A new study published on Arxiv found that 97.7% of tokens launched on decentralized cryptocurrency exchange (DEX) Uniswap are involved in scams, especially “rug pulls”. The term “rug pull” literally means “pull the rug”. This scam consists of a situation where a protocol is abandoned by the developers, who “run away” with the users’ funds. As a result, investors lose all capital. In general, these scams occur in DeFi protocols. One of the most prominent cases is that of the Squid Game (SQUID), a token inspired by the famous South Korean series Round 6. In November last year, the project applied a rug pull, causing the token’s price to drop by Rs. $16,000 for just $0.01 in just five minutes.
Token Scams on Uniswap
Launched in 2018, Uniswap is the main DEX that runs on the Ethereum network. The platform gained prominence in the market because it is a non-custodian and publicly verifiable exchange. To date, more than 40,000 ERC-20 standard tokens are tradable on Uniswap, according to the “Do Not Rug On Me: Zero-Dimensional Scam Detection” study. According to data from DeFi Llama, the platform currently has $4.22 billion in total blocked value (TVL). But Uniswap’s popularity seems to have attracted the scammers. After all, the percentage of tokens launched on the platform involved, in some way, with scams is very expressive in the study in question. The study analyzed a dataset of more than 27,588 tokens collected as of March 9, 2021. It then proposed a new method for labeling the tokens as frauds or not. After manually analyzing the data, they created a theoretical classification of different malicious maneuvers on Uniswap. “We have proposed several machine learning-based algorithms with relevant new features related to token propagation and smart contract heuristics to detect potential rug pulls before they occur,” they said.
Malicious Tokens on Uniswap
According to the article, the final list of tokens contains 27,588 labeled tokens, “631 labeled as non-malicious and 26,957 labeled as malicious.” Among the malicious ones, 24,870 are rug pulls and 2,087 are not. “We found that over 97.7% of the labeled tokens were rug pulls. Finally, we define two methods that use ML models to distinguish non-malicious tokens from others. We also verified the high effectiveness of these models in both cases. This implies that new malicious tokens can be detected before the malicious act. On the other hand, there can also be detection of tokens from a strong project at an early stage,” they concluded.
Study receives criticism on Twitter
The study was released by crypto influencer @DrNickA on Twitter and received rave reviews. That’s because many questioned the logic behind the study.
According to this research 97.7% of tokens launched on @Uniswap were rugs. https://t.co/l3OPF1U5vw pic.twitter.com/n7G2ibiVtf
— drnick 🗳️² (@DrNickA) October 31, 2022
Investor Maya Zehavi, for example, said that the study is very flawed: “Sorry, but this is a very flawed methodology for that statement. They literally took ALL tokens since 5/20 – 27,000 in total – and didn’t bother to filter them by liquidity or by volume… or by anything else. It’s like saying 97% of Twitter accounts are fake, but none were active last year,” she said.
