Twitter celebrity questioned Huobi's misappropriation of client assets. What is the truth behind it?

What is the current situation after Huobi’s layoff crisis? After Sun Yuchen’s “reflection” on Twitter, has Huobi turned the corner? Twitter celebrities have repeatedly tweeted to question Huobi’s misappropriation of customer funds. If Huobi did not misappropriate customer funds, why “Huobi has 151 million ETH, but holds 128 million HBeth, and the staking ratio can be as high as 0.85”, what is the truth? Huobi may still lay off employees in the future under the dismal operation. The greater challenge is that the crisis has spread to TRON, and Sun’s crypto empire seems to be shaking... And the Ethereum Shanghai upgrade in March may be a catastrophe for Huobi!

After the layoff crisis, can Huobi really turn the corner?

After Huobi launched PI and the internal layoff crisis, Sun Yuchen seemed to realize the seriousness of the problem. On January 9, he sent a series of tweets to admit his mistakes and reflect on them. Huobi's internal layoff crisis also seemed to slow down. So, has Huobi's crisis really passed?

Let’s take a look at the market reaction from the perspective of data. We published an article on January 8 titled “Will Sun Ge’s Crypto Empire Be the Next Landmine in the Crypto Market?” According to the statistics at that time: As of 21:00 Beijing time on January 7, DeFiLlama data showed that Huobi’s net outflow in the past 7 days was about 121 million US dollars, and the net outflow in the past month was 138 million US dollars. The capital outflow was mainly concentrated in the past week (Sun Ge launched PI coins that week and made drastic preparations for layoffs. Judging from the results, the more Sun Ge struggled, the more Huobi collapsed).

According to DefiLlama data, as of 21:30 on January 12, Huobi had a net outflow of $133 million in the past seven days and a net outflow of $200 million in the past month. Compared with our last statistics, Huobi's funds are still flowing out. It can be seen that although Huobi's crisis seems to be somewhat unnoticeable in the recent warming market, in fact, "smart money" is still flowing out of Huobi, and Huobi's crisis is further fermenting and intensifying.

Did Huobi embezzle customer funds?

In addition to the continuous outflow of funds, Huobi seems to be facing new doubts. One of the things that the market is paying more attention to is BETH. What is BETH? Eth2.0 currently uses the beacon chain of the PoS mechanism. Before the merger of Ethereum, after the beacon chain verifies the ETH sent by the user, the mortgage contract will destroy the sent ETH from the current Eth1.0 old chain, and give the user the same number of tokens on the beacon chain. We call this token on the beacon chain BETH. So what is the reason for the Huobi BETH incident that the market questioned?

Crypto V BitRun (@BitRunX) tweeted: Huobi is suspected of misappropriating customer assets! From the on-chain data: 1. Binance holds 6.06 billion ETH and 108 million Beth, with a staking ratio of 0.017; 2. Huobi holds 151 million ETH, but 128 million HBeth, with a staking ratio of 0.85. This is obviously unreasonable, that is, nearly half of the users' coins are staked, which is obviously impossible. It can only be that Huobi misappropriated customer funds to make profits by staking without user authorization.

BitRun (@BitRunX) then tweeted: As expected, HBETH has decoupled by more than 10%! Judging from the time of decoupling, it was exactly after Sun Ge joined the game, which means it was probably Sun Ge’s special arrangement.

BitRun (@BitRunX) then tweeted to question Huobi: Digging deeper, it is more serious than I thought! The HBeth in the Merkle tree (Figure 1) released by Huobi is fake, and the contract address (see link) has not been moved for a long time, which means that users pledge ETH2.0 on Huobi, but Huobi did not really use it for staking, and the flow of this part of the funds is unknown. Finally, the Hbeth on Huobi is also fake, and the 128 million US dollars is also fake. (https://etherscan.io/token/0x8587558fccba43c8a3a7f37184fc4130621c188a)

Regarding the remarks of this Twitter celebrity, we have not seen a very detailed response from Huobi. This article attempts to make a simple analysis of the above questions. BitRun (@BitRunX) raised three main questions: 1. There is a huge disparity between the staking data of BETH on Huobi and BETH on Binance; 2. HBETH is seriously decoupled; 3. Huobi has a staking entrance, but no one has pledged for a long time.

This article captures the time point when HBETH staking stagnates, as shown in the following figure (https://etherscan.io/token/0x8587558fccba43c8a3a7f37184fc4130621c188a)

As can be seen from the figure, as of January 13, 2013, the most recent pledge was about 184 days ago, with a total of two transactions, the amount was very small (about 1.6 ETH), and it can be basically ignored; the remaining HBETH was basically pledged 390 days ago, roughly in December 2021. By querying the information, it can be found that Huobi (now Huobi) officially cleared out users from mainland China on December 14, 2021.

This means that after Huobi (now renamed Huobi) cleared out mainland Chinese users in 2021, its users lost a large number of users. HBETH temporarily remained on the Huobi platform due to staking issues. Huobi has had almost no new users since 2021, and there has been basically no large inflow of funds. This can largely explain why Huobi has 151 million ETH but holds 128 million HBeth, with a staking ratio as high as 0.85. However, although this shows that Huobi is unlikely to have misappropriated customer funds, it truly shows the dismal operation of Huobi. With the arrival of the Ethereum Shanghai upgrade, after Ethereum is free to withdraw staking, Huobi’s funds are likely to face a large loss again, which may become a new big challenge for Huobi.

