This is a follow up on our last article, can DeFi buy You a Lamborghini? I recently discovered Uniswap and I am intrigued at the massive gains crypto traders have been making over there.
But as massive as the gains are on Uniswap, there’s a term every Uniswap trader knows and is afraid of. That term is Rug. Now, lets introduce you to Uniswap, the planet of crypto gems and moon boys.
What is Uniswap?
Uniswap is an Ethereum based decentralized crypto exchange that operates using an instant swap function based on current prices. What this means is, you can swap ERC20 tokens, as well as ETH to an ERC20, and vice-versa instantly wallet to wallet at current prices.
How does Uniswap work?
Let’s have a look at some features of Uniswap and we can have an idea of how it works from there.
- On Chain: Uniswap is based on the Ethereum Blockchain only.
- Uniswap is completely open source and decentralized: anyone can add a token to be traded on Uniswap.
- Liquidity pools: Uniswap solves the problem of liquidity by letting anyone with an Ethereum wallet to be able to add & remove liquidity at any time, and in return be rewarded by getting a share of the 0.3% trading fees.
- Instant trades: Uniswap trades are executed instantly at present market rate. Please note you cannot set a limit order.
What is Rug?
Yes, what is rug? We ain’t talking about rug carpet or Aladdin’s flying carpet lol but rug like ruuuuuuug hahaha, just cracking you up.
Rug can be defined as a scam in play on Uniswap. Example, when someone classifies a particular token on Uniswap as a rug, it means that token is a scam.
The term “rug” can be understood better by looking at the different types of rugs one can encounter trading on Uniswap.
Types of Rug
1. Fake smart contract rug: this is the most common rug scam on Uniswap due to Uniswap being decentralized and completely open source meaning anyone can add a token. Scammers have exploited this advantage by creating fake tokens that bear the names of popular tokens. A scammer for instance can create a token named Balancer (BAL) but with a fake smart contract and not that of the real BAL and add this token to be traded on Uniswap.
2. Scam presale rug: Another frequently pulled type of rug is the scam presale. Here an anonymous DeFi project organizes a presale event requiring people to send Ethereum to a smart contract and in return will get the presale tokens. Sooner or later the project disappears with peoples Ethereum which marks the end of the project, heartless yeah?
3. Presale distribution rug: Here the DeFi project actually completes the presale but then send tokens to other addresses owned by the team during the distribution process. These tokens are then dumped on investors when the token is added to be traded on Uniswap.
Overview of rugs on Uniswap
Thus far since I joined Uniswap I have witnessed three rugs and they packed up with more than 300 Ethereum each. As at the time of writing this article 1 Ethereum is $322, so 300 * $322 = $96,600. That is about 43 million+ Nigerian Naira.
These rugs include GRID, BIS, DFA, etc.
Uniswap has been one innovative cryptocurrency experiment but the risks associated with trading on Uniswap cannot be ignored.
Now let’s take a look at some precautionary measures that can be taken before investing in any token trading on Uniswap:
1. DYOR: This stands for do your own research. Please always do your own research before investing in any token added on Uniswap. Don’t buy any token just because someone is shilling it on 4Chan, Reddit, Twitter or Telegram.
2. Locked Liquidity: Even if you want to invest in a DeFi project with an anonymous team make sure it is one with the team’s distribution of tokens locked or how it’s commonly known as locked liquidity.
3. Avoid projects with an anonymous team: Looking at the third type of rug, one still needs to avoid any DeFi or crypto project with an anonymous team no matter how legit or solid they may make the project seem.