🌴 Babylon Finance is shutting down
Babylon is a community-led asset management protocol that enables users to create investment clubs (we call them gardens) and invest in DeFi together. It’s built on the Ethereum network and it’s non-custodial, transparent, permission-less, and governed by the community. BABL is the governance token behind it.
Update: For the liquidation process, check https://medium.com/babylon-finance/babylon-finance-liquidation-process-38332b7b5d0f
Update 2: All Babylon users will be made whole from the Rari Fuse Hack https://medium.com/babylon-finance/rari-hack-reimbursement-a47560999b9c
Update 3: Added instructions to withdraw your garden funds directly via Etherscan.
TLDR: Despite our efforts, we haven’t been able to revert the negative momentum caused by the Rari/FEI hack. Here are the final actions the core team is going to take:
- Consolidate all remaining treasury holdings and distribute them amongst BABL and hBABL holders. The process will start on September 6th. All the details about the liquidation process will be shared later this week.
- In order to prevent people from raiding the remaining liquidity, we are extracting all the liquidity from the Uniswap pool. The decision is pending to be ratified by governance.
- The team will return all tokens — both vested and unvested. We have not sold a single token and we will not receive a penny from them.
- Strategists will have until November 15th to close all the active strategies. No new strategies or gardens will be able to be created from the UI from today. The website and Discord will be shut down on November 15th. After this time, you can use Etherscan to withdraw the remaining funds in garden contracts. Head to the garden address on Etherscan, select Write contract, connect your web3 account and call the withdraw function with the following parameters:
withdraw( <YOUR_GARDEN_TOKENS_BALANCE>, 1, <YOUR_ADDRESS>, false, 0x0000000000000000000000000000000000000000 )
You can find your balance by calling balanceOf on the readContract tab.
- Once and if the FEI reimbursement is completed, the team will still do all the work necessary to reimburse all the users that had funds in the gardens at the time of the hack.
- All the code is open-sourced and the community is welcome to fork/clone and build on top of the Babylon project and/or token.
In the rest of this post, I will explain how we got here and the lessons learned along the way. Hopefully, this will be useful to other entrepreneurs and teams building in crypto.
The Point of no return
For context, here is a timeline of Babylon’s major events:
February 2021 — 🌱 Completed $1.9M Seed round.
Summer 2021 — Babylon DAO setup with On-chain governance. Public Beta.
November 2021 — 🔮 Prophets NFT Collection Released. Raised $3M.
December 2021 — BABL is listed on Uniswap.
February 2022 — 🫀 Released The Heart of Babylon. Created BABL Lending Market on Fuse.
March 2022 — 📣 Public Launch.
April 2022 — Rari Hack happened. Reimbursement approved.
June 2022 — 🚑 FEI cancels reimbursement and team takes emergency action.
Before the exploit, Babylon was in a relatively strong place. Despite releasing in the midst of the bear market in February, Babylon was able to reach 30M in TVL, created a top-10 lending pool on Rari with $10M, and acquired 1.5k depositors. The team had 9 months of runway plus access to +20 months through BABL collateralized loans.
From April to May, despite the wild bear market, the Rari hack, and the 3AC and Luna debacle, Babylon was again growing and gaining market share versus our competitors. However, at the end of June, FEI/Rari canceled the reimbursement and forced us to reprice the Rari assets to zero.
Despite 🚑 taking swift action and doing everything that we could, the Rari exploit was the domino that kickstarted a series of unfortunate events.
- 🌴 The gardens affected lost $3.4M and users withdrew 75% of our TVL in the following days. The TVL decreased from $18M to $4M in 2 days. The protocol captures a 0.5% mgmt fee and a 5% performance fee. TVL of 50M would have made the protocol self-sustainable.
- ☠️ Fuse was abandoned. BABL could not be used as collateral anymore to borrow funds. We had dedicated a lot of effort and time bootstrapping our $10M lending markets in Fuse.
- ☁️The team lost ~3 months of runway that were invested in Rari. These funds evaporated overnight along with the possibility of borrowing from the BABL holdings.
- Token price crashed from $20 to $5, removing any possibility of fundraising future activities from token sales. The token supply is limited, non-inflationary and only 10% remains in the treasury.
- 🔥 Team burnout. Dealing with the bear market, one crisis, another, and finally, the aftermath of the Fuse hack was extremely taxing for the team. Understandably, people were really angry even if the hack wasn’t our fault.
