Opinion |

Qtum Controversy: Patrick Dai’s exit from Bitbay

Recent accusations have dogged the Qtum project. Here is Smith + Crown's summary of the controversy and five key takeaways for investors.

Recent accusations have dogged the Qtum project. ICOcountdown has compiled several days worth of relevant communication here, where we found much of the source material. Below is a highlight of our thoughts at this time. We provide a brief recounting of events, then explain our five takeaways.

  1. There is not enough information to conclusively judge  Patrick Dai’s character, but his involvement in Bitbay and his attempt to hide it casts a shadow on his credibility.
  2. Given the high-profile third-party backing, it is unlikely Qtum is a scam.
  3. Qtum should improve its transparency, open up its Slack or explain why signups were stopped, and release some form of code or demonstration product.
  4. Interested parties should ignore several red herrings in this issue: PwC’s involvement, Dai’s multiple names, and Caspal’s Rubik’s cube record.
  5. The community should not expect this to be a fully decentralized project at launch.

We will update our thoughts if more information emerges. We have reached out to the Qtum team for an interview. If there are any issues this analysis does not address, please let us know.

What has happened?

First, project Lead Patrick Dai was once the Steven Dai associated with the Bitbay scandal in 2014. Joshua Bouw of Blockcoin exclaimed on February 21 in a series of tweets that Patrick Dai was the Steven Dai “that fucked #bitbay and David Zimbeck.” In 2014, Zimbeck posted an account of the scandal on reddit; in it, he frames Steven as the one who originally approached him about Bitbay but then got “pushed around” by other members of the team, who then go on to try to extort David. In a recent letter addressing the accusation, Zimbeck seems to slightly change the narrative in presenting Dai as a thief and possible scammer. He also says Dai did in fact steal both Bitcoin and BitBay when he left and never returned many inquiries from Zimbeck about repayment.

At first, Qtum appeared to ignore and resist the accusations that Patrick and Steven were the same. However, on February 25th, Patrick Dai admitted to using the pseudonym Steven Dai and being involved in BitBay, though he claims he returned all of BitBay’s funds before he left in 2015. Shortly thereafter, the Qtum foundation also released an official letter on the topic with the conclusion, “After studying the subject matter thoroughly, [we] see no fault in Mr. Dai’s past activities and regards the accusations as groundless.”

Since then, bitcointalk has erupted in accusations of scam and scandal. Qtum disabled signups to its slack channel, and beyond the letter posted in slack and reposted on bitcointalk, has not officially addressed the issue. While this controversy blankets English-language discussion of Qtum, it’s worth noting that at time of writing, neither major Chinese crypto media nor Qtum’s Chinese-language communities are discussing the issue. In addition, Qtum still has not released additional information about the sales terms less then twelve hours before the ICO is scheduled to launch on several exchanges.

