Liquidity pools play an integral role in the decentralized finance (DeFi) sector, storing funds that enable traders to quickly swap tokens. However, not all liquidity pools are legitimate. Some are created by bad actors whose primary goal is to steal from crypto traders.
Do you want to learn how to spot fake liquidity pools? Well, you have come to the right place. Keep reading this guide.
Fake Liquidity Pools Explained
Before diving deeper into fake liquidity pools, it is important we understand how legit liquidity pools work. When a crypto developer wants to launch a token, they must first create a liquidity pool and deposit an established currency, such as BNB or USDT. This currency is then paired with the newly created token, essentially enabling the trading of the new crypto pair.
In most cases, legit developers lock the liquidity pools, blocking everyone, including themselves, from withdrawing funds. Scammers, on the other hand, don’t lock their liquidity pools as they intend to withdraw funds deposited by traders once they achieve their target amount.
Several crypto developers have been accused of robbing investors through fake liquidity pools in the past. For example, decentralized finance protocol Meerkat Finance released its token in March 2021. When the asset’s liquidity pool received over $30 million worth of traders’ funds, Meerkat Finance developers withdrew $21 million and claimed that their token’s smart contract was compromised. Numerous Onchain observers, however, dismissed the claims, arguing that the withdrawn money was sent to wallets’ addresses tied to the creators of the DeFi protocol.
Additionally, developers of Arbitrum-based DeFi project Swaprum ran away with $3 million in 2023, leaving traders holding worthless tokens.
While the total funds lost via fake liquidity pools have dropped by nearly 40% in 2024 compared to 2023, the number of incidents is still significantly high and is expected to rise further in 2025 as the bull run picks up momentum.
How to Spot a Fake Liquidity Pool
Here are the red flags to look for:
1. Unrealistic promises and returns: Scammers make fake promises to persuade people to buy their tokens or provide liquidity. For instance, they may promise a 200% APY to liquidity providers, which is unsustainable.
2. Unverifiable or anonymous developers: Genuine projects are run by visible teams whose information is easily accessible. So, if you can’t verify the developer behind a particular project, there is a chance they want to execute a rug pull and disappear without a trace.
3. Non-audited or poorly audited smart contracts: Fake liquidity pools operate with poorly audited or unaudited contracts. This leaves room for potential exploits.
4. Limited community interactions: If developers of a certain crypto project limit community engagement, appear inactive on social media accounts, or evade questions, then they may have ill intentions.
5. Uneven Token distribution: Creators of fake liquidity pools usually allocate massive amounts of tokens to themselves. So, when liquidity increases, they dump their tokens, causing significant losses to other holders.
Tips for Avoiding Fake Liquidity Pools
Here is how you can avoid losing funds to fake liquidity pools:
1. Due diligence: Before buying a token, conduct thorough research into the project. You can start by investigating the developers’ identities. In addition, check reviews from other crypto users on social media platforms.
2. Check token distribution: Utilize block explorers such as Etherscan or BSCScan to check the distribution of the token in question. If only a small number of wallet addresses hold most of the tokens, then avoid buying the asset.
3. Confirm if the liquidity pool is locked: As mentioned, a locked liquidity pool prevents token creators from withdrawing funds. So, if a pool isn’t locked, it might be a sign that the developers behind the token are planning to execute a rug pull.
Conclusion
The Decentralized Finance sector is largely unregulated, thus making it an attractive avenue for scammers. So, it is your duty to protect your funds when exploring this nascent space. We advise using the protection tips discussed in this guide.
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