Previously in the cryptocurrency market, it has been incredibly difficult for smaller projects to gain liquidity for their tokens. The expenses involved in listing tokens on asset exchanges can be considerable and for a number of smaller projects are simply unaffordable. Inevitably, this has in the past, put off potential investors from sinking their money into a project that could have been something special, because they couldn’t move past the problem of the project’s illiquid token.
Thankfully, due to the advent and explosion in the popularity of UniSwap, more and more blockchain projects are being able to get access to automated liquidity on the Ethereum blockchain. Despite this new development, it hasn’t been completely smooth sailing and the “SUSHI Incident” is a perfect example of what can go wrong. So, what can UniSwap investors learn from the SUSHI Incident?
What Happened With SUSHI?
SushiSwap is a blockchain project that was founded by the anonymous developer who uses the pseudonym “Chef Nomi”. The project itself claims to be the next step forward and the natural evolution of UniSwap, which has taken centre stage of the decentralized finance arena in the last two years. The developer claims that community-oriented features make it better than UniSwap for users.
In the last couple of days, a bizarre turn of events has unfolded whereby Chef Nomi has removed half of the liquidity from the SUSHI/ETH Pool and has now liquidated all of his token holdings and cashed it out into ETH. Their development share contract held 2.5 Million SUSHI (the native token) and 20,000 ETH. From this, it has been claimed that Chef Nomi has made up to $13 Million after his exit.
Many people who have been following SUSHI have accused the developer of doing a “rug pull” which is the term given to those who list a project and put liquidity into it, in the hope that others invest to increase the value of the token. The developer will then “pull the rug” and remove their own liquidity, crashing the price of the token and making the developer money whilst losing investors potentially thousands. In this specific instance, SUSHI has tanked by over 50% as a result of the loss of liquidity.
Chef Nomi currently denies taking part in a rug pull scheme and claims that he cashed out his liquidity in an effort to focus on building the platform.
How Can Investors Better Protect Themselves?
Invest In Tokens Using Locked Liquidity Protocols
One of the biggest problems being faced by UniSwap investors at this time has been the aforementioned rug pulls, which are rife on the platform. This a shame due to the fact that there are many great projects that are trying to get noticed on UniSwap and could potentially be passed over due to the potential for scamming.
One of the greatest ways to protect people from scams on the platform comes in the form of locked liquidity protocols, like those offered by Liquidity Dividends (LID) Protocol. The project’s smart contracts make it so that liquidity deposited into UniSwap is “locked”, meaning that it cannot be prematurely cashed in. This alone makes it impossible for the currently common exit scams known as rug-pulls to occur, with projects opting into LID Protocol being certified.
This certification gives would-be investors the knowledge that the project they are investing in is legitimate and will put their mind at ease; knowing that they are not going to be scammed by the developers. Furthermore, this increased confidence by investors makes it more likely for them to deposit more capital into their investment, which will increase both the number of investments in a project and the value of the investments themselves.
This project holds key benefits for both investors and the launches that are looking to gain investment.
Do Due Diligence On Tokens Before Investing
This may sound obvious, however, it is important for you to do due diligence on a token before investing in it. Have a look to see whether there is information on the management team involved in the project, have they been involved in other reputable projects? Are they active on social media? Or they have they seemingly appeared out of nowhere to offer you the world? Doing some background searches can help you to find red flags and prevent you from making a bad investment that is victim to a rug pull scam.
Additionally, investors should be wary of listings that are brand new. This is because a large number of rug pull scams occur very quickly, with liquidity being pulled after a few investments have been made. If you are going to invest in a project, look and see if it has been around for a while first, investing in a project that has only been listed for an hour is a great way to get burned.