In a crisis, all correlations go to one. This series of unfortunate events created a tsunami that eroded our cash position, access to financing, and most importantly, user confidence.
Since the event happened, the team has been working without a salary trying to find ways to fund the team to get to those 50M in TVL. Unfortunately, the general market conditions depressed the token price to a point that there are not enough tokens to fundraise. We don’t even have funds to keep the website and protocol running beyond November.
We had reached the point of no return.
🧟 Zombies and Ethics
Having reached this point, we believe the responsible and moral thing to do is to wind down the DAO and return all remaining assets to BABL and hBABL holders.
Although most protocols/tokens never wind down and remain in a zombie state, we strongly believe that closing down is the only responsible route. Leaving the DAO in a zombie state is definitely easier and cheaper than closing down. It also has fewer legal complications. However, it is definitely not the moral or ethical thing to do.
We have failed and we need to accept it. It goes without saying that when a project/startup fails, founders should not receive any funds. We are going to return absolutely all of the team tokens — both vested and unvested. It’s really sad that this needs to be said. Utterly disappointing to see teams like FEI cashing out when their project has failed.
In order to prevent insiders from trading aroud the expected liquidation price and drain all the existing liquidity, we have removed most of the liquidity available in the Uniswap v3 pool. All these assets will be distributed to holders through the liquidation process.
Shutting down Babylon will help our community, investors, and frankly ourselves, to move on and release our energies on other tasks that will create value for the world.
📚 Lessons Learned
Leaving aside the hack, I will now reflect on the actions that led us here to extract wisdom for fellow builders in the space. Here are the five lessons learned during the journey:
1. When in doubt, raise more money 💰
After my experiences in YC, I truly believe a team of small and highly capable people outperforms bloated teams that hire too quickly. As a consequence, I focused on keeping the team small and as lean as possible (6FT + 2PT) to increase efficiency, and speed while reducing costs.
Running a DeFi protocol is much more capital intensive than your usual startup. Here is a rough breakdown of all the expenses incurred in the last 20 months by both the core team and the DAO. You can also see all the approved governance proposals that moved funds from the treasury here.
There are three categories of costs that regular internet startups don’t need to worry about.
- First, legal costs are 20x higher than in a typical startup. From incorporation to token grants and agreements, everything is considerably more complicated and expensive.
- Secondly, security is extremely important, and given the supply/demand dynamics during the last bull run, security audit firms demanded extremely high pay for their services. We took security extremely seriously, we conducted 7 security audits and ran a bug bounty program on Immunefi.
- Releasing a token requires a substantial amount of liquidity. We deployed $1M on launch and deployed an additional $500K across the full range to integrate with Rari and prevent oracle manipulation.
Our biggest mistake here was not to raise more money for the protocol. Last October, the bull market was already cooling down. The prospect of raising through a Balancer LBP seemed worse by the day. However, the NFT craze was booming. We believe in both DeFis and NFTs and we decided to create the first DeFi NFT collection, 🔮 The Prophets.
It was a big undertaking that took us two months.
There are people that understand DeFi.
There are people that understand NFTs.
Little overlap between the two.
We struggled to find users that understood both DeFi and NFTs. DeFi users didn’t understand why we didn’t raise through a normal token sale. NFT people didn’t understand DeFi nor the utility of the token.
We raised $3M, our goal was $20M.
This was our most expensive mistake. All the other problems are downstream and arose from this. We had planned to hire three more people to reduce our unsustainable pace of development and make our systems more robust.
Given that we didn’t meet our goal, we had to sprint to get to 50M in TVL to make the protocol profitable.
2. Risk and Time ⏳
We are still early. Asset Management is one of the smallest niches in DeFi with only ~$70M in AUM combining all the protocols. I have no doubt that Active Asset Management will be the largest sector a few years from now.
I truly believe that a crypto-native Vanguard will rise to offer compelling and secure investment opportunities for everyday investors. That’s the reason I started Babylon, to help normal people compound wealth through crypto investment opportunities. One platform that offers all the advantages of crypto while shielding the users from all the nonsense (hacks, scams, excessive leverage).
However, there was a mismatch between the services Babylon offers and the users that are currently in crypto. Referring to the S-Curve adoption model, we are around the beginning of the early majority phase. Most of the users are still crypto early adopters, aka degens.
Crypto users have an extremely short time preference and high-risk tolerance. Babylon protocol provides fund managers and investors with investment opportunities with different risk profiles but always focused on medium to long-term investments.
