Behind the Synapse Token Sale: Nima Capital Sells Luxury Home Due to Financial Issues and Defaults on Token Sale

Author: Grapefruit, ChainCatcher

On the morning of September 5, within just a few hours, the price of the SYN token of the cross-chain protocol Synapse dropped by more than 20%. The unusual price fluctuation attracted the attention of the crypto community, with many users speculating, "Could it be that there is a security issue with the cross-chain bridge?" Subsequently, Synapse clarified on the X (formerly Twitter) platform that the drop in the price of the SYN token was caused by market makers (or liquidity providers) selling SYN tokens and withdrawing liquidity.

While everyone regarded it as a normal sell-off, some attentive users discovered that this sell-off event was not as simple as it appeared, but was related to the market maker Nima Capital. However, Nima Capital had agreed with Synapse in March of this year to provide liquidity to the cross-chain platform for a period of 12 months. According to the original agreement, the liquidity was to be locked for nearly 7 more months before it could expire. Why was Nima Capital able to withdraw liquidity early while also selling SYN tokens?

This morning, Synapse's official statement confirmed that Nima Capital had indeed breached the agreement by withdrawing liquidity and selling SYN tokens.

So, how could the originally agreed-upon lock-up period between the project party and the market maker be easily broken? Even in the case of a breach, why was Nima Capital still able to obtain the project's tokens and sell them? Were these token release agreements not written into the smart contract, merely a "handshake agreement" or just verbal promises? Why do such handshake agreements occur repeatedly, and how can users avoid becoming the ultimate bearers of losses from such actions?

The Timeline of the SYN Token Sell-off Incident

What was the complete process of the SYN token sell-off incident?

First, on the morning of September 5, the sudden plunge of the SYN token drew the attention of community users. According to CoinGecko data, around 5 AM that day, the SYN token dropped from $0.4 to $0.3, with a decline of over 25% in a short time, and has since rebounded to around $0.35.

Subsequently, in response to the plummeting price of the SYN token, Synapse clarified on the X platform that the drop in the price of the SYN token was due to market makers (or liquidity providers) selling SYN tokens and withdrawing liquidity. The team is investigating unusual activities on their wallets, and the protocol or cross-chain bridge has not suffered any security vulnerabilities.

In fact, before Synapse's official response, a Twitter user @Speeker had already alerted that an address starting with 0X4d had sold a total of 9 million SYN tokens in batches within one minute (at that time, the token's value was about $3.7 million) and had withdrawn over $20 million in liquidity from the stablecoin pool on the Synapse platform.

Data analysis revealed that the address was suspected to belong to Nima Capital, and it was found that they had reached a relevant liquidity agreement with Synapse in March of this year.

According to a proposal from the Synapse community in March, Nima Capital was designated as the first liquidity partner for Synapse, promising to provide $40 million in stablecoin liquidity, locked for 12 months. During this period, Nima Capital could receive SYN token grants from the SYN Foundation (reportedly 10 million tokens) and 33% of the transaction fees, among other benefits. The proposal was ultimately passed with a 99.2% voting support rate.

However, with nearly 7 months remaining until the end of the promised service period, Nima Capital withdrew liquidity early and concentrated on selling SYN, causing its price to drop.

Later, some users reported that Nima Capital's official website (nimacap.com) was offline and inaccessible, and their official X platform account had been set to "protected," allowing only approved followers to view it. Some users speculated that Nima Capital might be facing financial issues and was selling off its assets, including cryptocurrencies. Real estate media Mansion Global reported last month that a related entity of Nima Capital had sold a luxury apartment in New York for $80 million.

According to the crypto data platform RootData, Nima Capital is a family investment firm that has made 24 investments in the DeFi and cryptocurrency sectors, including projects like 0x, 1inch, Liquity, Notional Finance, DexGuru, Handshake, etc. The most recent investment was in April, participating in the seed round of NFT developer Flow.

