is the announcement of Ramon Recuero, and the follow-up actions proposed by the Babylon team include:

• Starting from September 6, the remaining assets in the treasury will be liquidated and distributed to BABL and hBABL holders in full. Details will be announced this week;

• After obtaining the approval of the governance team, all the liquidity is withdrawn from Uniswap to prevent the loss of liquidity during the liquidation process;

• The team returns all the tokens, including the allocated part, the team has never sold the tokens, and will not seek a penny of interest from them;

• From August 31st, users will not be able to create new investment strategies or investment groups, and existing investment strategies will be completely closed together with Babylon's official website and Discord server on November 15th;

• Will cooperate with FEI to continue to implement the follow-up compensation process, and try to make up for the financial losses caused by hacker attacks to users;

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no end in sight

In this announcement, Ramon Recuero reflects and explains how Babylon came to be shut down, and he sincerely hopes that the lessons learned from Babylon can be helpful to other entrepreneurial teams in the cryptocurrency space.

Let’s take a look at Babylon’s journey from rise to decline:

• February 2021 - $1.9 million in seed round financing Summer 2021 - Create Babylon DAO, start on-chain governance, and start Beta testing

• November 2021 - Issue Prophets NFT, raising a total of $3 million

• December 2021 - BABL listed on Uniswap

• February 2022 - Release "The Heart of Babylon" and create a BABL lending market on Fuse

• March 2022 - Official release April 2022 - Rari was hacked and the compensation proposal was approved

• June 2022 - FEI decides to cancel payout, Babylon team takes urgent action

Until Rari was hacked, Babylon had been in a relatively strong position in the market: even in the bear market in February this year, it still achieved a TVL of 30 million. At the same time, it created 10 million US dollars on Rari The pool has gained 1,500 depositors and successfully entered the top ten pool rankings. According to the calculation, the funds can support the operation of the team for 9 months. In addition, the team also obtained funds for an additional 20 months using the BABL mortgage loan.

During the period from April to May, although there were multiple Debuff bonuses such as bear market + hacker attack + 3AC incident + Luna incident, Babylon has always maintained positive growth and gained more market share than competing products. Babylon had to redefine Rari's asset value to 0 until FEI/Rari announced the cancellation of the compensation at the end of June.

In the face of this crisis, although the Babylon team took quick actions and tried their best to restore the situation, the butterfly effect caused by the Rari incident was still unbearable after all:

• The affected investment group lost $3.4 million, and the withdrawal of related users caused Babylon's TVL to be withdrawn by 75% in a few days, reducing it from $18 million to $3.4 million. Since the agreement will charge 0.5% management fee and 5% performance fee, its sustainable automatic operation requires 50 million TVL;

• Fuse's bad debts are not repaid, users can no longer lend funds with BABL as collateral, and the Babylon team has spent a lot of time and energy trying to recover its $10 million loan market on Fuse;

• The team lost the funds invested in Rari, which could have supported the team for 3 months, and the possibility of using BABL to borrow money also disappeared;

• The price of BABL dropped from $20 to $5, and the possibility of raising funds through a token sale is basically zero since the token has a supply cap and only 10% remains in the treasury;

• The team is really tired. From dealing with the bear market at the beginning, to the incidents and crises one after another, and finally to the hacking incident that became the fuse, users were very angry with the team, even though the team was not at fault.

FEI's cancellation of the payout was the straw that broke the camel's back. A series of events and accidents, like a flood, completely swallowed up the Babylon team's cash position, financing channels and most importantly - users' confidence in the team.

Since the hack, the Babylon team has been working without pay. Every day, everyone is looking for ways to help the team survive the crisis and achieve 50 million TVL. However, the price of tokens in the mass market was depressed, and the team did not have enough tokens to fundraise, and even after November, there was not enough money to keep the website and protocol running.

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Play dead, or... face it?

At this point, the only thing an ethical and responsible team can do is to close the DAO and return the remaining assets to BABL and hBABL holders.

Although most agreements will not be liquidated, but will choose to be a half-dead zombie, because it is easier, cheaper, and has fewer legal problems; but the Babylon team believes that the only responsible approach is to shut down:

“We failed and we need to accept failure. When a project/startup fails, the founders should not take a smidgen of profit from it, so we will return all team tokens, distributed or undistributed Yes. To be honest, we are very disappointed to see a team like FEI make a lot of money after the project fails.”

In order to prevent insiders from trading tokens at the expected liquidation price and draining BABL's liquidity, the team has removed most of the liquidity in the Uniswap v3 pool. All assets will be distributed to token holders through a liquidation process.

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A few lessons learned

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1. More fusion

My experience working at YC has taught me that a small team of elite troops is much better than a large number of people, so we have kept it small (6 full-time, 2 part-time) to improve efficiency and reduce costs.

Running a DeFi protocol will be more reliant on funding than other types of startups, and here’s a rough breakdown of what Babylon’s core team and DAO have spent over the past 20 months.

There are three types of expenses that ordinary Internet companies do not need to consider, but Crypto companies have to consider:

1. Legal costs are 20 times that of ordinary startups.From registering a company, to authorizing currency issuance and signing agreements, everything is quite complicated and expensive;

2. safety is extremely important, the state of supply and demand during the last bull market saw security audit firms charge extremely high prices for their services. We take security issues very seriously, so we conducted 7 security audits and launched a bug bounty program on Immunefi;

3. Issuing coins requires a lot of liquidity.We deployed $1 million when issuing coins, and deployed an additional $500,000 later to integrate with Rari and prevent oracle manipulation.

