Anatomy of Justin Sun’s Hostile Takeover of the Steem Blockchain

The only thing more stunning was the lies he told to explain the takeover

It was a pretty ordinary Monday until I turned my attention to what was going on at Steem. News was just starting to break about a hostile takeover of the Steem chain by Justin Sun of the @tronfoundation and the new owner of Steemit Inc. and steemit.com.

It was a stunning counter-attack in response to a defensive step the chain’s governance had taken a week earlier.

What set all this in motion?

Getting Through the Cryptowinter

In the midst of a lengthy cryptowinter, Steemit Inc had been forced to lay off 70% of their development team in November 2018. The move caused considerable concern on Steem as Steemit Inc was the primary block development firm.

Out of the uncertainty came a greater awareness that while Steemit Inc was an integral part of the platform, the level and pace of development happening with the various dapps would mean the chain would continue even if Steemit Inc didn’t. Confidence as a community grew.

Steemit Inc didn’t go away though.

Under the leadership of then newly appointed Managing Director Eli Powell, the small remaining team pulled together. They focused first on cost reduction and improving operational efficiency. Then on further development and growth.

The team worked together to build bridges and improve communications with the community. Lack of communication had been a bone of contention between Ned Scott and the community. Powell and other members of the Steemit Team appeared regularly on podcasts held on Discord, interacting with the hosts and the community.

Coming into 2020 things were looking pretty good.

Communities were in beta and almost ready for release. Smart Media Tokens (SMTs), first announced by Scott in 2017, had been developed and were on a testnet. Steemit encouraged the community to participate on the testnet. The testing had been going on for months and the team felt confident SMTs would be released in a matter of weeks.

The Steem community is small but passionate about their platform. We dare to dream and work toward a more tokenized web where people can earn for what they do for free on other social media. We were the first blockchain based social media and are still the most active.

While a lot was happening on the chain, the lack of funds for a cohesive marketing of the chain was a point of frustration for many in the community.

The Sale of Steemit Inc & Steemit.com

On February 14th Steemians checked into their favourite platform to learn the rumours making the rounds late in 2019 had been confirmed. Steemit Inc and Steemit.com had been sold by Ned Scott to Justin Sun of the @tronfoundation.

Part of the sale included the transfer of about 73million Steem to Sun’s control. These funds have been a source of controversy throughout Steem’s existence. They were mined at the very beginning of the chain and at one point was 41% of the supply in 2017. It’s currently about 20% of total Steem.

Members of the community vote for up to thirty witnesses with their votes influence based on the amount of stake they hold. The top 20 witnesses vote on matters like hardforks with a super majority of 17 needed for the vote to pass.

The Witnesses are developers, dapp owners or community leaders. Their contributions to the chain and the community are usually a deciding factor when Steemians vote.

Information and Misinformation

The press release issued by Justin Sun talked of the Tron Foundation investing funds into Steemit which would be welcomed by the community. The release originally published here on Medium seems to have been deleted from the @tronfoundation account

What raised eyebrows and blood pressures quickly was statements referring to Steem dapps being migrated to Tron and token swaps. The claim of a community of over 20 million users on Steem was eye-popping since there is just over 1million accounts.

It became apparent Sun thought he now owned the blockchain and dapps attached to it. That was news to the actual owners of the dapps and the community.

The Steemit Inc team was silent. We learned later, they had known some deal was in play but they learned the details like the rest of the community. They didn’t have a conversation with the Tron team until after the announcement was made.

An AMA (ask me anything) was scheduled for the following day. The community hoped to get answers to many questions. The Steemit team was finally able to post a communication.

Ninjamined Stake a Major Point of Concern

Scott had made a commitment to the community to use the ‘ninjamined’ stake (locked in Steem) for the betterment of the community and to not vote on Witnesses (also known as block producers) which form the chain’s governance.

An earlier hardfork had the code to enforce those commitments by setting the Steemit accounts to non-voting. As long as Scott kept his word, that code was not turned on.

The unexpected had happened. Scott sold the stake. This now meant that another investor held those funds and the community didn’t have a clear picture of his intentions. It was one of many questions to be asked at the AMA.