Five key takeaways

  1. There is not enough information to conclusively judge Patrick Dai’s character, but his involvement in Bitbay and his attempt to hide it casts a shadow on his credibility. It’s not clear why Zimbeck’s initial account cast Steven as a victim while his recent one casts him as a thief and possibly a mastermind. It’s also not clear why he would lie about it now. Some accuse Zimbeck of trying to pump the BitBay price, but this is unlikely–he has spent years disproving the defamation campaign BitBay team members waged and it’s not plausible that he would consciously throw it away. Zimbeck likely didn’t know what went on behind the scenes of BitBay–if he witnessed a Dai-led conspiracy to oust him, he could have posted it. Based on the information that has been posted, there are multiple ways to interpret what actually happened behind the scenes at BitBay. One’s interpretation would color one’s judgement of Dai. Ultimately, only Dai really knows what his involvement was. But he should have disclosed his version of it and now, he should do something to rectify it.  
  2. Given the high-profile third-party backing, it is unlikely Qtum is a scam. Despite what one thinks of Dai’s character, it is not the only relevant consideration in evaluating Qtum as a whole. If Dai did intend to mislead investors, the list of people deceived would include Roger Ver, Anthony Di lorio, business professor and angel investor David Lee Kuo Chuen, and Bo Shen of Fenbushi Capital, among others1. Of course, that’s not unheard of: Elizabeth Holmes’ team presumably misled investors about Theranos for years. However, Theranos-level scandals are far more rare than random pump-and-dump schemes. Even scandals like BitBay lacked third-party endorsement. The DAO was certainly a third-party-endorsed debacle but it was not a scam.
  3. Qtum should improve its transparency, open up its Slack, and release its code or a public alpha. Dai should have disclosed his prior involvement to both his team and probably to the community. Dai’s recent success was also an opportunity to make things right with Zimbeck. Dai’s team members initially expressed surprise about the BitBay scandal and mocked the accusations. That looks bad, and Qtum should apologize beyond the formal letter it released. Finally, Qtum should also respond to accusations that there is no actual code. It’s not unheard of for teams offering enterprise-oriented software to keep code hidden from Github, but given prevailing concerns, they should make something available, even if it’s only snippets to show there is actually software. Overall, Qtum has an opportunity to apologize and course correct. It should take it.
  4. Investors should ignore several red herrings in this issue: PwC’s involvement, Dai’s multiple names, and Pascal’s Rubik’s cube record. PwC’s involvement is not surprising: a project like Qtum would seek out major corporate partnerships to help it interface with the business community, its target market. The retraction of mentioning PwC’s involvement is also not surprising: small companies with large partnerships lined up do mistakenly release the information before it’s been fully authorized. As for Dai’s multiple aliases, it’s not uncommon in Chinese culture for people to go by different names in different professional and social settings. Given names are generally only used by close family members and friends, while professional pseudonyms are often used in business settings. Many people use an English handle when dealing with foreigners. It’s a little unusual for Dai to use multiple English pseudonyms, but not altogether unheard of. Finally, a Coinjournal article has accused Qtum’s “Caspal” of lying about his rubik’s cube accomplishments. Caspal (the current English name for Yunqi Ouyang) has his Rubik’s cube record available here, which backs up a literal interpretation of the claims on his qtum profile. As with all the team bios, Qtum should have linked to it.
  5. The community should not expect Qtum to be a fully decentralized project right out of the gate. Qtum has emphasized a focus on blockchain industry applications and regulatory compliance. The Qtum economy white paper says that, “the design of the Foundation’s governance structure mainly considers sustainability, management effectiveness, and fund-raising security”. The token distribution will be more centralized than other projects. Given that only 51% of tokens will be distributed during the ICO, the team will be able to retain a controlling stake with only a modest investment. The governing foundation also won’t hold elections for two years. This shouldn’t be surprising. Taking a step back, one must acknowledge that this project is backed by many well connected people in one of the world’s most centralized advanced nations: releasing an early-stage fully decentralized project in the context of Chinese political and economic norms is probably not feasible. This could change in the future, but the team seemingly made all aspects of governance predictable and controllable for two years. Perhaps ownership of the network will become more decentralized over time as the foundation distributes its token holdings, but there is no guarantee it will. The revelations about Dai do not change any of these factors.

  1. Roger Ver has confirmed his involvement with Qtum in an interview with 8btc.com. Anthony Di Iorio confirmed his through twitter. Bo Shen of Fenbushi Capital signed the letter from the Qtum Foundation regarding issue of Patrick/Steven Dai. Other prominent members the project claims are involved have had plenty of time to deny involvement.
  2. Smith + Crown do not know either Zimbeck, Dai, or anyone involved in the BitBay scandal. We have no special or privileged information. Based on what has been posted, there are multiple ways to interpret what actually happened behind the scenes at BitBay. One’s interpretation would color one’s judgement of Dai. One plausible alternative interpretation is that Dai thought he was a minor character in the whole affair, fled when he saw it going south, and didn’t feel beholden to a group of people he met on the internet and concluded he couldn’t trust. Not defending Zimbeck would have been low but not nefarious. It would be undeniably human to feel ashamed of this and want to avoid it. It’s possible we will never get all the facts about what happened at BitBay.