Doing a Risk Assessment on Cream.Finance
Crypto is playing with fire, but good investing means doing just that.

Doing a Risk Assessment on Cream.Finance

By AlucardLife | cryptoinvesting | 21 Nov 2020

The reason I love crypto so much is that I get epiphanies all the time. The one I got today was about how to more properly assess risk in a project.

One of the risks that traditional investors don't really have to worry about is the rugpull. This occurs when someone who has centralized power in a project just sucks all of the value out of a project. There are many ways to do this. Why would you want to stay in a project that could initiate a rugpull? Keep reading.

Risk in Crypto

First of all, just understand that there's no way to escape risk in crypto. Moreover, there's no way to escape a high amount of risk in crypto. So there's that, and it undergirds everything else I do in the space.

So why stay in crypto at all? Because I believe in the asymmetric risk of the whole market. I describe asymmetric risk here.

To say this another way: I am willing to do business with gangsters and degenerates in crypto because there is much more good here than shit.

So let's talk about the Cream lending/borrowing platform and how I'm assessing its use to me.

The Problem With Jeffrey

The biggest problem most people have with Cream is with its most prominent founder, Jeffrey Huang. Huang came to prominence in an Asian Wu-Tang style rap group before beginning a career as a businessman. The most successful of these ventures outside of Cream is Swag, a live streaming porn site. So yeah, we're dealing with a porn producer. Nothing wrong with the product (the girls on the site are very attractive), but you have to know it's a dirty business. Between pop music and porn, Mr. Huang has likely developed a thick skin against what I'll call "economic empathy."

Huang's reputation took some hits when one of his ventures, a social media network, went south. Apparently he ran off with the funds. I can look at this two ways. I guess there are some upfront ways to handle a situation like this, but if an investment goes wrong, what the hell is he supposed to do? Everybody's running off, so someone has to run off with the money. There's no way to make it right, including "taking it on the chin." All that means is more aggravation for the person who's trying to be honorable.

So what we've got is a moderately successful businessman who isn't past covering his own ass if shit gets funky. Got it.

The Problem With Cream

Swag has a token that showed up on Cream as collateral. Without being too technical, just understand this allows anyone holding large amounts of Swag to completely wreck Cream users. Guess who holds most of the Swag? That's right, the Swag founders.

Outside of this issue, Cream.Finance is an excellent platform. It offers high APY for a large variety of assets — much higher APY and many more assets than competitors like Compound, Bancor and Aave.

How to Do Business With Gangsters

So Jeff and the gang could destroy my crypto world. I use Cream as the center of my crypto world, basically. If they pull the rug, I'm not just rekt, I'm fuckin rekt.

But I'm not getting out just yet. Let's see why.

Cream Pros:

  • No need to scam in a bull market — If Jeff and the gang wanted to rugpull everyone for some major cake, they could have done it easily. There is $126 million in value on the Ethereum side of Cream, with another $10 million or so on the Binance Smart Chain side. That's a good payday that they haven't taken.
  • Dev borrowing is good for business — Jeff and his boys did "borrow" around $4 million from the Cream protocol using Swag. That's not an alarm bell yet (see above pro), and may actually be a good thing. If they are borrowing from themselves and making money, then Cream could benefit from more development capital and rewards for users.
  • Connection to respected businessmen — One of the advisors for Cream is the Compound founder Robert Leshner. It is definitely worth noting that Leshner tweeted in August that he does not endorse Cream. However, Leshner is an admin keyholder. This greatly reduces the probability of a front door scam, but the back door Swag scam I mentioned above could certainly still play out. A scam also seems less likely, however, because Huang would not want to purposely ruin his affiliation with Leshner.
  • A legitimate marketing effort — Cream has also employed Boxminer to shill the project. Boxminer is a well-respected public figure in crypto who closely monitors his own reputation and surroundings. Boxminer is one of the only YouTube guys I know who limits access to his Telegram group to ensure quality discussion. Shills I hate like Elliotrades and Bitboy certainly don't do that — their entire game is all about low-quality volume shilling.

Cream Cons:

  • Total value locked is decreasing — At its height, Cream was home to over $300 million in locked funds. Since news of a potential scam broke, money in Cream has fallen to around $140 million, falling to a low of just over $100 million on November 4.
  • The core team is all connected to Huang — Huang and three developers are the only executives of Cream.Finance, and they own the governance on the platform. Users actually created a proposal to remove Swag from the Cream protocol. The proposal seemed likely to pass until some anonymous whales (likely connected to Huang) hammer voted the proposal down.
  • The technology is in no way unique — At its core, Cream is a fork of Compound and other top lending protocols. This doesn't say much for the dev team Huang has put together. It also lends no credence to Cream's promises of eventually decentralizing.

My Conclusion

Cream.Finance is definitely set up in a way to protect the founders, as are all businesses. My assessment is not about whether the founders are selfish or dirty. My thought process is this: If it is more profitable to the founders to create a successful business than to scam, then logically, the founders will not scam. A second level to this process: The founders must believe that they can create a successful business that is more profitable to them than a scam. 

The second part of that process is actually the more important. And it seems to me that Huang and company still believe in themselves. They are making the effort to market themselves through legitimate channels and build enhancements to their protocol. They are spending money they don't have to spend in order to build.

What's more, the $4 million outflow of funds from founders that got everyone up in arms seems like what any bank owner would do who wants to leverage his bank to invest in another business. This is normal behavior (I'd do it, and I plan to in the future), but crypto investors may not have ever been this close to the guy with the safe key. So I won't get scared over this.

The most important condition: The market as a whole is bullish. If you're investing $4 million in crypto and porn like Huang right now, you're going to make money. If you're making money from Cream, you don't need to rugpull anybody.

So what am I going to do? I'll keep my money in Cream for the rest of the bull market unless TVL falls below $50 million. After that, I'll reassess. If the market as a whole goes bearish, I'm fuckin gone. If I don't see continued improvement in the protocol, I'm gone.

Also, I protect myself by never fully paying back my loans. If I keep money out and Cream rugpulls, right now I'd only lose 50% of my holdings. I will never pay the loans back until I get ready to completely exit the protocol.

Also, the Cream and Swag tokens seem like they are only made for the benefit of the founders. I will never buy either of those tokens or stake them in Cream. A lot of the anger around Cream is based on people losing money in these tokens, not in the protocol.

Yes, I'm playing with fire. But I believe if you properly assess your risk, you have a great chance of winning. Knock on wood.

BIG NOTE: If Cream fucks me, I'm not going to run to the "authorities" like a little bitch and give them any of the ammo they need to ruin all of defi. If I'm willing to risk tens of thousands of my dollars on an Asian porn guy, you can put on your big boy pants and keep the big cheaters (government) out of our shit. Stop crying, punks, and take responsibility for your own shit. This is crypto.

11/21 UPDATE: That song with Method Man was so cringe. Bitconnect vibes. I'm now more bearish on Cream. They won't rugpull RIGHT after that kind of a marketing scheme, so I can maybe ride out this bull market. But right after, I'm gone. This is not good.


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