Yield generation app Stablegains could be facing a class-action lawsuit after the company lost more than $44 million of customers’ funds by investing them in Terra’s failed UST stablecoin.
Stablegains Loses Customers’ Money
The fallout from Terra’s collapse keeps getting worse.
Stablegains, a yield generation app that promised users 15% APY on USD, is being threatened with legal action after losing over $44 million of its depositors’ funds. Class action law firm Erickson Kramer Osbourne sent a letter to Stablegains on May 14 demanding records of customers’ accounts, the firm’s marketing and advertising materials, and communications records regarding the UST stablecoin.
“You owe an ‘uncompromising duty to preserve’ any evidence you know or reasonably should know [that would be] relevant in a pending lawsuit, even though no case has been filed,” the letter read, implying that the law firm may intend to take legal action imminently.
At the time of the letter, it was unknown how much exposure Stablegains had to UST, which had disastrously collapsed from its dollar peg less than a week prior. However, on May 15, Stablegains co-founder Kamil Ryszkowski revealed the full extent of the firm’s losses from investing in UST.
In a post to Terra’s research forum, Ryszkowski claimed his company held funds that totaled 47,611,058 UST from 4,878 depositors while requesting that the Stablegains wallet be included in any future compensation package given out to Terra users. At UST’s current market value of $0.07, Stablegains appears to have lost over $44 million of its customers’ money.
The Stablegains Story
Stablegains was part of Y Combinator’s W22 batch and had received over $3 million in funding from several venture capital firms, including SNÖ Ventures, Moonfire, and Goodwater Capital. The Stablegains founders had graduated from top London universities and previously worked at reputable companies in executive positions.
Despite its esteemed backing, there were also signs that Stablegains wasn’t all it was cracked up to be. The company marketed itself as a “simple and safe” way for its users to benefit from “advances in financial technology.” Documentation on the Stablegains website assured users that the value of their deposited assets would remain stable “regardless if the crypto markets are soaring or crashing.”
In reality, Stablegains took customers’ U.S. dollar deposits, converted them to UST, and deposited them into Anchor Protocol. Anchor, a Terra-based lending and borrowing DeFi platform, guaranteed 18% APY on UST deposits before the algorithmic stablecoin lost its peg and crashed the Terra ecosystem. Stablegains skimmed 3% off Anchor’s yields for its trouble while returning the remaining 15% to customers.
While it’s clear that the only way Stablegains could have achieved such lucrative yields on stablecoins in the present crypto market was to use Anchor, since-deleted documentation on the company’s website painted a misleading picture to customers. An article covering the risks of crypto stablecoins and how Stablegains mitigates them claimed that the firm mainly used USDC to generate yields, with smaller allocations to UST and DAI to diversify its holdings. However, in an update on the UST depeg situation posted to the Stablegains website on May 17, the firm admitted to holding all of its users’ funds in UST.
Do the Plaintiffs Have a Case?
Understandably, many customers who had deposited their funds with Stablegains may attest that they were lied to about the risks involved and what the firm was doing with their deposits. Aside from the misleading asset allocations and deceptive advertising, Stablegains also appears to be attempting to trick its customers into signing away their right to sue the company.
After a tumultuous week of uncertainty for Stablegains users, the firm announced that it would start allowing UST and USDC withdrawals again. However, USDC would only be given out at the market value of UST. Some discerning users also noticed that Stablegains had included a catch in the terms and conditions for withdrawing USDC. The terms read:
“Under no circumstances shall Stablegains be liable to losses due to the exchange rate of UST to USDC at the time of processing your USDC withdrawal request.”
By including this stipulation, Stablegains is effectively holding users’ funds until they agree not to take legal action against the company.
Whether the pending class-action lawsuit against Stablegains will proceed is not yet clear. However, the evidence of deceptive advertising and misleading deposit information is apparent. The firm’s attempt to trick users out of taking legal action may also indicate that Stablegains fears an incoming lawsuit and is making a last-ditch effort to quash potential plaintiffs.
Though the full impact of Terra’s collapse is still unknown, the Stablegains story proves that the damage has been significant across the industry.
Disclosure: At the time of writing this piece, the author owned ETH and several other cryptocurrencies.