How to Identify and Avoid Scams on Uniswap

One of the foremost anchors of cryptocurrency is the emergence of exchange platforms where crypto enthusiasts and investors can exchange and trade crypto assets in open markets. These exchange platforms can be centralized or decentralized. Due to the inherent presence of third parties and central governance, centralized exchange platforms are susceptible to a SPOF –

Single Point of Failure.

Aside from SPOF, which can be due to compromised central governance, a centralized exchange platform can rug pull if the developers are malicious and dishonest. Many security reasons are behind the paucity of centralized exchanges.

On the other hand, decentralized exchanges (DEXes) are widely adopted by countless crypto enthusiasts and investors. The reason is none other than the perks it offers regarding securing digital assets. DEXes are blockchain-based exchange platforms that mirror all the security architecture and other characteristics of the blockchain they're built on. An example of such DEXes is Uniswap.

What is Uniswap?

Uniswap is a P2P decentralized exchange platform that allows users to trade, swap, or exchange cryptocurrencies without going through any third party. It runs on a permissionless blockchain hosted on the Ethereum platform–through a smart contract– with a native token of UNI.

As a decentralized platform hosted on Ethereum, Uniswap only supports ERC-20 tokens, a standard for Ethereum-based tokens. UNI holders govern Uniswap without the interference of any third party.

Founded by Hayden Adams in 2018, Uniswap represents various financial tools encapsulating DeFi protocols. Aside from having its native token and representing a DEX, Uniswap also represents Automated Market Maker (AMM) which allows users to trade with its liquidity pool.

One of the main drives behind the perpetual adoption of DeFi (Decentralized Finance) is its success over the years; this has attracted countless naysayers and newbies to the crypto-verse. As DeFi keep growing by stretching its wings and tentacles, malicious actors and mischief-makers are also seeking illicit ways to take advantage of DeFi investors and scam them of their digital assets.

For instance, Uniswap has recorded a trading volume of over $1 trillion since its emergence in November 2018. This and much more keeps making Uniswap a target for scammers to unleash their scamming activities on innocent investors.

To avoid scams on Uniswap, one needs to understand the kind of scams that are liable to occur on Uniswap.

Common Scams on Uniswap

1. Rug Pulling Scam

A rug pull happens when project developers suddenly abandon a project and pull all its liquidity. Pulling out the liquidity is equivalent to withdrawing the support of the project, which is liquidity. Rug pulling is known with DeFi projects, which provide the needed liquidity to DEXes like Uniswap.

Newly launched tokens are not usually listed on centralized exchanges (CEXes), this made them turn to DEXes, which provide liquidity. Since Uniswap supports ERC-20 tokens, ETH is provided as the liquidity of existing and any newly launched projects. Usually, when tokens are created, liquidity is always offered to DEX, where it is launched.

The liquidity is paired with another token, like ETH in the case of Uniswap. The new token might as well be sold through an Initial DEX Offering (IDO), where investors purchase the tokens, and proceeds from the sales will be locked for a particular duration.

Once the project has been widely or fairly adopted such that token value keeps going bullish, the project's liquidity can now be accessible to the developer. To rug pull, the developers can sell their own tokens at a high value, pull out the project's liquidity, or exploit loopholes in smart contracts to siphon investors' assets.

Investors will now be struggling to sell their tokens due to insufficient liquidity. They are likely to be forced to sell at a low price due to the AMM pricing algorithm that calculates token prices based on the pair of coins in the liquidity pool of the DEX. Rug pulling can also be termed "Liquidity pull" since pulling out the liquidity leads to this scam.

2. Crypto Exit Scams

Exit scams are fraudulent tactics unscrupulous cryptocurrency developers use to steal money from investors during or after an ICO (Initial Coin Offering). Most new projects employ influencers or promoters to lure investors and enthusiasts to their projects.

At first, the project might seem legitimate with no iota of deception; either by promising high returns or even delivering impressive returns.

