2019: Year in Review

2019 is coming to a close, and, as a project aimed at helping investors navigate the crypto space without major disappointments and losses, we would, unsurprisingly, like to give an overview of where things stand with respect to scams and other dubious projects.

Losses due to scams: 2019 vs 2018

The passing year featured a lot of activity and important trends in the blockchain and crypto space: the rise of DeFi, continuing infrastructural improvements, the launch of multiple blockchain 3.0 projects such as Zilliqa, Algorand, Hedera Hashgraph and others. However, those things did not bring back to the industry the sort of public attention that it briefly captured in late 2017.

Nonetheless, the activity of various crypto scams continued unabated and, sadly, probably caused a lot more damage than in 2018. Crypto investigators from Ciphertrace publish quarterly reports on crypto activities resulting in illegal gains. The report for the fourth quarter is not yet available but by the end of the third quarter, various participants in the crypto space had lost around $4 billion to illicit actors. This is up from $1.7 billion in the whole of 2018. Of this, a large part is attributable to scams, the most spectacular of which was Pluscoin.   

Scam of the year: Pluscoin

Pluscoin was a scam that was busted in June. It was primarily aimed at China and other South-East-Asian countries.  While it is not operational anymore, some of the persons behind it continue to be at large, and according to Ciphertrace, its investors may have lost around $3 billion in deposits.

Another crypto security firm Chainalysis recently suggested that perpetrators behind Pluscoin may have been causing some of the recent decline in the BTC prices through attempts at cashing out their illicit gains on OTC markets. Moreover, according to the analysis by Elementus, the Plustoken scheme also siphoned around 10 million ETH, which represents around 9.2% of the whole ETH circulating supply. 

Notable ongoing scams: Dagcoin, Zynecoin and Sestrel

The crypto scams that have caught our attention since the launch of the Testacoin projects are Dagcoin, Zynecoin and Sestrel. We covered the first two in our articles (here and here).

Dagcoin is, basically, the successor of the notorious Onecoin using the same educational packages-based MLM pyramid scheme run by a separate organization called Success Factory. However, the Onecoin veterans who run it have apparently become savvyer in terms of marketing, and the project has a running clone of the Obyte/Byteball DAG and sleek promotional content on Youtube.

Zynecoin is an apparently Morocco-based project initially vigorously promoted by controversial French comedian Dieudonné M’Bala M’Bala. It promises to develop a specifically African cryptocurrency. This is already a major red flag because it is unclear what this could even mean. The project plainly does not have either a team or a technology to create an innovative blockchain platform. Nonetheless, the Zynecoin team has announced that after its success with the French-speaking investors, it is on the verge of a significant expansion into other countries, especially Japan.    

The Sestrel project has recently been launched by Dieudonné himself. One could imagine that he observed the success of Zynecoin and decided that it would be even more profitable to launch his own scam rather than benefit from merely being the biggest Zynecoin affiliate. This project is even bolder than Zynecoin in its brazenness. Its web-site allows one to buy sestrel tokens and receive the project’s whitepaper. Which, in contrast to a normal whitepaper, is an almost purely rhetorical document containing nonsensical or empty promises, such as the claim that sestrel will reunite the French local currencies and that its underlying project will at the same time restore the French cultural vitality, freedom of expression and so on. Not surprisingly, there are zero technical details about the actual implementation of the project and there is no information about the team. Despite all these transparent flaws, according to Dieudonné, already around 3,000 people have invested. 

What the crypto space needs to help people avoid dubious projects

Clearly, given the scale of the past and ongoing crypto scams and dubious projects, the current state of affairs urgently needs improvement. Not only does the reputation of the blockchain space as a scam paradise need to be embellished but it is probably also desirable to prevent scams from accumulating large parts of the supply of major crypto assets like BTC and ETH.    

Finally, it is important to consider the ways in which the blockchain community could help move the space forward with regard to outright scams and dubious projects. In this article, we will focus on two of them: educating people on the need to verify projects and tackling fake trading volumes.

Lack of public awareness

As we can infer from the estimated amounts of funds lost to crypto scammers, while we are far from the late 2017 cryptocurrency boom, there are still a lot of people investing considerable amounts of money into crypto assets with the hope of getting significant returns. This may be making the threat from scams and dubious projects even more urgent because in the absence of large upward price movements for legitimate crypto assets, people seeking high yield may be easier to spoof by promises that it is not yet too late to do what the early investors in BTC and ETH did.