This morning, Synapse confirmed that Nima Capital's removal of liquidity constituted a breach of contract. The liquidity proposal from Nima Capital was approved by the Synapse DAO on March 19 of this year. According to the proposal, Nima Capital was required to provide $40 million in cross-chain liquidity for 12 months in exchange for token emission rights granted by the DAO during this period. Yesterday, Nima Capital sold the SYN tokens granted to it by the DAO and removed all liquidity provided to the stable pool six months ago, violating the terms of the SIP-21 proposal. The Synapse team has been trying to contact Nima but has been unsuccessful.

According to DeFiLlama data, Synapse's TVL is currently $112 million, down about 20% compared to the day before.

Lock-up Terms as a Joke: Management Loopholes or Unwritten Rules Between Project Parties and Market Makers?

The sell-off of the SYN token seems to be caused by the market maker's financial issues, but it actually reveals a lack of binding rules regarding the token lock-up by the Synapse official, highlighting some hidden unwritten rules between the project party and the market maker.

The lack of binding power over the tokens allocated to market makers is a point of contention among community users. Originally, there was a 12-month lock-up period, but less than 6 months into it, the market maker withdrew liquidity. Why did the official have no constraints on the sale of SYN tokens? Why was Nima Capital still able to obtain SYN tokens despite breaching the agreement? What exactly are the lock-up regulations regarding tokens between the project party and the market maker? Why does the proposal only mention that the provided stablecoin liquidity is locked for 12 months, but there is no mention of the SYN token grants being locked for 12 months? Is it possible that the lock-up rules between the project party and the market maker have no legal binding, and these published rules are merely for show? Some users even expressed a desire for there to be a real off-chain contract between them. However, from Synapse's current response, it seems there is no agreement in place.

In fact, incidents like Synapse's are not accidental; the agreements with market makers are often referred to by users as "handshake agreements"—lacking written and legal efficacy, merely existing verbally or through a handshake.

Last month's Curve sell-off incident similarly involved tokens that were originally agreed to be locked for six months being sold early. The OTC trading of CRV led to a 20% drop within a week, nearing the on-chain liquidation line, and the sold CRV tokens were mostly those previously sold off by its founder, with investors having promised a 6-month lock-up. However, within just a few days, some participants had transferred their tokens to centralized exchanges, raising suspicions of offloading. For instance, DWF Labs transferred 2 million CRV to Binance, although they later stated it was for trading needs and that they would withdraw the CRV back on-chain after completing their plans, yet users still viewed it as an offloading action. Subsequently, it was confirmed that the CRV lock-up did not seem to be enforced through legal or smart contract means, with Curve founder Egorov stating in a statement that buyers violating the cooperation agreement would not face negative consequences. Additionally, earlier this year, the Arbitrum Foundation secretly transferred 750 million ARB tokens to other wallet addresses despite a proposal not being passed.

From this perspective, breaches of contract between project parties and market makers or investors occur frequently, which is why when the Nima Capital sell-off incident happened, some users remarked, another seasoned player exploited DeFi governance drama to obtain tokens from the project treasury and then violated the agreement and sold the tokens.

These actions seem to contradict the currently heavily promoted concepts of "decentralization" and "Code is Law."

In response, crypto investor VeVe stated that regarding the Synapse incident, it is currently unclear what the specific details of the lock-up terms for the SYN token are within the protocol. For the Synapse team, the real issue now is to disclose to users whether there are relevant smart contract constraints on the specific rules of token lock-up or if the terms for the agreed-upon locked liquidity have been modified.

Moreover, there are indeed some unspoken rules between market makers and project parties, and their transactions have always been opaque, which is a problem for the entire industry. Over time, there may one day be specific rules published, but in the short term, that is unlikely. Investors should proactively advocate or urge project parties to disclose specific lock-up mechanisms and details when it comes to such proposals, or they can choose not to purchase tokens that do not provide sufficient information and disclosure.

The Synapse sell-off incident also indicates that "handshake agreements" are a potential ticking time bomb for both users and project parties.