Introduction

In Part 1 of the $Memecoin Economy, we explored the history of memecoins, their growth, and the industry-leading level of revenue they generate for onchain trading tools; a sector that seems unstoppable and opulent, but a sector plagued by a deep dark underbelly. In Part 2 we explore this deep dark underbelly by shining light on common scams and red flags within the memecoin economy, highlighting how hard it is to navigate the millions of tokens created every month.

The Breeding Ground: DEXs

The enormous rise of the Memecoin economy has largely been enabled by DeFi, more specifically Decentralised Exchanges (DEXs). These DEXs rely on the Automated Market Maker (AMM) model to handle the buying and selling of tokens/memecoins in an automated manner via smart contracts.

DEXs and AMMs have revolutionised a way for value to be exchanged onchain permissionlessly and in a non-sophisticated manner; boasting +$21b in Total Value Locked through market leaders such as Uniswap, PancakeSwap, and Raydium.

When you marry permissionless DEXs with permissionless token creation, you get an economy where value is instantly created and desired. Anyone can now create a token/memecoin for anyone else to buy (while attempting to get rich in the process).

While not all token creations are equal and there are genuine and reputable tokens out there, the graphs below illustrate the stark reality of trying to find the next big memecoin which can be likened to finding a needle in the haystack.

Since the start of the year, over 1M tokens have been created every month on average across Solana and various EVM chains. We have also seen ~600k new DEX pools created every month for the past 6 months. To put this into perspective, the top 10 cryptocurrencies account for ~85% of the total crypto market cap, which means very little value is created from these millions of tokens deployed each month.

Thus, it’s evident that DEXs and AMMs are incredibly innovative technology, but they have also spawned a breeding ground for scammers looking to extract funds from naive or less-sophisticated users looking to make it big.

Rug Pull 101: Common Scam Tactics & Red Flags

One of the biggest fears for memecoin/token buyers and holders is opening up their wallets and finding that their tokens are worthless and that they’ve been a victim of a “Rug Pull”. Rug Pulls come in many forms, some soft and some hard, with the former happening over a long period of time and the latter occurring rather abruptly. The common types of rug pulls include:

• Liquidity Pulls: Bad actors remove liquidity from a token pool, causing the token’s price to plummet.

• Malicious Token Code: Token creators include malicious functions into token contracts that allow them to mint more tokens, restrict transfers or sales, or even burn tokens.

• Fake Projects (& Pre-Sales): Scammers create seemingly legitimate projects, attracting attention and participation, only to disappear with the project’s assets, leaving the token worthless.

• Team Exit: A project’s team suddenly disappears, leaving participants with no support or future for their token rendering it worthless.

We’ll focus mostly on Liquidity Pulls and Malicious Token Code as they are arguably the most rampant problem across all the millions of new tokens deployed every month.

Liquidity Pulls

You see, for a memecoin to be tradeable there must be a liquidity pool that contains some number of memecoin tokens and an alternative token like USDC, ETH or SOL, for the memecoin to be traded against, thus, determining its price. Anyone can provide this liquidity but in the early stage of a token, it is typically supplied by the token creator by using a portion of the token supply they minted to establish a market and begin attracting buyers.

As new buyers come into the market, the price of the token goes up and the value of the liquidity pool increases due to trading fees and an increase in ETH or SOL in the liquidity pool. At some point when the value is high enough, the token deployer will remove all the liquidity from the pool causing the price of the token to plummet. In doing so, the token deployer gets back worthless tokens they created, but more importantly, all the accrued trading fees and ETH or SOL accumulated in the liquidity pool making it a profitable endeavour.

Example Chart of a Typical Rug Pull

A striking example of just how prevalent this is can be shown by looking at PancakeSwap and Uniswap, the two leading DEXs for new tokens and memecoins. When analysing events where 98% or more of a pool’s liquidity was removed in one transaction within 1 day:

• PancakeSwap V2 on BNB Chain had 765,272 rug pulls; while,

• Uniswap V2 on Ethereum Mainnet had 199,175 rug pulls

We can also see (as illustrated below) that 66% of all PancakeSwap V2 and 69% of all Uniswap V2 rug pulls happen within the first hour of a pool receiving its first bit of liquidity. We also found that rug pulls occur most frequently around the 5-minute mark for both DEXs.

Clearly, there is a stark difference between the total number of rug pulls on BNB Chain for PancakeSwap vs Ethereum Mainnet for Uniswap. This is likely attributed to cheaper transactions on BNB Chain vs Ethereum Mainnet, costing serial ruggers a lot less money in transaction fees which inherently makes their operations cheaper with higher profit potential.

This is also true for Uniswap V2’s second-largest deployment on Base where transactions are cheap, totalling an impressive 474,676 rug pulls in just 9 months since it launched on the chain. Conversely, despite its low fees, Arbitrum does not follow suit with only a total of 1,560 rug pulls.

Maybe it’s because Base’s $2.9B Memecoin economy is significantly larger than Arbitrum’s $120M, providing an abundant pool of participants for scammers to prey on.

Malicious Token Code

Liquidity rug pulls are not the only trick up a scammer's sleeve and over time as traders have gotten wiser, they look to only trade tokens with their liquidity locked to protect themselves from potential liquidity rug pulls. So as traders have adapted, so have scammers, finding a new angle by creating malicious token code.

When a token is created code can be added to the token’s smart contract allowing the creator to perform certain actions. When a token is created by a scammer, these actions are often designed with malicious intent to profit from buyers.

Some of the most common malicious code functions include:

• Adjustable Buy/Sell Taxes: Allowing the owner to charge users when they buy or sell their token.

• Honeypots/Blacklists/Whitelists: Disabling the ability for token holders to sell or transfer the token.

• Mintable/Burnable: Allows the owner to mint new tokens or burn someone else's tokens at their discretion.

• Proxy Contracts: Allowing the owner to change the token contract, deceiving buyers who thought it was safe.

These tactics enable scammers to manipulate the token's behaviour, making it difficult for buyers to detect the risk until it’s too late.

Even if liquidity is locked, always make sure to check the token’s contract code!

Conclusion

The $Memecoin economy, while lucrative and innovative, is rife with challenges that make it a minefield for traders. The ease of creating tokens on decentralised exchanges has led to an explosion in the number of new tokens, but this also provides a fertile ground for scammers.

From liquidity rug pulls to malicious token contracts, bad actors have found numerous ways to exploit unsuspecting participants, tarnishing the memecoin ecosystem and creating a deep dark underbelly.

Traders should remain vigilant and look for venues that ensure a safe trading environment, maybe just maybe… we have a solution for you ;)