Over 40% of DeFi is a scam… (kind of)
Original Publication: Alexander Szul, Aileen Duaz; 26 September 2022
Back when I started in decentralized finance (right before DeFi Summer), the very first project that I bought into was a scam. It had a legitimate-looking website and a decent enough token utility (sports betting), so I tossed a couple thousand dollars into the service. At the exact moment that I submitted my transaction on my mobile wallet, the website went blank… After checking some Telegram groups it came to light that the project had just rugged! I looked at my phone and the transaction was still pending. I panicked and looked everywhere to try and cancel my purchase, but cancellation was not built into the app so there was nothing I could do. Leaning back in my chair and exhaling in frustration, I watched my funds go down the drain. After about 20 minutes, however, I got a notification that the transaction had failed and I still had all of my money! I began laughing hysterically at how lucky I’d been that gas prices spiked right when I sent my transaction on-chain. That tense experience was my first moment in DeFi and I haven’t looked back since.
With this memory in mind, I wanted to take the information that we’ve been gathering at Rome Blockchain Labs (RBL) and put it to good use. Unbeknownst to most people, our team has built a kick-ass data service. RomeNET is so kick-ass that we can share swap, liquidity, and money market data on over 1,000,000 pairs in just 1-2 seconds. Given this data capacity, I worked with my EA to formulate a research topic that would help prevent new traders from making the same mistake that I almost did. The goal of this research was to determine the number of fraudulent/duplicate pairs created year-to-date in 3 of the top decentralized exchanges (DEXs) - UniswapV2 and UniswapV3 on Ethereum and PancakeSwap on BNB Chain.
In other words, how many token pairs have the exact same tickers. For those of you who do not know, a ticker is the short, capitalized acronym used when trading a token. U.S. Dollar Coin has the ticker of USDC, for example. On most DEXs trading pairs are seen as USDC/XYZ. Due to the nature of decentralized protocols, anyone can create a token, list it, and market it which means that scam projects have an (almost) level playing field with legitimate builders. When we ran through the numbers, what we found was shocking.
Discussion
Rome Blockchain labs found that of the 6,098 active pairs created in 2022 on these 3 DEXs, 400 (6.6%) active token pairs have the same token symbols as another.
This means that they have both been traded or had liquidity moved in the past 24 hours. When disregarding pair activity status, this number jumps to 81,458 (42.7%) of the 190,887 pairs created this year. This is in line with attempted bait-and-switch scams where bad actors will create, seed, and trade tokens with tickers identical to real tokens at their launch date. Mimicking the ticker of a legitimate pair attempts to capture real assets in exchange for fake tokens from unaware traders.
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Since this research used token symbols to count the number of iterations of a given pair, any pair with the same set of symbols was considered duplicated. However, not all duplications are guaranteed to be fraudulent. It was found that there may be some legitimate tokens that use the exact same symbol as a completely different pair. For example, UniswapV2’s most duplicated active pair is WETH/TINU but they are not direct copies of each other; TINU is the symbol for Tama.Inu, Tresor Inu, Turtle Inu, and even more differently named pairs that are no longer active. Meanwhile, out of the 6 versions of PancakeSwap’s most duplicated active pair, Google/WBNB, 5 are named GoogleFinance and were likely created with malicious intent.
What this research demonstrates is that most scam activity is opportunistic. This means that scam pools are most active during a new token's initial seeding stages. Activity then dies off as market attention normalizes around the legitimate pair.
Comparing the twenty-four-hour volume of pairs was a good indicator two years ago, but is no longer a trustworthy indicator of pool legitimacy. Blockchain 3.0 networks have such low gas fees, some being below 1c, that scammers can spend thousands of dollars to mimic hundreds of thousands in organic volume. Some DEXs use pre-set token lists, but as many traders attempt to purchase a token right at the listing, it’s far more common that the targets of scams will go by the ticker or a contract address directly.
Assisting communities in avoiding scams not only protects trader funds but also demonstrates goodwill towards the market at large. By extension, this reflects highly of project founders to the ecosystem leaders and future investors. To experienced DeFi traders, you likely know how to avoid these scams but new traders do not have the experience that you have been able to gather.