On this part, our biggest mistake was raising too little money. In October last year, the market gradually cooled, and it became more and more difficult to raise funds through Balancer LBP. But at the same time, NFT-related topics are heating up. We believe in DeFi and NFT, so we decided to create the first DeFi NFT series - The Prophets.

• It's a big project, we spent two months on it

• Someone understands DeFi

• Someone understands NFT

• Few people understand DeFi and NFT at the same time

We try and work hard to find users who understand both DeFi and NFT, but DeFi users don't understand why we don't directly sell tokens for financing, and NFT users don't understand DeFi, nor do they understand the utility of tokens.

• Through this attempt, we raised $3 million, and our original goal was $20 million. This is the most expensive mistake we have ever made, and it can even be said that all other problems have arisen from it.

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2. Consider risks, weigh opportunities

The market is still in its early stages. Asset management is one of the smallest niche markets in DeFi, even if all the agreements are counted, it is only 70 million US dollars, but I firmly believe that active asset management will be one of the largest market segments in a few years.

I believe from the bottom of my heart that there will be a cryptocurrency-native hero project that will provide credible and safe investment support for retail investors. And this is also my original intention of founding Babylon. I hope to help ordinary people achieve compound wealth growth through cryptocurrency investment. I hope to provide a platform that can protect users from hackers, scams, high leverage, etc. while aggregating all the advantages of cryptocurrency. Threat of risk factors. However, the services provided by Babylon do not match current cryptocurrency users.

Judging from the product life cycle curve, current cryptocurrency users are still early adopters with shorter time preferences and higher risk tolerance. The Babylon protocol can provide investors with investment opportunities with different risk preferences, but has been focusing on medium and long-term investments from beginning to end.

Under this mismatch, the Babylon team has gone farther and farther on the risk curve in order to be able to provide the services that users need: the sustainable growth of The Fountain of ETH, the largest investment group on Babylon, is the creation of 3 It was realized after the option of the double-leverage stETH strategy. At the same time, the risk appetite of users has forced the team to integrate with more and more protocols, including Rari. In addition, Babylon was forced to introduce a leverage mechanism to keep APY competitive.

Beyond that, what's unique about our idea is actually using blockchain technology to create non-custodial, community-led funds, something that wasn't possible before cryptocurrencies. Community run, collaboratively built, compounded wealth - but most users don't want to be part of it. What investors want is to put their money in it, forget about it, and take it out with the proceeds when they remember it. Therefore, most investment groups on Babylon are run by a core of 2-3 people, and other members only appear as witnesses in the entire storyline.

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3. Deep Bear and Undercurrent

Regardless of what the media says, just look at your bank balance and you will know that we are currently in a recession. From the outbreak of the epidemic in 2020 to the complete failure in 2022, we are witnessing history:

• The fastest annual liquidity drawdown in history;

• Worst bond market since 1789;

• The 60/40 portfolio is on track to lose 49% this year, delivering the worst return ever;

If this is the case for bonds and stocks, it is not surprising what happened to the cryptocurrency market. Fed and central banks suspend fiscal and monetary policy as their response to inflation; everyone rushes to the exits on the news, sending tsunami-like volatility to global markets; disorderly deleveraging The frequent occurrence of incidents led to a chain reaction of liquidation, and more than one trillion dollars disappeared out of thin air; 3AC, Luna, Celsius, Voyager...

As the top of the tall building, the asset management agreement not only bears the risk of the basic agreement, but also faces the risk of the entire currency market. Therefore, the Babylon team had to race against time to try to support the unwinding and deleveraging of several strategies. Here I have to mention the deleveraging of stETH, which was once traded with ETH at a discount of 8%.

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4. Crazy World

Finally, it has to be mentioned that the current regulations are still full of uncertainties. In order to reduce risks, many projects will choose to register legal entities, which will cost hundreds of thousands of dollars in legal fees.

However, the challenges at the regulatory level go far beyond money: the U.S. Department of the Treasury prohibits the use of Tornado, even if the user is the one who does the evil, the code and technology itself are neutral, and there is no good or evil.

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last word of thanks

For one reason or another, Babylon failed as a result.

But I'm proud of what we've accomplished during this time:

Created a sophisticated DeFi asset management protocol serving tens of thousands of users and achieving a TVL of $30 million;

Designed and listed a token with a viable business model; Created a fully decentralized DAO with an on-chain governance system;

Designed, implemented and released the first set of NFTs with real utility in DeFi protocols;

Created a strong pledge mechanism and token economy; launched a $10 million lending market on Fuse;

Take the lead in making improvements in UI/UX, such as gas-free deposits on the mainnet and free on-chain governance voting;

Created a composable API that allows fund managers to create DeFi strategies associated with custom contracts.

We hope that the work we do can help other teams in this field, so all our code and libraries are open source: https://github.com/babylon-finance?view_as=public

There are four resource libraries: Protocol Code:

• Smart contracts, test and deployment scripts;

• Dapp: front-end code;

• API: smart contract integrated development tool;

• Docs: All documents.

Thanks for all the work done by the team, and thanks to all the investors and community members for their help and support in the past year. Despite the aforementioned challenges, I remain extremely optimistic about DeFi and asset management. Best of luck to other teams in this space!