Later, after the project launch, when the developers have established trust, they make away with people's assets.

An example is LoopX crypto, which guaranteed weekly profits during its ICO. Founded in September 2016, the project pulled its exit scam in February 2018 after raising BTC and ETH to $4.5 million from investors. Confido, Bitconnect, and a host of others did something similar too.

3. Meme Coins Scam

Meme coins are cryptocurrencies that are inspired by jokes or memes from the Internet and social media. They are not fake coins, but they promise holders outrageous returns within a short time. They are highly volatile because they are highly community-driven tokens, i.e., their prices are usually determined by their respective online community perceptions and social media, which generally results in FOMO.

Due to the success recorded by meme coins like DOGE and Shiba Inu, other meme coins have erupted, with most rug pulling on their investors. An example is SQUID, which was inspired by the popular Squid Game TV show. Unfortunately, it pulled, such that its price plummeted by 99%, and holders could not sell their tokens.

4. Mimicked or Fake Token Scam

This kind of scam on Uniswap is when scammers find a new legitimate token waiting to be listed and develop a listing that is quite similar to the official one before it. The fake listing is possible because scammers are exploiting the features of DEXes like Uniswap, which is open and allows free token listings.

Scammers can fool crypto investors into purchasing fake tokens believing they are genuine. This will leave victims holding worthless tokens. A fake Teller finance token was created in 2020, same with Acala and NEAR tokens, but investors were warned by the legitimate projects to steer clear.

5. Social Engineering or Catfishing Scam

This kind of scam usually occurs when scammers fool the public that some notable influencers are buying a particular token that might be fake. This can be done if the scammer can get influencers' addresses; they'll then initiate any transaction and make it look like a particular investor is acquiring the token they're rooting for. This will generate a buzz that will drive community interest in such a token, which might be a fake or meme token.

Catfishing is when an impostor pretends to be someone else on social media. Scammers can pretend to be a whale or a notable influencer and influence community opinion regarding a token they wish to use as a tool of scam.

So, How Can You Identify These Scams and Avoid Them?

Identifying all sorts of scams on Uniswap and other exchange platforms (DEXes and CEXes) boils down to DYORing - Doing Your Own Research. Researching about projects you want to invest in helps pre-empt falling for scams or scam tokens. DYOR entails but is not limited to the following steps:

1. Check Out the Project's Smart Contract and Code Audit

A genuine project usually audits its smart contracts and codes; professionals do this to ascertain there are no loopholes that could harm the project or its investors. The reason for checking this is that auditing is costly and can hardly be afforded by scammers.

2. Analyze the Project's Smart Contract

Analyzing a Smart contract might be tasking or tricky, but it is not hard as it seems. Looking for the project's liquidity, the last 24 hours' trade volume, and transactions would be best. If any of the trio is low or below average, that might be your red flag. In addition, look out for outrageous or bloated trade volume.

How?

Some projects' last 24 hours trade volume might be influenced by wash trading, whereby an investor buys and sells tokens multiple times in a short time to deceive the crypto community about the token's price or even liquidity.

If a project's liquidity is low, there is a high tendency for trade volume to correlate to the low liquidity available. Low liquidity and high trade volume don't correlate; that might be your red flag.

3. Verify Through Reliable Sources

Instead of searching for tokens on Google, Telegram, Twitter, or even Uniswap, verify genuine tokens via reliable sources like CoinMarketCap or CoinGecko. Both are crypto-tracking sites with analysis and information about almost all crypto tokens.

4. Look Out for Updates From Verified Source

Genuine projects usually have a media presence where updates are released. Even Uniswap has verified social media pages where they interact with their community to establish their presence. Any project without a media presence or a recently opened social media account is probably a scammer.

Conclusion

Scams can only be eschewed if users are diligent in their research about a project. There's no limit to how intense your research can be before investing your money in any project. All in all, always invest what you can afford to lose.

Photo by Wan San Yip on Unsplash