As cryptocurrency markets continue their retreat, DeFi tokens are getting hit particularly hard and investors are growing wary of a rising trend of ‘rug pulls’.
In essence, a rug pull is similar to a pump and dump. Tokens are artificially inflated by hype and spurious liquidity, only to be sold off or dumped at a peak leaving the latecomers out of pocket.
This has left many DeFi tokens with chart patterns that resemble those that were seen by countless altcoins during the 2017/2018 ICO boom. Analysts have even joked that some charts look like Dubai’s iconic Burj Khalifa tower, which is effectively a huge spike in the sky.
Liquidating DeFi Rug Pulls
Popular analyst Josh Rager recently posted how he has just liquidated a large stash of these assets which are now worth a pittance.
Many of these DeFi clones are just tweaked smart contracts launched by anonymous entities with no backing or code audits. They’re driven by hype and tend to attract ‘degens’, or degenerate farmers, just seeking a quick buck.
Tokens are initially distributed or airdropped in greater numbers to early adopters who provide that liquidity boost at the start. As the hype mounts, more liquidity pours in and the laggards lose out when the tokens are sold at many times their original value. This entire process can happen within a few hours.
It is made possible by the nature of decentralized exchanges such as Uniswap which allow anybody to create any token and list it providing it has the equivalent liquidity in another token, usually ETH.
Rager joked that he could use the losses to count against capital gains for tax purposes this year.
DeFi Dumps in 2020
There have been a number of highly successful DeFi protocols this year which have seen their native tokens surge hundreds of percent. These are usually more established platforms with greater transparency and fully audited smart contracts.
On the flip side, there have been a number of copycats that simply didn’t make the grade and the premise that DeFi has already peaked. SushiSwap is probably the best example of this with its rocky start and pump and dump chart pattern. At the time of writing, SUSHI tokens were trading for $0.62, down over 94% from their peak.
Swerve is another example with SWRV prices down over 90%, and bZx protocol has seen its native token slide 92% since ATH following a series of security exploits. Nearly all DeFi tokens are in decline at the moment but many were just scams from the start, which is why it pays to always do your own research.
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