Substratum’s recent Smart Contract Update and Treasury Management

Thoughts on the upcoming Substratum smart contract upgrade, token swap, and treasury management

A month ago or so, I wrote a piece about a major security flaw in Substratum’s smart contract which allowed the team to execute a mint token function and create tokens out of thin air.

Recently, Substratum has come out with great news about their token swap to begin December 17th. This has cleared up some of my points about the major security flaw they ignored for 4–5 months until a post went trending on Reddit, causing them to take action.

Update: Substratum has deleted this video off their main You-Tube channel. A re-upload can be found here.

In their latest update from the fearless leader and CEO of Substratum, Justin Tabb tells everyone that “No action needed on the SUB token holder side” for the upcoming token swap. Also, the smart contract has been audited already by a third party as they used quantstamp for this audit.

Interestingly enough, if all this great news was not enough to knock your socks off with positivity… Justin announced about 6 minutes in the team will start trading their ICO eth holdings from their first ICO. That’s right, with all the money you put into the ICO and all the $13.8 million they raised from August-September of 2017, they want to start trading those funds to make up for all the value that ETH has lost.

Can’t make this up.

I’ll get into some of the details of their upcoming smart contract upgrade, token swap, and treasury management. Also, I will also explore why this decision to trade investors ICO funds is damaging to their reputation and trust.

Smart Contract Upgrade

I wrote about Substratum’s mint token function and freeze token function in the past, explaining how these 2 functions can be easily abused by the team. While many Substratum maximalists in the community felt it was not a issue, several people agreed with my post and one that went trending on Reddit.

The facts of the matter were these 2 functions were known for months and the team said they would fix it “next week”, 6 months ago. Here we are today and the team is “quickly” going forth with a token swap which is to begin on December 17th, 2018.

Watching the latest update from the team on their youtube channel, Justin has confirmed the Substratum token swap will indeed begin on December 17th, 2018.

“So we will be doing that starting on uh December 17th. Uh basically we will start putting the transactions over the Ethereum network in batches, um and starting with the greatest number of transactions and going down. So a few things that are important for you to know uh although we really try to take the guesswork out of this and make it absolutely.. you know.. you guys don’t really have to do anything”.

Great news for SUB token holders! So, there will be no action needed on the token holder side. Binance will apparently also be supporting the token swap. It should be noted this is not a common swap and it seems the team’s motives are legitimate here, making the swap easier for the community. However, most swaps require you to send your erc20 tokens to a new address to exchange them for the newly minted tokens when you request a token swap. Substratum is basically swapping one erc20 token for another erc20 token.

Treasury Management

A few months ago, I made a post on why I believed Substratum’s second ICO to be a money grab. I was justified in my research as the team was liquidating 500–1000 ETH on a biweekly basis at the time. It obviously raised serious red flags as they weren’t liquidating at market highs, rather break even prices of their first ICO. These totals amounted to just about $1 million.

The team was likely panicking from poor treasury management from their first ICO, taking in so much allocation of ETH and being not cash positive. After raising $13.8 million from investors in their first ICO, one had to wonder why these people deserved a second round of funding?

Recently, I’ve been met with criticism from admins and the community alike for my concerns on the team’s liquidation of ETH at breakeven prices as “FUD”. Justin has recently stated a reason as to why the team liquidated so much ETH in the past months.

“ A few months ago or maybe a month and a half ago we did a cash in of 1000 Ethereum and people wondered why we did that. Well it based on off of our simulations of and we have a full-time trader now for Amplify and um basically his Monte Carlo simulations indicated that Ethereum was going to at least test $160. It was prudent to cash in over $200 and the 1000 Ethereum we needed and we’ve done that, been a very wise move obviously. Um so, well we’ll just throw it all in this video, basically what’s happening now is um the simulations continued to indicate that Ethereum is going to continue this downward trend obviously. Uh and test all the way down to $60. So we are going to not cash in, but uh begin basically attempting to trade up so we can further our position as long as possible. Obviously, this bear market is hard on everybody, uh we’ve made the long bet on cryptocurrency which worked out very well for us uh we did a lot of cash-ins above $1200 or above $1000. Uh and so, but when our ICO price was $225 up to $250 in Ethereum and now you’re talking about $60, that obviously cuts your time by 75%. So, we’re taking advantage of the trader that we have uh in full time and we are going to be actively trading a portion of the Ethereum that we have so that we can trade up basically so that we can sell at the top of the bands and buy at the bottom of the bands”.