This mismatch has pushed the team to move further and further out into the risk curve to be able to serve our users. Our biggest garden The Fountain of ETH only saw sustainable growth once we added capabilities to create a 3x levered stETH strategy. Their risk appetite has also forced us to integrate with more and more protocols, including Rari. Similarly, we were forced to introduce levered mechanics in the 🫀heart to remain competitive with DeFi APYs.
Additionally, our unique insight was to use blockchain technology to create non-custodial community-led funds. This couldn’t be done before crypto. Funds which are run by a community that collaborates to build and compound wealth together. We learned that most users don’t want to get involved. Investors just want to deposit money, forget about it and earn a return. Most of our gardens in the end were run by 2–3 people and the contributions from the other members were testimonial.
Although we had found a light-market fit, these issues prevented us from acquiring enough users to sustain the complexity and ambitious goals of Babylon.
3. The Bear 🐻 and The Wave 🌊
No matter what the media tells you, we are in a recession. Your wallet knows it. From the pandemic-fueled extravaganza of 2020–2021 comes the hangover of 2022.
By June, this year was already making records:
- Fastest yearly drawdown of liquidity in history.
- Worst performing bond market in the first half of the year since 1789.
- 60/40 portfolio was on track to lose 49% this year, which would be the worst annual return on record.
If Bonds and stocks are performing like that, it’s no surprise what happened to the crypto market. Fed and the other central banks have temporarily suspended the fiscal and monetary policy to appear like they are fighting inflation.
Everyone rushed for the exits the moment the market understood that the Fed took away the punch bowl. As a consequence, a tsunami of volatility hit global markets. This volatility created an unruly deleverage event that cause a liquidation cascade that wiped out more than a trillion dollars. 3AC, Luna, Celsius, Voyager….
DeFi had to withstand this insane amount of volatility. Asset Management protocols sit at the very top of the building, withstanding not only the risk of the underlying protocols but of the money markets as a whole. As a result, Babylon and the team had to support the unwinding and deleveraging of several strategies against the clock. Especially important was the deleverage of stETH, which at one point was trading at an 8% discount vs ETH.
Furthermore, these liquidations depressed the token prices of crypto assets. Most notably ETH and BABL, both lost 60% of their value in just a few weeks. As a consequence, our treasury took again another major hit.
4. Mad World
Finally, the regulations are still uncertain and hostile. Every project is forced to spend hundreds of thousands of dollars in legal fees just to set up the legal entities required to minimize risk.
Recently, things got beyond monetary challenges. The decision to ban Tornado cash by the US Treasury Dept was a huge disappointment. Technology is neutral and it can be used for both good and evil. Tornado cash is used to provide privacy in Ethereum so other users cannot freely inspect and surveil all your financial transactions. Same as cash, it can be used for legit and illegitimate purchases. The technology itself and its code should not be banned. I hope that freedom of speech will in the end prevail.
Although these regulatory changes didn’t affect our outcome, it was yet one more risk to consider in our already precarious situation. Another little nudge that pushed us towards this conclusion.
Thank you 🙏
Despite all these reasons, I take full responsibility for the outcome. We failed.
At the same time, I can’t help but feel proud of all the work we have accomplished during this time. In the last 20 months:
- We created a complex DeFi Asset Management protocol that served thousands of users and reached $30M in TVL.
- Launched 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 NFT collection with real utility in a DeFi protocol. Hedgies from dYdX would release a month later.
- Created a powerful staking mechanic with innovative tokenomics in the Heart.
- Bootstrapped a $10M lending & borrowing market on Fuse.
- Spearheaded UI/UX improvements like gas free deposits on mainnet and free on-chain governance voting.
- Created a composable API to allow fund managers to create DeFi strategies that connect with custom contracts.
We hope all the work we have completed helps other teams in the space. All of our code and repositories are open-source.
Here are the four repositories:
- Protocol Code. Smart contracts, tests, and deployment scripts.
- Dapp. React Frontend code.
- API. Smart Contract integration development tools.
- Docs. All of our documentation.
I would like to thank the team for all the work done. It has been an honor to fight our daily battle against this challenging problem together.
I would also like to thank all of our investors and community members for all the help and support provided during the last year.
That’s all for now. Personally, despite all the challenges ahead, I remain incredibly optimistic about DeFi and Asset Management. I wish the best of luck to the other teams building in this space: Enzyme, Enso, Set, STFX...