Tackling DeFi Scams: Making Pre-sale Ecosystems Safer

A daunting task facing decentralized finance (DeFi) project owners is the need to raise funds for their new projects, particularly as a spate of recent "rug pull" scams have begun to negatively affect the DeFi and decentralized exchange (DEX) ecosystem and reputation. 

During the ICO era, the average period that a business person had to raise funds was about 3-6 months, and it would cost the founder up to $1 million just for advertising and marketing. However, a founder would need only a few hours to list a new project on a DeFi platform and initiate a private sale announcement. DEFI is quite effective as it does not require a marketing budget to launch, the barrier of entry is low, and has no waiting time.

Anyone can list a project on DeFi even if it is an unfinished one and can invite just about anyone to participate in the raising of funds or project development. In this way, project owners need to conduct a private sale where they would list their project on a DeFi platform to gain access to the masses and contact the community.

Liquidity Protocols

However, these project founders require a solution to transform the DEX presale landscape. Liquidity protocols such as Liquidity Dividends Protocol (LID) offer presale licensing and Initial Liquidity Offering (ILO) where new projects or tokens deposit and lock liquidity are raised in a presale event. ILOs have become an important popular approach to rapidly scale and develop new tech. However, they have also attracted high cases of “rug pull” scams.

As new investors and several veterans are aware, “rug pull” scams have negatively affected the reputation of the DEFI/DEX space in recent times. But the good news is that the LID Protocol is among the leading liquidity protocols that effectively solve such problems by offering presales that trustlessly locks liquidity in DEXs, like Uniswap.

Investors need such liquidity protocols because most of the time they don’t have the time or the technical capacity to verify every and each presale contract.  There is, therefore, a need for such trusted systems to streamline the presale process and improve their presale success.

First, project founders need to secure an ILO (Initial LID offering) so that they can inform the DEFI community that they are commencing a token presale that would be available to the public and then invite the community to participate in the upcoming sale.

Rug Pull Scam Problem

Decentralized exchange services such as Uniswap offers efficient and cheap ways to fund new projects as they do not impose bogus conditions, and there are no unnecessary charges. 

However, such innovations always have some drawbacks. For example, illicit entities and malicious actors can take advantage of this very nature of DeFi liquidity models to scam innocent investors. Such kinds of scams are popularly identified as a “Rug Pull,” which is one of the key concerns of investors and project owners as it threatens to stifle the growth of the DeFi landscape.

A recent SushiSwap scandal is a good example of how the “rug pull” problem adversely impacted DeFi. Chef Nomi, the anonymous SushiSwap creator liquidated his share of the Sushi/ETH worth $13 million in the liquidity pool without consulting the community. The single incident caused the value of the token to decline by more than 50%. Irrational decisions and fraudulent motives are the cause of such incidents and they are a threat to DeFi markets and investors.

Media sources have reported various “rug pull” cases. For example, scammers could place liquidity into Uniswap but pull it out from unsuspecting investors and traders at some future time. Some “rug pull” scams happen as quickly as 30 minutes after the launch of a token in the DeFi landscape. Others occur over a period of several days or weeks as liquidity is quietly reduced. It is a kind of scam where hackers set up liquidity in the pool but end up pulling it after some time, thus leaving unsuspecting holders with severe losses.

As such issues are common across the DEFI system, a few crypto projects such as Liquidity Dividends Protocols (LID) have opted to offer a solution to solve the “rug pull” scams and other related liquidity problems on Uniswap and other DEX platforms to ensure that the market retains its legitimacy.

LID Protocol as A Solution to Liquidity Problems

The LID Protocol uses an enhanced locked liquidity protocol to remove losses caused by “rug pull” scams on DEFI platforms. As investors raise funds on the LID protocol, the funds are locked and only released after a certain period of time. Moreover, investors and project owners are thoroughly vetted to ensure that they have something innovative and are likely to continue working in the future.

Solving the “Rug Pull” Problem

First, the LID Protocol offers proof of liquidity that makes it impossible for scammers to pull out their liquidity as they are vested for a period of time to enhance innovation and development on the platform. This is ensured by locking the liquidity of tokens, which are pre-launched on their platform, for a particular timeframe to ensure that the DEFI ecosystem maintains a transparent and trustless mode of operation.

In other words, the protocol helps to ensure that no one – not even the owners, is allowed to prematurely withdraw money deposited in liquidity pools. This implies that the project founders cannot pull the liquidity from their project in a manner that scammers use to con investors out of their tokens or money.

Solving Cascading Collapse

LID protocol also prevents liquidity problems on Uniswap DEX by offering incentives like tax incentives and token payments to users who participate in actions which are beneficial to the community at large. Investors who use their staked tokens to participate in protocol governance are incentivized to increase their chances of remaining holders of the token, thus saving liquidity even during cascading failures. Of course, the protocol provides users with a highly safe and trusted platform to conduct frictionless financial transactions.