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Secret Network, a privacy-focused blockchain, has seen a growing number of validators halt their services, after the head of an affiliated foundation took out more than $2 million in dividends and an upgrade led to technical problems.
At least four major validators say they have halted services, including Smart Stake, Kingnodes, Azul Collection and Domerium Labs.
The trend could spell trouble for Secret Network should others follow.
Smart Stake was the latest company to stop validating Secret Network, posting a tweet over the weekend that cited “recent events” as a main reason for leaving.
Late last week, Guy Zyskind, Secret Network’s founder, who leads the development of the network’s core technology as the CEO of SCRT Labs, alleged on a project forum that the Secret Foundation’s founder, Tor Bair, made an undisclosed sale of foundation funds and directed some of the proceeds to himself as a kind of dividend payment.
“Secret Foundation sold a substantial amount of USD worth of SCRT,” Zyskind wrote in the post. The project’s SCRT tokens have a market capitalization around $124 million, according to CoinMarketCap. “Tor cashed out a significant portion of these proceeds (to the best of our understanding, a figure in the low-to-mid seven figures) as a dividend.”
Zyskind continued, “There are potentially other unreported financial irregularities, such as an open loan to Alameda or one of its affiliates by the Secret Foundation. To the best of our knowledge, the loan or its lack of repayment have not been disclosed to the community in any of the reports.” Alameda refers to Alameda Research, the bankrupt crypto trading firm that was embroiled in the collapse of Sam Bankman-Fried’s FTX crypto exchange.
Zyskind recommended that the Secret Foundation be re-established as an organization “that operates as advertised, and as a network of Secret’s magnitude deserves.”
Foundation head claims he was owed
The Secret Foundation was set up to provide grant funding and other resources to projects that run within the Secret Network ecosystem, but it started to face heightened scrutiny last year after revelations that it was incorporated as a for-profit entity despite previously representing itself as a nonprofit. That led to calls from the Secret community for greater transparency surrounding the foundation’s operations and its use of community funds.
Bair defended himself in his own forum post, which he published an hour after Zyskind’s. In the post, Bair claimed that the withdrawn foundation tokens were owed to him as a part of his SCRT vesting schedule.
“Instead of paying out my vested tokens in December 2021, I converted my vested portion of tokens to USD at the OTC price and Secret Foundation distributed these funds as a dividend,” Bair wrote. OTC stands for over-the-counter, referring to the off-exchange market price. “The amount of tokens vested was 375,000 SCRT. The amount of the dividend distribution was $2.625M, which is the OTC price of $7 multiplied by the tokens vested.”
While he acknowledged the need for more transparency, Bair did not address whether the Secret Foundation has any outstanding loans to Alameda.
Bair did not immediately respond to requests for comment.
Smart Stake, for its part, said that politics at the Secret Foundation wasn’t the determining factor in its decision to stop validating the chain. “Many projects have all kinds of issues and they sail through the tough times and recover from it,” a representative for Smart Stake wrote in a message to CoinDesk. “The Secret Network community is raising the right questions. Most of the core team members are still trusted.”
The decision to leave Secret stemmed primarily from issues with the network’s core technology, the representative said.
“Recently, a firmware upgrade from Intel was mandatory but problematic to achieve for many validators on time, and it resulted in fairly stressful times for several validators,” the Smart Stake representative said. “Couple of validators ended their validator in the last month, and it was a decision Smart Stake was assessing as well at the time.”
Azul, Domerium and Kingnodes all halted their Secret validator operations prior to the most recent Secret Foundation controversy. Domerium, like Smart Stake, cited problems with the handling of a recent upgrade.
Azul said that it was shifting focus to the “application layer” of the chain. Kingnodes cited problems with validator profitability.
In a tweet responding to an earlier version of this article, Zyskind remarked that the validator departures are of minor concern for Secret in the long term. “A single validator with 0.6% of voting power left yesterday (which happens). The others are also marginal and left for the technical requirements to run a node,” he said.
“Secret requires more technical chops to run and if you’re not proficient you’re probably running at a premium which in this market may make some people give up,” Zyskind added.
The validator departures are the latest sign of potential trouble for the Secret Network, which in November disclosed that it was forced to patch a critical security vulnerability that could have been used to decrypt private user transaction data.
UPDATE (Jan. 30, 21:42 UTC): Adds statement from Guy Zyskind.