In this regard, it is genuinely worrying how little people are searching for the information about crypto scams or checking whether particular, clearly suspicious crypto projects could be scams. 

Consider the chart below depicting the Google trends data for searches for the words “ethereum” and “crypto scams”. Given that the searches for the word “ethereum” are only a small fraction of the searches for “bitcoin”, the fact that the searches for “crypto scams” essentially do not even register on the chart suggests that extremely few people actually try to get themselves informed.

One could of course object here that, perhaps, people are mostly just trying to invest into Bitcoin, and that protects them against most crypto scams. However, this would be to misjudge how the information about crypto scams spreads. The most successful crypto scams are either MLM schemes with no real product like Onecoin, Dagcoin and (probably) Pluscoin or schemes promoted by big social media influencers like Zynecoin and Sestrel relying on the popularity of the controversial French comedian Dieudonné.

What unites both of these scam types is that people do not generally learn about them by googling, reading the crypto media, checking the popular crypto subreddits and so on. Rather, they tend to either know someone who has already invested (usually in a scammy MLM scheme) or follow certain unscrupulous social media influencers.

Another way to show that people who are targeted by scammy projects rarely check whether those projects are legitimate is to consider the example of Dagcoin-related videos on Youtube. Dagcoin’s latest major video (admittedly, well-made) has, sadly, accumulated almost 90 thousand views in 15 days.  In contrast, the view count of the most popular recent video in English unambiguously classifying Dagcoin as a scam currently stands at around 3,000, and the video was published in April. 

The need to tackle fake trading volumes

We already touched upon the issue of fake trading volumes and how to spot them in one of our past articles. Coinmarketcap’s attempt to address it through introducing the liquidity metric is laudable. However, it is probably insufficient to help investors here and now avoid scams and especially dubious projects that are not clear scams.

We already wrote previously about how the suspicious ABBC Coin project’s token was only traded on dubious exchanges, despite its high position in Coinmarketcap’s rankings. An even more egregious example is Mindol. This mysterious purportedly Japanese cryptocurrency without any clear technical fundamentals has shot up from nowhere to the market capitalization of $855 million in a matter of weeks. However, if one looks at its trading pairs, the only two major ones are hosted by the Cointiger and Coinall exchanges.

It is entirely possible that Mindol’s market capitalization is entirely fictitious and based on wash trading or outright transaction fabrication but if someone searches for the project on Coinmarketcap, one will first find its high market cap.

Of course, there are alternatives to Coinmarketcap such as Messari that publishes the real volume metric based on trades conducted on 10 crypto exchanges recognized as providing reliable volume data by Bitwise. Messari rightly does not even list Mindol. However, Coinmarketcap remains by far the most popular crypto asset data aggregator, and especially newbie investors are overwhelmingly likely to just use it. While Messari’s approach to calculating real volumes is perhaps too radical, Coinmarketcap should probably at least avoid calculating market caps for tokens listed only on dubious exchanges like Cointiger and Coinall. The blockchain community at large should start holding Coinmarketcap more accountable about how it handles this issue.

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In future articles, we will do our best to come up with the additional proposals on how to improve the situation with crypto scams and dubious projects. We wish you a Merry Christmas and a scam-free 2020.  

Potential Scam Alert No. 1: Dagcoin

Onecoin was perhaps the biggest scam in the history of the cryptosphere. The latest popular BBC podcast series by Jamie Barlett throws light on the whole scale of that pyramid scheme as well as some of the mechanics of how it functioned and how it managed to become as big as it did.

In one of the episodes, Barlett mentioned that some of the former Onecoin MLM leaders have recently switched to promoting another cryptocurrency project called Dagcoin. Hence, given the possible urgency of it, in our first potential scam alert, we will cover Dagcoin. 

Dagcoin’s time of public appearance is suspicious

It is interesting that the public appearance of Dagcoin took place in August-September 2017. The first official tweet was posted on 26 September 2017. The first blog entries date to August. This is the time when the Onecoin Ponzi scheme has started to face serious problems, which leads us to Dagcoin’s significant connections to it.

