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Exit scams and rug pulls in the DeFi space have increasingly become a subject of concern. Last year alone, DeFi rug pulls, and exit scams accounted for 99% of all $1.9 billion crypto frauds in 2020.
In May 2021, DeFi100 pulled a $32 million exit scam leaving investors counting enormous losses. In exit scams, promoters launch a promising crypto platform, carry out intensive marketing, raise funds from investors and then disappear with the initial capital abandoning the project.
DeFi rug pulls is a new form of crypto exit scams where crypto developers abandon a DeFi project taking off with investors’ funds. The scammers also take away buy support or Decentralized Exchange (DEX) liquidity pool from the market.
Rug pulls in the DeFi ecosystem mainly occur on decentralized exchanges (DEXs) such as SushiSwap or Uniswap, where fraudulent token creators can create and list a fake token for free without any verification or audits. Once created, the scammers pair the token with a leading crypto coin such as ETH forming a liquidity pool.
The scammers then wait until investors swap a considerable amount of their ETH for the new coin or token, then drain the DEX pool. Draining the pool drives the coin’s price to zero, leaving investors with virtually worthless coins.
It’s practically impossible to trace exit scams, and DeFi rug pulls scammers thanks to the decentralized, anonymous and regulation-free nature of the cryptocurrency space.
However, such scams in the DeFi ecosystem can be prevented using liquidity lockers where project developers can publicly lock liquidity on Automated Market Makers (AMM) for a predetermined period.
This guarantees investors that the project developers are unable to drain their funds in a rug pull, leaving them counting losses. Here's a look at the best liquidity lockers for DeFi projects in 2021.
When launching a project, developers list their tokens on Decentralized Automated Market Makers (AMMs) such as Uniswap or PancakeSwap. Once listed, the tokens are placed in a liquidity pool after pairing with a leading cryptocurrency, i.e. seeding.
The developers are then granted liquidity pool (LP) tokens that may come in the form of user funds, developer/team funds or both. Once in their possession, the LP tokens can be transferred just like any other crypto token.
This makes the token susceptible to scams as the developers can easily transfer the token to their private accounts or exchange them with other tokens based on a different blockchain network.
A liquidity locker enables developers to store or lock LP tokens in a smart contract for a predetermined period, withdrawing their power of transferring the LP tokens.
Liquidity lockers enable project developers to enhance investors’ trust in the project by showcasing that the liquidity is locked up and that the Developer/Team cannot drain (remove) the liquidity arbitrarily, leaving investors counting massive losses.
As mentioned earlier, DeFi rug pulls are increasingly becoming prevalent in the DeFi ecosystem, scaring away investors. Several DeFi projects, including DistX, Thodex, Compounder Finance, and Meerkat Finance, among numerous others, unexpectedly removed funds from their liquidity pool without warning leaving investors high and dry.
DeFi rug pulls have recently hit a fevered pitch owing to the DeFi's ecosystem's relatively new nature, technical aspects and lucrativeness, making it a fertile ground for scammers to prey on uninformed investors.
Liquidity Lockers encompass smart contracts that essentially solve the issue of rug pulls by allowing developers to publicly lock LP tokens for a predetermined period such as 12 months or even implement combinations allowing the coin owner to withdraw a certain percentage of the locked tokens every month.
Liquidity Lockers reinforce investor trust in DeFi projects by enabling developers to showcase that the liquidity is locked up and cannot be drained unexpectedly. Think of liquidity lockers as mini time-locked safes in which developers agree to lock their liquidity in smart contracts to boost investor confidence and offer them peace of mind.
Liquidity Lockers are both beneficial to developers and investors. For investors, it prevents DeFi rug pulls that leave them counting enormous losses. For developers, liquidity lockers ease legitimacy concern and boost investor confidence allowing legitimate projects to grow.
Launched in June 2020, Unicrypt Network is a multi-chain decentralized platform that offers a suite of decentralized services. Of particular interest is its liquidity locking service that leverages Proof of Liquidity (POL) to enable developers to lock liquidity on AMMs such as Uniswap for a set period. Unicrypt is credited with inventing the liquidity locking concept back in June 2020.
In Unicrypt, project developers/teams are charged a small fee of 0.3% to lock up the tokens in their smart contract for a predetermined period, usually more than 6 months or for different time frames such as withdrawing a particular percentage of the locked LP tokens every month.
Unicrypt is currently the most used liquidity locker in Uniswap, PancakeSwap V2 and other AMMs, with over 3\,000 Unicrypt lockers in use holding approximately $80 Million liquidity. Unicrypt was designed to complement the Uniswap liquidity pool. On Uniswap, investors can seamlessly browse through all locked liquidity pools and access crucial details about the liquidity pool, such as the termination date and total funds locked, to be able to make a sound investment decision.
The Unicrypt team seeks to go public with the platform set to launch a new website and integrate additional services, notably token minter and token vesting. The liquidity locker also recently moved the locked liquidity on PancakeSwap to V2 following its migration from V1 to V2 in April 2021. Unicrypt liquidity locker's outstanding features, notably lock splitting, incremental locks, and ownership transfer, make it the best overall liquidity locker in the market. The liquidity locker will also migrate to Uniswap V3 once it arrives.
Based on the Binance Smart Chain, DeepLock is an outstanding liquidity locker that allows developer/teams to lock up any BEP-20 based LP tokens from PancakeSwap, protecting investors from DeFi rug pulls.
In addition to the liquidity lock function, DeepLock packs additional function decentralized & rug-proof launchpad, auto-locked liquidity and a vesting feature that allows developers to implement their specified locking schedule. DeepLock currently has over $ 12M locked spread across 311 projects.
DeFi yield protocol is a decentralized finance network that offers a suite of tools and services, including yield farming, staking and liquidity lockers. The DYP lockers allow developers to lock liquidity across several AMMs, including SushiSwap, Balancer, Uniswap and PancakeSwap, boosting investor confidence in the project.
DYP Locker doesn't charge developers to lock liquidity- it's absolutely free of charge. To lock liquidity, developers/teams need approximately 1% of the LP value converted to ETH and used to buy and lock DYP within the platform. Once the locking period expires, the liquidity locker releases DYP to the recipient wallet along with the locked LP tokens. This means that developers get back the locked DYP once they unlock their liquidity. DYP Locker is still relatively new on the DeFi yield protocol, and it's yet to lock a considerable amount of LP tokens.
Investors in the DeFi space look to generate considerable profits by starting out early with promising DeFi projects before they “explode” and become valuable. However, exit scams and rug pulls where developers unexpectedly remove liquidity provided in Automated Market Maker platforms including SushiSwap, Uniswap, PancakeSwap and more makes it extremely difficult to invest in the DeFi space. As such, locking liquidity is increasingly becoming a standard in the DeFi space to prevent costly rug pulls and boost investors’ confidence in legit projects for their growth.
Liquidity Lockers such as Unicrypt, DeepLock and DYP Locker prevent rug pulls by locking LP tokens for a specified period. It enables investors to separate scam projects from legitimate projects with real-world use cases. For any avid DeFi developer, it’s crucial to leverage the services of liquidity providers to guarantee investors of project legitimacy and consequently stimulate growth.