The AMA Didn’t Help

The heavily attended event left most disappointed. We came away with very little solid information. Sun had sort of committed to no token swap and not using the stake for Witness voting — “for now”. Immediately following the AMA over 250 Steemians gathered in a voice channel on the PALnet discord server for a Witness forum.

The Witnesses talked about their impressions and possible outcomes. Members of the community joined them on voice and the text chat was flying by. It would be the first of many similar discussions taking place in various discord servers where the community gathers.

Witnesses and Stakeholders Come Together

Over the next several days the messages shared at the AMA failed to match up to what was going out on Twitter and Medium from the Tron team. The Steemit team was reporting the information they had was the two chains working together more in parallel.

There were still a lot of unanswered questions.

In the background a group of about sixty witnesses and stakeholders came together to discuss the situation. While I am not part of the group, word has filtered out there was considerable discussion and debate on possible scenarios and responses.

What Sun might do with the stake was a major security concern. Efforts were made to contact him by email, on Twitter and through the Steemit team to ask for a conversation with him. The efforts were met with silence.

The group may have remained in an uneasy holding pattern if not for Sun’s actions on Tron. On February 19th Justin Sun used his stake on Tron to vote on two Super Representatives which are similar to Witnesses. He had previously insisted that neither he nor the Tron Foundation were involved in community voting.

Sun’s Actions On Tron Triggers Response on Steem

The group moved into even more serious discussion on how to secure the chain. Many were reluctant to deny any stakeholder access to their funds but in light of Sun’s actions on his own chain, a super majority was reached.

Steemit’s known stake would be frozen until communication could be established with Justin Sun and his team. A working agreement was going to be needed going forward. The group announced Softfork 22.2 on Sunday February 23rd.

A softfork was preferred by the group as it was reversible and didn’t require involving the exchanges to upgrade. The code froze the accounts known to be held by Steemit Inc from doing anything except delegating and undelegating Steem Power.

Justin Sun responded within hours with an open letter to the Steem community. He proposed a townhall with the top 50 witnesses to take place on March 6th. Many found the prompt response an encouraging sign.

The Softfork Was Not Without Controversy

The reaction in the community was not universal support. Some were passionate in their opposition. Witness votes were removed and added by some depending on their stance.

Immediately following the softfork announcement a heavily attended townhall took place in the PALnet discord. It lasted about two hours. A few days later ArtemisNorth and I hosted another discussion on our regular show in The Ramble discord server.

Discussion at both events was spirited but respectful.

Everyone was awaiting the Townhall with Justin Sun to see how things were going to work out.

Hostile TakeOver Strikes

In the early hours (for me) of March 2nd Sun and the Tron Foundation made their move. They had managed to get access to enough stake proxied to one account to vote in what appeared to be 20 sock puppet accounts into the top Witness spots.

They issued an open letter to the community announcing their actions and justifications. The letter was written and signed as if coming from the Steemit team we have known and worked with for so long. Few if any believed it was written by them or by anyone but Justin Sun or at his direction.

They also announced the rather curious step of wanting to change the power down (unlocking) time for Steem power to 24 hours. This was to take place during a future hardfork being worked on.

Steem uses a seven day voting window on content posted on the platform. Allowing a power down shorter than seven days would have serious consequences for chain security and open the door for voting fraud. The current power down period is thirteen weeks. Changing to a four week power down had been under discussion.

They then installed another softfork which freed up the Steemit stake. Delegations to dapps on the chain were withdrawn and some substantial transfers were made to crypto exchanges. Justin Sun didn’t buy the Steem blockchain, he stole control of it.

The Crypto Exchanges Involvement

It emerged that three exchanges: @binance, @poloniex and @huobi-global had allowed their customers holdings of Steem to be powered up on Steem and used to remove the top witnesses.

Some saw the transfers as payoff for their collusion. Others suggested the more likely possibility was to have some liquidity.

The rationale for the short power down took on a new light. The customer funds used to engineer this takeover were now locked in for 13 weeks but customers on the exchanges had every right to withdraw and expect their funds sent to them.

Some stakeholders confirmed this when they had tried to withdraw funds and hours later had not received the.

