'This Circus Needs to Stop Now': How DeFi Protocol Wonderland Avoided Shutdown After Scandal

By Liam J. Kelly

Decrypting DeFi is Decrypt's DeFi email newsletter. (art: Grant Kempster)

The biggest story to hit DeFi this week (and maybe in the past two years) was the revelation that the co-founder of DeFi project Wonderland, 0xSifu, is an alleged serial fraudster with ties to the infamous Canadian crypto exchange QuadrigaCX.

Wonderland is an Olympus fork built on Avalanche, with a similar bonding mechanism and exorbitant APYs for staking. 

But if you’re not caught up on any of that, not to worry. Here's what we know so far. This story is pretty convoluted, and is by no means finished. 

On January 27, a Twitter user named Zach declared that 0xSifu is in fact Michael Patryn, a co-founder of QuadrigaCX.

Patryn spent 18 months in prison for credit fraud and has ties to a criminal organization called the ShadowCrew, according to reports from Canadian news outlet The Globe and Mail. 

Now, the Quadriga story was a weird one, even by crypto standards. The other Quadriga founder, Gerald Cotton, died while on his honeymoon in India and was apparently the only one with access to the exchange's private keys. Without access to these keys, $190 million in exchange assets were essentially frozen. 

To help move the proceedings along, a Canadian court appointed the accounting firm Ernst and Young to oversee a resolution. The firm later revealed that the cold wallets with those exchange funds were in fact empty.

It’s a long complicated story, mired in controversy and strangeness. I’d recommend catching our explainer on the events here.

This is relevant context because before Zack’s outing of 0xSifu last week, it appears that no one had any idea 0xSifu and Patryn are the same person—including the other people behind Wonderland. Once uncovered and then confirmed by Wonderland co-founder Daniele Sestagalli, other developers, including SushiSwap founder 0xMaki, came out to say they had suspected 0xSifu was “borderline.” 

The events caused panic throughout the sector, landing a massive blow to the Frog Nation, the group of projects overseen by Sestagalli, which were all inextricably linked to Patryn. What’s more, Sifu was in charge of Wonderland’s massive treasury holdings, and investors in the project were, understandably, none too pleased given Sifu’s past.

Tokens for Wonderland and associated projects like Popsicle Finance and Abracadabra all collapsed. For those on the outside, it may have been hard to feel sympathy for investors who invested in a project called “Abracadabra.” But for those holding bags, it was brutal. 

We’re talking Lehman Brothers collapse-type fear levels here. 

Wonderland then launched a vote to remove Sifu from his position as treasurer, then another vote to wind down the project entirely. Tons of similar proposals emerged on the voting platform Snapshot, all with conflicting outcomes. 

And once the “official” vote concluded, and the community voted to continue moving forward, Sestagalli announced on January 30 that the project would be shutting down.

Just 14 hours later, enough had happened behind the scenes for Sestagalli to reverse course. He tweeted that “a lot of great people reached out to help Wonderland move ahead stronger than ever.” 

Shortly after, Sestagalli told the Wonderland community in Discord that the “DAO is gonna be managed now by me Directly. The circus needs to stop now and we need to gather with serious proposals and structure to move forward.”

And that’s sort of where things stand now: Wonderland lives on.

Most notably, Sifu/Patryn began moving blocks of 100 ETH through the privacy mixer Tornado Cash on February 1. Elsewhere, the CEO of Wintermute, a market maker in DeFi, reported that the wallet connected to Sifu/Patryn reports a “low risk” flag when pushed through a commercial service like Chainalysis or Elliptic. This means that from a KYC and AML point of view, these analytics services don’t consider this particular wallet as doing anything shady. 

It’s quite a messy situation, but isn't the first DeFi has seen, and won't be the last. The situation raises questions about your favorite DeFi personalities—the humans behind their Discord usernames and Twitter avatars—and who holds the power at the popular "decentralized" organizations.

And Sifu/Patryn himself raised one such question on Wednesday:  “When did we start demanding background checks in DeFi?”

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