Regarding the HBeth depegging issue of Huobi, this is actually the same as the outflow of funds from Huobi we talked about above, at least in terms of time. After Sun Yuchen took over Huobi, the market became concerned about the future development of Huobi, which led to a continuous negative premium for HBeth. Especially after Huobi’s recent layoffs and the launch of Pi, the market’s concerns became even worse, and funds began to flee frantically, which is consistent with Huobi’s overall capital outflow. Recently, affected by the Shanghai upgrade (focusing on solving the Ethereum withdrawal problem) and the rise in the market, HBeth has risen significantly, but it has not returned to a reasonable price overall, showing that the market’s distrust has not been completely improved.

On January 10, Kaiko released some research data, which to some extent also reflected the sharp deterioration of Huobi's financial situation, which can confirm our analysis above. Kaiko's research data showed that Binance's trading volume market share increased from 37% in 2020 to 57% in 2022, maintaining the first place; Huobi's share dropped from 22% in 2020, the second place in the market, to 4% in 2022.

As the crisis spreads, TRC20-USDT faces challenges

After a series of crashes in the crypto market, many market makers, institutions and OTC service providers have become more sensitive and cautious. As mentioned above, despite the recent rise in the market, the market still has various doubts about Huobi, and the crisis caused by Huobi is further spreading to Sun Yuchen's crypto empire.

Earlier this year, crypto influencer @catmangox tweeted that the entire Japanese cryptocurrency exchange community had already begun preparing for Huobi’s collapse, and were preparing to clean up their mess and return to local exchanges. Many of them had withdrawn their money to offline digital wallets.

If the comments of the big V are still groundless, then the withdrawal of Pionex proves that the market's concerns do exist. On January 5, Pionex ambassador Ye Shaowei said on Facebook that due to the gradual decline in trading enthusiasm on the Huobi exchange platform in recent months, the Pionex security team has also gradually reduced the aggregated market-making funds in Huobi to protect the funds of the majority of Pionex users. At present, all the aggregated market-making funds have been withdrawn from Huobi.

In addition to the massive outflow of funds, Huobi also faces challenges with TRON USDT. On January 12, Wu said blockchain tweeted: Recently, some OTC traders said they would no longer accept TRC20 USDT. For example, Legend Trading & ZING said: "We are currently suspending the acceptance of TRC20 USDT. Please go to the exchange to exchange for ERC20 USDT before trading with us." The specific reason is unknown. The market suspects that it may be related to the FUD of TRON and Justin Sun that spread in the community. However, some OTC traders said that despite the rumors, users are still generally using TRC20 USDT.

In addition, according to Wu Blockchain, Matrixport has suspended TRC20 USDT deposits and withdrawals since the 9th, and there is no announcement of relevant explanation. Regarding the reason why OTC merchants refuse to accept TRC20 USDT, one explanation is that it does not meet the anti-money laundering requirements of tools such as Chainalysis, so it is rejected by institutions and relatively compliant OTC merchants.

In Sun Yuchen's crypto empire, TRON is considered to have performed relatively well overall, but with the merger of Ethereum and the outbreak of Layer2, the pressure on Ethereum's competitive chain is increasing. After Sun Yuchen acquired Huobi, Huobi's crisis is likely to spread to TRON. On December 19, 2022, according to a report released by CryptoQuant, Huobi's reserve cleanliness is 56.7%. According to Coingecko data, Huobi's daily trading volume is about US$422 million. CryptoQuant analysts said, "Huobi's reserve setting is currently very risky, and its issued tokens pose a threat to the company's network health because it is difficult to verify the authenticity of the issuance of these tokens." With Sun Yuchen taking over Huobi, Huobi has launched a large number of TRON tokens. If the Huobi crisis is not handled well, it will undoubtedly hit Sun Yuchen's crypto empire hard.

It may only be a matter of time before Huobi lays off employees, and the Tron system is entering a turbulent era

Judging from the current data, although Sun Yuchen has made frequent moves since he took over Huobi, judging from the market reaction, he has not only failed to win back users, but has also caused further capital outflow. Although Sun Yuchen has already expressed his reflection, the market has not bought it, and the capital situation is still not optimistic. Huobi’s layoffs were a hot topic some time ago, and although they were temporarily suspended, judging from the current situation of Huobi, Sun Yuchen’s layoffs are inevitable, and it is probably only a matter of time.

The more serious problem is that with the intensification of Huobi’s crisis, TRC20-USDT has begun to be abandoned by institutions, which will undoubtedly further affect the future development of the TRON system. As Twitter celebrity @bc1Peter said, "The lifeblood of the Sun Ge system is TRX. Sun Ge made his fortune by relying on TRX, and the subsequent series of acquisitions, the issuance of stablecoins, and the recent acquisition of Huobi, I guess, all relied on TRX as collateral and borrowing money." If Sun Yuchen's leverage is too high, along with a series of liquidity crises triggered by the acquisition of Huobi, Sun Yuchen's crypto empire will experience a turbulent era.