*It should not be inferred from this analysis that rug pulls on Uniswap are more or less common than other DEXes.
To have your token traded on Uniswap V2, a token creator must create a liquidity pool. To do so they need to provide the same amount of supply of wrapped Ethereum as their token. This sets the initial price. Because the token issuer can reserve a large number of tokens, if not all of them, to themselves, this gives token issuers the ability to manipulate the price of the liquidity pool.
Coinfirm has noticed a large number of rug pulls (token creators manipulating the price of a token via liquidity pools and then withdrawing all ETH) from liquidity pools. Coinfirm’s analysis of Uniswap V2 found that a large number of liquidity pools are created by developers with the express intention to rug pull.
Fake or worthless tokens that have been created by a developer with the intention of a rug pull often have an accompanying website hastily created.
44.73% of the liquidity pools had a lifetime of between 30 mins and 3 days. This is in contrast with the longest liquidity pool on Uniswap V2 being 591 days. The very common number of potential rug pulls makes the average drastically go down.
Scam Token / Rug Pull Case Study
TruAmpl was one such case. With the smart contract of the token seen here on Etherscan; 0xFCB755B046ea9B9bC4586db4018b49c5A02e3d1c and the Uniswap V2 liquidity pool for scam token against WETH seen as 0xa118263e32b84b6bae4589a330d7f8c25e117029.
The pool was created and supplied with liquidity on Aug-15-2020 06:19:52 AM +UTC with the rug pull happening just 45 minutes later at Aug-15-2020 06:56:48 AM +UTC (see the rug pull transaction 0x0d55ef137e6e583e4f71078495e3533371119e67181800a418fcf7017673480c). The rug pull withdrew liquidity of 154 ETH & 2,926,099 TMPL tokens. (with the TMPL quickly becoming worthless and now trading at USD 0.00).
This example explains why the average life of a liquidity pool is so short and is just one of the many cases Coinfirm has uncovered.
Median, Average and Maximum Uniswap v2 LP Lifespan Statistics as of 14 Oct 15:30 GMT+2
Median by block: 4694. By time: 19 hours, 33 minutes and 30 seconds.
Average by block: 369164. By time: 64 days, 2 hours and 11 minutes.
Maximum by block: 3403176. By time: 590 days, 19 hours and 54 minutes.
What is Uniswap V2?
Uniswap V2 is the latest version of the Uniswap decentralized exchange (DEX). It allows for flash swaps (by bringing in the use of WETH instead of ETH) and maintains highly decentralized price feeds, making it very manipulation-resistant.
However, manipulation is unavoidable when the creator of a token can manipulate the price with their large reserves.
How to Avoid a Rug Pull?
Do your own research.
Are the creators real people? Is there a whitepaper that is unique with specific benchmarks and goals? What track record do the developers have? Before the pool was created how old is the token smart contract itself? If you are going to deploy funds how much can you afford to lose? Have you been approached by an individual touting the particular token or liquidity pool pair? If any of those questions are not satisfied then think again.
How does Coinfirm mitigate the risks of Liquidity Pools?
Coinfirm has developed reports for liquidity pools specially tailored to financial institutions and large liquidity providers, to enable them to leverage the yields of DeFi whilst being able to mitigate regulatory risk. DeFi is quickly becoming a larger and larger aspect of the cryptoverse with USD 96.46 billion TVL as of the date of this post.
To give another idea on the scale of interest, this is the first of the top 100 busiest smart contracts on the Ethereum network; USDT, USDC, Livepeer, LINK, TRX, DAI, SHIB, OMG and KICK. The first – USDT – has had nearly 20 million addresses interacting with it. Coinfirm analyzes almost all of these token populations and smart contracts for crypto crime.
Download a redacted 28-page sample report on illicit funds in a liquidity pool below.