ZKasino refuses to refund, and has misappropriated customer funds to profit over 3 million dollars from cryptocurrency trading

Author: Lila, BlockBeats

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In April this year, ZKasino, a decentralized betting platform in the ZK ecosystem, was embroiled in a "runaway" scandal: altering the website's event descriptions, refusing to refund users' staked ETH from events, shutting down Telegram speaking permissions, canceling an offline meeting in Dubai, and unilaterally transferring user funds to Lido for staking… Many users suspected that ZKasino had already "soft rug." On May 28, ZKasino officially responded, stating that they had initiated a 2-step bridging refund process, allowing bridge participants to register and bridge back their ETH at a 1:1 ratio. They would collect registration data over the next few days and release a new announcement as soon as possible, providing data for public verification.

However, by August 14, the previously "runaway" decentralized entertainment platform ZKasino had still not processed refunds, and the funds raised by investors remained in the original two addresses.

On November 23, on-chain data analyst Yu Jin monitored that ZKasino's address began to misappropriate "funds prepared for user refunds" to leverage long ETH on-chain. They deposited 5,270 ETH into Aave as collateral to borrow 11.589 million DAI, subsequently increasing their position by 3,500 ETH.

On November 28, the ZKasino project team continued to lend out 9.36 million DAI to purchase 2,603 ETH. After depositing 10,535 ETH from users into Aave as margin, they had cumulatively borrowed 53.77 million DAI to purchase 15,645 ETH to leverage long ETH. The average price of this leveraged ETH purchase was $3,437, and with the significant rise in ETH, the ZKasino project team’s operation of misappropriating users' ETH as margin for leveraged long positions had already yielded a floating profit of $3.22 million.

From on-chain data, it appears that ZKasino is not "unable to repay," but rather openly choosing to "profit from user assets." Every step taken by ZKasino is extracting trust and assets from users, which completely deviates from the original intention of decentralization and transparency. The ZKasino project team is using user funds to earn floating profits in high-risk operations while ignoring the issue of returning users' funds, which undoubtedly constitutes a secondary harm to the victims.

Timeline of the ZKasino Incident

Back to April 19, multiple community users discovered that after the ZKasino staking event ended, ETH refunds were not opened for a long time. Subsequently, through the Wayback Machine, it was found that ZKasino deleted the phrase "Ethereum will be refunded and can be bridged back" from the Bridge funds page on April 18, causing panic among users and raising suspicions about whether they were planning to "run away with the money." Users who participated in the staking event flocked to ZKasino's official Twitter to inquire, and Telegram also became a platform for rights protection, but soon the ZKasino team members shut down Telegram speaking permissions.

On April 20, the MEXC trading platform, which was originally scheduled to launch ZKasino (ZKAS) that day, announced a delay in the launch and withdrawal of funds, and ZKAS deposits were also temporarily halted. MEXC staff responded to the "runaway" allegations against ZKasino, stating, "We are just one of the investors; the actions of the project team have nothing to do with us. We, as investors, are also victims."

Perhaps due to pressure from multiple parties, ZKasino finally made a brief response: there are currently many FUD rumors. The ZKasino network will continue to launch, and the previous delay was due to the listing on the exchange.

However, users were not satisfied with this simple response, and the main issues became "When will refunds be made?", "Is it a soft rug?", and "Why was the mainnet refund description changed?"

On April 21, according to on-chain analyst Yu Jin's monitoring, ZKasino transferred 10,515 ETH that users bridged into ZKasino to a multi-signature address, which was subsequently deposited into Lido. These ETH were bridged by users for mining, but the ZKasino project team modified the official website description, forcibly converting users' deposited ETH into their platform tokens.

On April 22, Big Brain Holdings, previously disclosed as one of ZKasino's investment institutions, published a statement "debunking rumors," denying any involvement in ZKasino's financing.

At this point, users' concerns seemed to be gradually "validated." Some users also discovered that as early as March 16, Kedar, the founder of the Ethereum Layer 2 DEX project ZigZag, had warned that ZKasino seemed to have issues. In Kedar's tweet, he mentioned that most of ZKasino's revenue was fabricated, and users should be cautious about participating in their ICO activities.

Currently, ZKasino's latest tweet only announced the project's next steps: "All ZKasino games will be transferred to a new chain - and will still be retained on Arbitrum and Polygon. Native DEX and stablecoins will be launched soon. The first batch of ZKAS has been distributed to bridge participants."

However, there were no congratulations or celebrations in the replies to the tweet, only users repeatedly asking, "When will refunds be made?"

Views and Suggestions from Crypto VCs and KOLs

As a "star" project in the ZK space, many KOLs participated in and recommended this project during its initial launch. Now, with such negative events occurring, these KOLs have naturally become the target of criticism. In the crypto field, how to avoid pitfalls, and who should be held accountable when a project encounters problems? ABCDE Capital co-founder Du Jun, crypto KOL 0xSatoshis, @0xkillthewolf, and others shared their views, which are summarized by BlockBeats as follows:

ABCDE Co-founder Du Jun (@DujunX):

Regarding the project team's runaway, I see everyone is holding investment institutions and KOLs accountable. I think while it's reasonable, it’s also a bit absurd.

