Safemoon’s ‘Reflection’ Tokenomics: Legitimate or a ‘Slow Rug Pull’?

Safemoon's 'Reflection' Tokenomics and Emissions Schedule

SafeMoon has been riddled with controversy since its March 2021 inception. That’s been a product, in part, of its “reflection” tokenomics, and the SafeMoon team’s alleged lack of transparency surrounding the issue. Here’s our attempt to unravel the project’s tokenomics.

What Are ‘Reflection’ Tokenomics?

SafeMoon introduced the idea of reflection tokenomics, though a number of projects have attempted to emulate the concept. The scheme works by promising to “tax” holders whenever they transact on a decentralized exchange (DEX).

In SafeMoon’s case, the project promises to redistribute a 4 percent fee on each transaction to existing holders. Another 3 percent go to SafeMoon’s liquidity pool on Pancake Swap, while 2 percent are sent to a “burn” address, and 1 percent are directed to SafeMoon’s “Ecosystem Growth Fund.” That adds up to a 10 percent “tax” on transactions.

A top source of controversy has been the project’s “burn” mechanism. The project’s white paper asserts that SafeMoon’s tokenomics come with an “inherent burn which can achieve token scarcity with a depreciating token supply.” The paper adds that the mechanism will lead to an “increasing scarcity of tokens” as tokens are “absorbed into the burn address.” More on this in the next section.

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The Problem With SafeMoon’s Reflection Tokenomics

There is one big problem inherent to reflection tokenomics. They don’t work on trades through centralized exchanges (CEXs) unless those exchanges facilitate the process. SafeMoon is presently offered on several CEXs — including Mexc, Digifinex, and Gate.io. The project advises that, at the moment, its reflection tax is “ONLY … calculated from the volume of the exchange [tokens] are held on.”

More troublingly, according to blockchain auditing firm CertiK, SafeMoon misled investors about the nature of its “burn” address. Analysts said the process enabled SafeMoon’s “owner address” to “accumulate a significant portion of LP tokens” over time. In addition to the risk of malfeasance by project developers, CertiK noted, “mishandling of its private key [could] have devastating consequences to the project as a whole.”

The firm recommended that SafeMoon take measures that included the introduction of a governance model that allowed users to vote on the project’s tokenomics to “increase transparency and user involvement.” It also recommended assigning privileged roles to multi-signature wallets to prevent the LP wallet from becoming compromised. SafeMoon has not acted on CertiK’s recommendations to date, but argued that users should trust developers nonetheless.

“Risks in regard to ‘rug-pulls’ or anything else is mitigated due to the fact that every member of SafeMoon would be subject to litigation and likely a swift prison sentence,” SafeMoon said in a statement to CertiK. “Additionally, outside of the law, our social lives would be in ruin, and we would not be able to show our faces in public again, let alone get another job.”

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SafeMoon Circulation as of August 2022

At its launch in March 2021, SafeMoon’s initial token supply stood at 1 quadrillion — or 1,000,000,000,000,000 tokens. However, nine months later, developers migrated the project to what they said was a “new” version, V2. The move cut circulation to 1 trillion, a number that developers achieved partially by “burning” tokens held by investors who refused to migrate or were unaware of the need to do so. (Stephen Findsein, a YouTuber and SafeMoon critic who goes by “CoffeeZilla,” estimated losses from that event totaled approximately $102 million.)

As of August 2022, SafeMoon’s token circulation stood a little higher than 562 billion. As of August 7, the project reported burning nearly 438 billion tokens, or 43.79 percent of supply. (The exact number, which you can find by looking at the  project’s burn wallet on the Binance Smart Chain Explorer, was 437,925,321,798.)

SafeMoon’s market capitalization as of August 7 stood at $219 million, making it the 172nd largest crypto project in the world by total investment.

SafeMoon Tokens Burned Annually

As of August, SafeMoon had burned a lifetime average of 23,124,467 tokens daily. We can extrapolate that out to get some loose estimates of what supply would look like in the future if it maintained that rate.

Jan. 1, 2023: 558,707,939,337
Jan, 1, 2024: 550,267,508,882
Jan. 1, 2025: 541,827,078,427
Jan. 1, 2026: 533,386,647,972
Jan. 1, 2027: 524,946,217,517

You get the idea. The numbers lead us to a burn rate of 8.4 billion tokens annually, currently worth 1.5 percent of supply.

That being said, attempting to calculate circulation more than a couple of years in advance is a largely theoretical endeavor. After all, any change in SafeMoon’s value will change the number of tokens involved in a given transaction. If a user wants to transact $100 in tokens valued at a penny each, the transaction would involve 10,000 tokens. If SafeMoon is worth $1, on the other hand, the transaction involves just 100 tokens. A 2 percent burn tax in the first example involves 200 tokens — compared to just two tokens in the second example.

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Unanswered Questions

As you may have noticed, the plan presents a number of unanswered questions. Among them: What happens when SafeMoon’s supply reaches zero? If centralized exchanges list SafeMoon, what will prevent investors from using them to avoid the project’s “taxation” scheme? Addressing the issue of whether additional exchanges will list SafeMoon in the future, developers note (in a grammatically error-riddled statement), “While we are all wanting to be on every exchange, we really need to protect the SafeMoon holders, which some exchanges do not have their users’ best interest. In order to keep protect the holders, SafeMoon is looking to maintain the process of partnership with all its exchanges.”

Do developers have the legal authority to force securities exchanges to comply with plans to meticulously manipulate token supply? Courts in the U.S. haven’t spoken, but the idea is questionable at best.

Lawsuits, Allegations

Adding to the mayhem, Findeisen — the YouTuber mentioned earlier — unleashed serious allegations this year related to SafeMoon’s tokenomics. Specifically, Findeisen said, SafeMoon founder Kyle Nagy had slowly extracted “taxed” proceeds from the project’s liquidity pool — to the tune of $10.3 million. Nagy stepped down, and lead developer Thomas “Papa” Smith took his place. Findeisen shared a similarly unsettling assessment of Smith, saying, “When Kyle stole money, he just took from the liquidity pool. But Papa was different. He had a story about it, he justified himself by saying he wasn’t rug-pulling liquidity. He ‘was moving the funds.’ You know, fund migration from a Version 1 liquidity pool to a Version 2.

“So Thomas withdrew liquidity 18 different times,” Findeisen added. “He actually held on to $143 million worth of liquidity. The sum of outgoing SafeMoon transactions was about $100 million. Of that $100 million, $58.9 million went to Bitmart and $8.1 million went to other undisclosed wallets.”

SafeMoon faced trouble even before Findeisen’s allegations. A group of investors led by plaintiffs Bill Merewhuader, Christopher Polite, and Tim Viane filed a lawsuit in February against the project and several celebrities who promoted it — including Jake Paul and Soulja Boy — alleging that SafeMoon’s architects engaged in a “slow rug pull.” The law firm handling the case, Johnson Fistel, is asking investors interested in participating in the action to contact them.

You can read the lawsuit in full embedded below.

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