97% of tokens launched on Uniswap would be scams

According to a recent study, 97.7% of tokens launched on the decentralized exchange Uniswap would be scams. 

According to this research 97.7% of tokens launched on @Uniswap were rugs. https://t.co/l3OPF1U5vw pic.twitter.com/n7G2ibiVtf

— drnick 🌗 (@DrNickA) October 31, 2022

To be precise, the study by Bruno Mazorra, Victor Adan and Vanesa Daza published on Cornell University’s arxiv.org portal states that 97.7% of the tokens launched on Uniswap eventually turned out to be “rug pulls.” 

“Rug pull” refers to the action of pulling the rug out from under someone’s feet, thus causing them to suddenly fall. In the crypto environment, this definition indicates a real scam by which developers launch a project with the sole aim of raising money and abandon it as soon as possible by “running away” with the funds collected.

What are DEXs and why Uniswap is an oasis for rug pulls

Decentralized Exchanges (DEXs) lend themselves particularly well to this type of scam activity because anyone can list their token, without any filter or control. 

In addition, there is also a lot of liquidity available on the major DEXs, so it is often not that difficult to collect money by selling tokens created only specifically to raise money. 

However, the fact that anyone can list any purposefully created token for sale on a DEX simply to collect money from the uninformed does not mean that all tokens on DEXs are scams. 

What actually matters are the trading volumes, and not per se the number or percentage of scam tokens. 

In total, the researchers found on Uniswap, the largest DEX on Ethereum, as many as 18,000 tokens identified as rug pulls, which means actual scams with different strategies behind them to collect money and then run away with the money. 

For this reason, they even decided to classify them into various categories, studying for each of them the underlying scam strategy and obvious characteristics, such as vulnerabilities of smart contracts, the various types of attacks, and how the money obtained in this way was laundered. 

On this theoretical basis, they analyzed the tokens on Uniswap and found that 97.7 percent of those found were indeed rug pulls.

Mazorra, Adan and Daza are university researchers, and actually wrote this report in January. However, until now it appeared to be unknown to most. 

According to them, Uniswap, just like other DEXs, is so simple to use and lacking in rules that users can easily exchange digital assets without relying on trusted counterparts.

In other words, if from a strictly IT point of view it is trustless, meaning it does not require trust, from a financial point of view it is not trustless at all, because there are many users who are forced to trust the counterparty when they buy a token issued by someone else. This trust in the vast majority of cases has turned out to be misplaced. 

What are rug pulls

However, the researchers also point out that rug pulls are a phenomenon that already existed in traditional finance, although in DeFi it has become more relevant. 

The researchers have devised a machine learning algorithm that is used precisely to detect those tokens that look for all intents and purposes like scams. Unfortunately, such an algorithm works only after the fact, so it serves only to label as scams those tokens that have already turned out to be such. 

In other words, it cannot be used to detect rug pulls before they blatantly turn out to be such. 

In fact, early detection of rug pull projects is not at all easy, even though these tokens have some features in common with other scams. 

First, they promise gains to those who buy them. To be precise, they promise easy, substantial, fast, and above all effortless and risk-free gains. Since such gains in finance practically do not exist, anyone who promises such things is lying. And anyone who lies by asking for money is in fact operating a scam. 

Second, they make it difficult to identify their perpetrators with certainty, since the scammers who design these rug pulls obviously do not want to be recognized. 

Third, they are not offered by companies authorized to offer investment products in accordance with the law. 

Doubts regarding the results of the research conducted on Uniswap tokens

As could be expected in such cases, doubts have been raised regarding the correctness of this research. 

In particular, the indiscriminate use of the term “rug pull” has been questioned, because some of the tokens identified as such by this research would instead be scams of a different kind, for example based on phishing. Indeed, it appears that many of those tokens were duplicates of other tokens, in other words, not dissimilar designs of scams based on the rug pull technique. 

On DEXs, it is so easy to make copies of tokens, so many of the scam tokens might just be copies of real scam projects. 

The biggest doubt, however, is that these data have not been weighted for liquidity, i.e., trading volumes. In fact, most of the trading volumes on DEXs still seem to belong to non-scam tokens, and this definitely changes the perspective. 

While a lot of scam tokens have been launched, these have managed to attract only a small percentage of the capital circulating on DEXs. 

So the figure highlighted by Mazorra, Adan, and Daza seems resounding, but it probably isn’t that much more so. It is a number that is astonishing, but only on superficial analysis. As soon as you delve deeper you realize that within a decentralized ecosystem it seems relatively in the norm. 

The UNI token

It is worth noting that Uniswap’s UNI token has appreciated in recent times. 

After hitting an annual low in June at $3.6, it has climbed back up to the current $7.3, which is more than doubling its value. 

However, it had previously lost a lot from its all-time high of nearly $45 in May 2021, but going back to the pre-bubble period shows that by the end of 2020 UNI’s price was in line with the 2022 low. 

So during 2021 a large speculative bubble inflated on the price of UNI, which then completely deflated in 2022 causing the price to return to where it was before the bubble inflated. Moreover, it has since doubled, suggesting that it is actually not doing so badly, despite the -84% from the highs.