In the crypto field, 95% of investment institutions are actually the vulnerable group, flattering project teams for quotas, flattering platforms for listings, flattering LPs for money, definitely the "flatterers."

Good projects don’t involve these institutions in the early rounds, let alone conduct due diligence on the project team. If they can send money to an address, they should be grateful. KOLs may seem powerful, and some projects even have KOL rounds, but they are also at the bottom of the food chain, with no voice. If KOLs don’t get paid to promote, it’s hard to hold them legally accountable; they can only be morally condemned. Looking around, only the top exchanges are at the top of the food chain; other roles are just there to play a minor part.

When the project team runs away, everyone seeks rights protection from investment institutions and KOLs. The institutions and KOLs have also invested real money; who should they seek rights protection from? In this jungle society of crypto, we must take responsibility for our investment outcomes, continuously learn, and only then can we earn more and live longer.

Finally, I strongly condemn the runaway project team and the KOLs who promoted these runaway projects, hoping that unscrupulous projects will face legal sanctions and refund coins as soon as possible, and that everyone’s wallets will be safe.

Crypto Artist Niq (@niqislucky) replied:

Admit it: the vast majority of staking projects are just like putting money into a "multi-signature address." Unless the team is well-known, otherwise VC brand endorsement is almost the entire trust basis for retail investors. KOLs? Responsible for spreading the word, even taking the blame.

The comparison between VCs is where the weakness lies. If the gods gather, those who can't get in are just novices. No matter how novice, for retail investors, the information/funds are completely overwhelming. Not on the same level, who are you writing for to empathize? Retail investors only feel it's crocodile tears…

Crypto KOL 0xSatoshis (@0xSatoshis):

In light of ZKasino's soft rug status, I have reviewed all staking projects today, excluding ATOM+OSMO+TIA+DYM staking.

Currently, the projects participating in staking are:

1) swell+eigenlayer+renzo+puffer (total within 20E)

2) blast initially invested 25E, now only retains 6E, with serious inflation of points

3) lista over 5000 U

4) merlin only staked Runestone

5) bouncebit less than 10,000 U

Next, I will periodically withdraw principal or reduce positions to a reasonable level (the so-called reasonable is that if it goes to zero, I can accept it). I feel that the risk of nested staking is very high now. If one dollar is staked once in projects A, B, C, D, and E, the TVL becomes five dollars, but the market is still only one dollar. If in the meantime the water runs away, or there is a hacker attack, the risk is continuous. While there is still liquidity, it's better to exit part of it first.

Additionally, I want to emphasize again, do not trust KOLs' promotions, including this little retail investor. Just seriously study the content they share. As for whether to invest in the end, it must be decided by yourself. Investment is our own business; KOLs provide us with content and information to assist our decision-making.

For beginners, I still suggest participating less in staking projects. Principal comes first, and seasoned investors should control their positions, aiming for low-cost high returns.

Brothers, it’s okay to earn less, but we can’t lose everything. Staking should control positions, and I don’t recommend using off-exchange leverage to stake. In web3, nothing is impossible. Don’t always think that problems won’t arise. Many people, including myself, thought the same about FTX. When an avalanche occurs, no snowflake is innocent. So, prepare your risk control in advance and take responsibility for your wealth.

Finally: All the projects I participated in mentioned in this article are merely my own review and do not constitute investment advice, and I am currently reducing my positions. Please judge for yourself, DYOR!

Crypto KOL Killthewolf.eth (@0xkillthewolf):

The ZKasino incident is now a hot topic. Although I did not invest in or participate in staking for this project, a total of four people have asked me whether to invest in this KOL round. Here, I will write down my thoughts and insights, hoping to help everyone filter projects in the future.

The KOL round valuation is $9 million, with 15% unlocked at TGE. At first glance, this condition seems like a no-brainer, because the institutional valuation is $350 million, and I am 40 times cheaper than the institution. As for the 15% unlocking at TGE, I only need $60 million in FDV to break even, and the institution has already given a valuation of $350 million.

The main two reasons I ultimately did not participate are:

First, why is the valuation $350 million? Recently, Ethena, which went public on Binance, had a valuation of $300 million, and Puffer Finance had a valuation of $200 million. Why can ZKasino, a gambling platform, be valued at $350 million? Because of this valuation figure, I have doubts about this round of financing.

Second, the project team claims revenue of $8 million. Although everyone defaults that this number is somewhat inflated, I still checked the top 20 user addresses for platform betting amounts, all of which are suspected project team alt accounts inflating the numbers.

Third, the founder's character is very questionable. Previously, their official account used a bloody video of a murder case as a joke for marketing, which caused quite a stir at the time. @zachxbt has also exposed various things this person has done: https://x.com/zachxbt/status/1731025316204745113

So from my perspective, this project’s valuation is fake, revenue is fake, character is poor, and conscience is nonexistent. Therefore, I ultimately did not participate and fortunately avoided a big pit.