The Community Comes Together

Once again the community came together in a Townhall on the PALnet discord and over the next seven hours hashed out what was going on and our responses.

The Steem people on Twitter started letting others in crypto know about the collusion of the exchanges. Tweets were sent to the exchange accounts. @binance and @huobi-global responded and eventually withdrew their votes in the face of community fury. Tron owned @poloniex remained silent.

Justin Sun’s Orwellian Spin

Justin Sun remained silent until late last night. Then he unleashed a series of tweets laced with lies and distortions.

Steem didn’t do anything. Those ‘hackers’ were the Witnesses I’ve already talked about who secured the chain. Well, except for the one vector they thought was not going to happen. Until yesterday, few believed the exchanges would engage in this type of collusion.

Apparently though, this has been a concern before and reported on about Binance’s use of Tron’s TRX to vote itself in as a Super Representative. Huobi has indicated they would repeat their use of customer’s holdings if they felt the need.

The softfork froze about 73million Steem using code that was already in the existing code but had never been triggered. There were some additional actions added to secure the chain. No one in any position to take action ever threatened to nullify the stake. Frozen is not destroyed.

If the Witnesses, the governance of the Steem chain, actions were indeed criminal, then call in the authorities. Nice try Justin. Again at no time was there a threat to destroy the frozen assets nor was there any risk for any Steem holder, including Steemit Inc.

The Steem ecosystem was already safeguarded. The private property was being held in escrow in order to secure the chain. The hostile actions of Justin Sun has placed the future of the chain and the community at risk.

There was no need to control the network for any length of time. The Townhall on March 6th would have led to a peaceful resolution and release of the funds through good faith communication and actions.

Again, there were no hackers. All actions were taken by the community elected consensus Witnesses who discussed and worked with other witnesses and stakeholders to reach agreement on chain governance.

The chain was safe before the hostile takeover. Time to withdraw is now. Two of the exchanges withdrew their votes AFTER Steemians called them out repeatedly on Twitter.

They initially tried to claim their actions were part of a routine Hardfork. Except there wasn’t a hardfork, it was a softfork and no exchange involvement needed.

The under cover actions were not taken to protect the safety of the network. They were taken to attack the network and centralize a decentralized blockchain using 20 accounts created at the same time by the same user aka sock puppets. Justin Sun was installing fake accounts to replace real active and engaged Steemians.

It has been clearly established the exchanges colluded with the Tron Foundation to take control of the Steem chain though the one vector the Witnesses had missed securing. No hackers, no threat to anyone’s property and no need of protection.

The Steemit Inc team who was in place prior to the arrival of Justin Sun and the Tron Foundation were working very hard to develop the chain. They saw great opportunities for even more development in collaboration with Tron. That team was unaware of the hostile takeover of the Steem chain by their employer until after it was done.

That team has been devastated by three resignations: Mike Vandeberg, Andrew Levine and Steve Gerbino. The head of Communications and two of the core people on the development team.

There hasn’t been a hacking incident unless you view the hostile takeover of the chain by the owner of a dapp to be hacking. As I write this I’m seeing reports of more accounts joining Steem, powering up more Steem and voting the sock puppets.

That is not the actions of someone planning to return a chain to the community. That is the actions of someone who has already stolen control of the community’s chain and is consolidating the theft.

The Passion of a Community United

Justin Sun may manage to steel the Steem chain, even the name. I am very certain he’s made sure he will not have the support of the passionate Steem community that is uniting against him.

There is a window, a rather small window, through which he could de-escalate the situation and dial back the hostility. That would take a person with a lot more wisdom than he’s demonstrated so far.

Think about this Justin Sun, when a community of users comes together in a discord chat for not one or two hours but almost SEVEN hours to discuss the threat against their chain and community — wouldn’t you like to have that passion supporting your business interests?

Wouldn’t you like to have those dapp owners and community as bullish on Tron as they are on Steem?

ShadowsPub is a writer and community leader on Steem. She writes on a variety of subjects. If you’d like to receive prompts for your writing daily, join Prompt A Day.

Writer | Publisher — I write what catches my interest. A lot catches my interest. I create books to use. Life is a marathon, set your pace & enjoy the trip.

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