The first question that comes to mind is if this is even legal for them to trade investor funds and gamble them through their “simulations”? Substratum is not a financial management company. Substratum admins and community members have boasted for the past 6 months how the team has plenty of money. Why are they deciding to “trade” or gamble their first ICO ETH holdings if that’s the case?

A likely conclusion can be drawn from this. The only reason the team has to trade is that they are running out of funds. Their second ICO has been a failure if their ETH raise totals don’t help show that. How can they (not being a financial management company, mind you), confidently say ETH is going to $60. If this is the case they should short ETH on bitmex at 100x. Last time I checked, Substratum is not a trading firm and investors did not put their money in to be traded on the open market to “increase ETH allocation”. If you fail to see this difference, then I really don’t what to tell you.

Justin follows this up by stating the following in his recent update:

“ Actually, we’re not doing anything different than what’s in our whitepaper, we’re not doing anything but trading it off the USDT. And that’s in the whitepaper, the original whitepaper and you can take a look. So, we will be actively doing that and uh you can obviously watch that happen but it’s just to further our position. So, we will be able to pick up a percentage of Ethereum and we rebuy in and once the market turns bull, which I believe it will in a couple months then our position will be that much better and we will be able to further the time that we have and uh and continue building the products that we set out to build. Uh and until we get cash flow positive, which we expect to do next year”.

Now, where is actively trading your ETH holdings mentioned in the whitepaper? To further your position? So, let me get this straight. The team is going to be trading funds they took in from investors to “actively trade them” and increase their ETH allocation? Remarkable.

Justin makes an interesting comment as well about the team expecting to be cash flow positive next year. I’m just going to say this, he is making wild assumptions on the future finances of his company. There is very little chance the market will turn around next year, although one can hope. He is making serious speculations and the fact he mentions it, indicates that being cash flow positive is definitely a serious concern.

It seems Justin is banking on too many “what if’s” that makes Substratum an extremely high-risk investment. Trading ETH, hoping a bull market happens in 2 months, hoping cash flow positive next year. These are crazy and wild speculations that should be cause for concerns amongst investors regarding the treasury management of this company.

Also, selling funds isn’t the same as actively trading. Furthermore, “it was in the whitepaper” isn’t any better than “it was in the terms and conditions”. It’s not a reasonable expectation to have the project you donated to start squandering the funds and trying to beat the market while hoping they win so your money is not wasted. So yeah, “in the whitepaper” is true, but it should not have been there.

To clarify this, I think it’s very irresponsible for these ICO’s to keep their funds 100% in ETH. I don’t have a major issue with moving some to USD, but actively trying to trade it and beat the market? That carries a massive risk and is unethical IMO. However, permanent residents of Substratumville seem to think otherwise as indicated below.

In Conclusion

Is this something as a SUB token holder or outside figure you feel you should support? Do you agree with the idea of the team trading your funds, those same ones that you invested in their first ICO and trying to beat the market because their ETH has lost value? I for one believe this is a red flag among several others that have been brought up in the past regarding partnerships, a faked magazine cover and many more. DYOR.

EDIT: Since this publication was posted, a trending article on Reddit regarding this situation has been suppressed from 60 upvotes to 0 with about 100 comments. Wonder why that would happen?

Disclaimer: I am not a financial advisor and the research presented in this article should not constitute a means to buy or sell speculative crypto assets. As always, do your own research and weigh in both sides of the parties arguments.

Twitter: @wbm_97