Participation of prominent Onecoin figures, MLM tactics and Success Factory

By far the biggest red flag about the Dagcoin project is its resemblance to Onecoin in several important respects. Like the latter, Dagcoin is mostly promoted not through the usual blockchain public channels (known cryptocurrency exchanges, blockchain events, Reddit, etc.) but through an MLM scheme involving a network that does not even have the same name. The network in question is called Success Factory.

Jamie Barlett in his series on Onecoin nicely demonstrated that the secret to that scam’s massive success was its recruitment of some of the most prominent network marketers from all over the world. Those marketers had previously sold things like Amway or Oriflame products were persuaded to switch to Onecoin, even though they appear to have had doubts about the presence of the actual blockchain and cryptocurrency from the start. Those people brought their massive networks with them, too. They also brought in their questionable promotion practices, including constant motivational content, massive events resembling a hybrid between Oscar Academy Awards and a cult gathering.

One can find all of this in the case of Success Factory/Dagcoin if one bothers to look on Youtube. Down to some of the same prominent showmen such as Kari Wahlroos (Onecoin then and Dagcoin now) and Igor Alberts (then and now). The CEO of the Estonian company behind Dagcoin Nils Grossberg had also apparently been involved in Onecoin.

The adoption of Dagcoin also appears to mainly proceed through the MLM channels, namely, the sales of educational packages (described in more detail on p. 17 here). The supposedly existing coin is not listed on Coinmarketcap, and thus any cryptocurrency exchange tracked by it. 

Dubious whitepaper and the relationship to Obyte/Byteball

The whitepaper of the Dagcoin project looks strange, to say the least, and almost nothing like a legitimate project’s one. It mostly consists of extracts from the whitepaper of another, seemingly legitimate project, Obyte (previously, Byteball).

Obyte is a relatively unknown blockchain project aiming at developing a DAG-based alternative. It appears to be a legitimate and active project with a running distributed ledger and listings on Coinmarketcap and certain exchanges. 

While it is beyond our technical acumen to opine on the merits of Obyte’s technology, the odds that it is a groundbreaking project capable of taking a significant market share are probably slim. Even among the DAG-based platforms under development there are the giants of Hedera Hashgraph and Avalanche, just to name two. This will be important for the final conclusions. It also appears to be a semi-centralized platform meaning that the maintenance of the ledger is ensured by a limited number of publicly known nodes called witnesses. This aspect probably hampers its prospects even further. 

Getting back to Dagcoin, its whitepaper does not even hide the heavy reliance on Obyte but it does not explain in which way Dagcoin is an upgrade on Obyte. It merely states that Dagcoin had first been an asset on top of the Byteball platform before the Dagcoin fork of the Byteball tech was presumably created.

Both projects appear to have ledgers running. The DAG explorer available on the Dagcoin website looks like a carbon copy of the Obyte’s one but appears to track transactions on a different ledger. 

Project’s code on Github

Dagcoin has code published on Github but it has not been updated since February this year, and most repositories since 2018. There is no mention of the code having been moved elsewhere. Obviously, this is a matter of significant concern, too.

Project’s coverage in cryptosphere

To our knowledge, despite the claims of being the best investment opportunity since Bitcoin, Dagcoin has not been covered by any remotely respectable crypto or non-crypto news outlet. Almost no respected blockchain expert has opined on it, the only comment we have seen was from Sergio Lerner who dismissed it as a scam. Interestingly, he had, perhaps, been the first person to propose using a DAG for a cryptocurrency, and even called his proposed project Dagcoin.

Project team

The Dagcoin official site makes no mention of the actual development team. The two listed authors of the Dagcoin whitepaper do not make the situation with the team clearer because the linkedin profiles of neither of them – Yary R. and Daniel Raissar – does not mention anything about Dagcoin. However, the Github profile of Yary R. does appear to indicate participation in the Dagcoin project. Another Github profile whose contributions to Dagcoin repositories are visible is attributed to Priit Kallas. A Google search of Priit Kallas and Dagcoin returns nothing and his Linkedin profile does not mention the project, either. We did not check the profiles of all the Github contributors to the project code but the pattern is clear enough.

The list of Dagcoin-related people on Linkedin does not feature any developers, either. Even the profiles of Dagcoin’s Chief Visionary (sic) Officer Kriss Ress and the CEO of the actual Estonia-registered company behind the project Nils Grossberg are silent about Dagcoin.

The situation with the project team of Dagcoin is, thus, extremely suspicious, to say the least. If Dagcoin were a legitimate breakthrough project, there would be no reason for its creators to hide their participation in it on Linkedin. 

And even if the aforementioned whitepaper co-authors had really been the core contributors to the project, their listed credentials are not remotely sufficient for creating the world’s best, revolutionary blockchain platform.

A talk with one of the former Dagcoin developers

Our hypothesis was that the people who contributed the text of the whitepaper and the code on Github were genuine Estonian IT professionals only hired by their MLMer countrymen to do those specific tasks. We managed to contact one of them, and he appears to have basically confirmed our idea.

His version of events is that he and others helped to develop the Dagcoin platform, despite the concerns about the founders’ preceding involvement with Onecoin. The intentions of the founders were supposedly good and they only used network marketing to better distribute dagcoins than it is usually done with cryptocurrencies.

He further claimed that the code on Github has not been updated for some time because the founders had changed the devops team and that they were currently having some sort of “liquidity problems,” even as they were trying to genuinely build the promised breakthrough platform. He did not respond to the question whether some genuine improvements had been made to the Obyte technology underlying Dagcoin.   

Why spreading the coin via an educational packages MLM is a bad idea

One of the biggest reasons to doubt the narrative that Dagcoin is a legitimate crypto project and not a cover is that spreading a crypto asset via an MLM scheme (assuming that the buyers of Success Factory packages are even getting the coins) is a rather poor way of achieving genuine adoption.

Given that dagcoins probably have no immediate use and the fact that the rewards for recruitment are in the form of other currencies than dagcoin, the main motivation for ordinary participants in the MLM scheme has to be the prospect of recruiting further participants. This means that Dagcoin adopters are not actually adopting a cryptocurrency or the Dagcoin tech. 

Secondly, the price of packages does not seem to have any clear connection to some kind of price per token, in fact the token does not even have any price whose discovery takes place at actual markets. This complicates any future price discovery, even in the unlikely scenario that the listing of dagcoins will be attempted in the future. 

Conclusions

On almost all counts, the Dagcoin project is extremely suspicious. It does not appear to be listed on any genuine crypto exchange, its Github code has not been updated for almost a year, its team is not communicating about the project like a blockchain project team is expected to. Most importantly, there is no explanation of why the Dagcoin technology is innovative or why it is promoted through an MLM scheme.

The most likely interpretation of the available evidence regarding the Dagcoin project, in our view, is that it is a post-Onecoin scam in which former Onecoin marketers decided that after Onecoin it would be more credible to add an actual blockchain platform for cover. It is an interesting question why they chose to fork the tech of an obscure project for that purpose but it is of secondary importance. 

Even with the seemingly existing Dagcoin ledger and assuming that its development is ongoing, it is extremely risky to invest into dagcoin. Even if you manage to get hold of some coins, it is impossible to ensure that they will ever become saleable on any solid cryptocurrency exchange. Nor is it possible to be confident that the supply of dagcoin is not controlled by the project team and that they cannot increase it at will, substitute the existing ledger with another one or do any other manipulations that could make your coins worthless. 

However, it is, in principle, possible that they actually decided to promote a genuine crypto project after the debacle of Onecoin. This does not, however, mean that purchasing Dagcoin education packages is a good idea. As we mentioned above, the Byteball technology that Dagcoin seems to have adopted without much modification is one of a mass of underdog competitors in the crypto space. If it is unlikely to get traction, a fork of it without any prominent technicians working on it is even less so.

Practical advice

On the basis of the above, we strongly advise you to consider avoiding investing into Dagcoin altogether, especially into educational packages. If you really desire to invest into the project, ask the promoters if it is possible to actually acquire the coins without packages. Try to verify that the coins actually exist on the Dagcoin’s ledger and which percentage of the ultimate coin supply they represent.  But, as mentioned above, be aware that there is no guarantee that the dagcoins you would buy will not be diluted, replaced by another token, etc.