The MemeCoin of 2024 has turned into a PVP game: 6 precautions to avoid participating in Rug Pull projects

Recently, the popularity of MemeCoins seems to still attract a lot of attention. At the beginning of this month (August), Pumpfun announced two updates:

• Token creation is completely free. Anyone (without needing to understand any technical development) can create tokens through Pumpfun with just one click. The original fee of 0.02 SOL that the creator had to bear will now be borne by the first buyer after the token is created.

• When the token completes its Bonding Curve, the creator will also receive a reward of 0.5 SOL, which comes from Pumpfun's migration fee. This reward can be obtained regardless of whether the creator has ever held or is still holding the token.

Supplementary Knowledge: What is a Bonding Curve?

A Bonding Curve is a mathematical model widely used in token economics and Automated Market Making (AMM) fields. It is primarily used to algorithmically determine the relationship between the price and supply of a token. Common types of curves include linear, exponential, and logarithmic curves, each with its specific mathematical expression to calculate the relationship between a token's price and its supply. In the DeFi space, these curves are usually designed so that as the supply of the token increases, the price of the token also increases. This incentivizes early investors, who can purchase when the token supply is low (and the price is low) and potentially gain returns as the market expands. The following diagram illustrates the relationship between Pumpfun's bonding curve, price, and token quantity.

As of the writing of this article, the number of tokens created through the Pumpfun platform is 1,827,856, as shown in the following image.

If we also consider tokens created through other launch platforms or launch tools, it is estimated that the number of MemeCoins created in the crypto space is at least over 2 million. Currently, the MemeCoin space has not only become an extreme PVP Gambling venue but seems to have also entered a state of "everyone issuing tokens."

And it is under this scale effect that Sun Ge (Sun Yuchen) has also officially made his appearance. On August 12, the DEX SUNIO under the TRON ecosystem officially launched SunPump. A few days later (on August 16), with Sun Ge's continuous promotion, the SUNDOG launched on SunPump broke the $100 million market cap in just three days. Currently, the number of MemeCoins created on SunPump has exceeded 12,000, with total revenue surpassing 4.5 million TRX, as shown in the following image.

Many people actually understand that in the world of MemeCoins, as a zero-sum game, if a few people make a lot of money, it is because the vast majority of people are losing money.

A few days ago (on August 19), a Twitter user conducted a statistic using Pumpfun as an example: only 70 traders (accounting for 0.0028%) made over $1 million; 924 traders (accounting for 0.037%) made over $100,000; 11,936 traders (accounting for 0.477%) made over $10,000; and 76,567 traders (accounting for 3.061%) made over $1,000. Overall, among users trading through Pumpfun (the platform currently has a total of 3.534 million wallet addresses that have participated in trading), only 20% of traders achieved profits (earnings greater than 0), while the remaining 80% incurred losses, as shown in the following image.

Moreover, the MemeCoin space is also filled with various Rug Pulls, with about 99% of MemeCoin Rugs allowing only 1% of people (including insiders) to earn substantial profits, while the rest of the participants essentially become the "韭菜" (chives, a term used to describe investors who are easily exploited). Therefore, for anyone looking to profit from the MemeCoin game, the priority should be to consider or pay attention to how to avoid participating in such Rug projects.

What is a Rug Pull?

Rug Pull literally translates to "pulling the carpet," which colloquially means to roll up the mat and run away. It refers to the behavior of project creators abandoning the project and leaving investors with worthless tokens.

Currently, there are two common forms of Rug Pull: hard pulls and soft pulls. The former mainly involves malicious code (hidden vulnerabilities in smart contracts) and liquidity theft, while the latter primarily involves token dumping (quickly selling off after a price increase).

Among them, soft pulls are something many encounter frequently. For example, malicious individuals create a MemeCoin and use various means to quickly inflate the corresponding token's price to attract more buyers. The creator will then quickly sell off their holdings at an opportune moment, causing the price to drop to zero, thus completing the harvest. The following image illustrates this.

Next, let’s continue to explore this topic and see how to avoid participating in such Rug projects.

1. Anonymous or Unknown Teams

Currently, the vast majority of MemeCoin creators are anonymous or unknown. However, some project teams may forge identities to make their created MemeCoin appear more legitimate in order to deceive participants.

Therefore, in addition to maintaining a cautious attitude towards anonymous team projects, it is also necessary to conduct background checks on those so-called public project teams. Don’t assume a project is reliable just because you see a foreigner’s avatar and various so-called institutional backgrounds. You should have some basic judgment abilities, such as searching for their historical information on platforms like Google and Twitter for further understanding.

Alternatively, if they have corresponding Twitter accounts, you can also consider using some third-party tools, such as TwitterScore, tweetscout, getmoni, etc., to conduct checks, as introduced in previous articles.

2. Token Liquidity

Liquidity theft is also a common method of Rug Pull. Generally, to initiate trading, MemeCoin creators must add liquidity to the pool (for example, creating a BRETT/SOL trading pair), and whether the liquidity is locked is currently one of the main methods to assess its safety.

Liquidity locking mainly involves destroying LP (liquidity pool) tokens. Once destroyed, the pool cannot be withdrawn (in simple terms, ensuring that the assets in the liquidity pool cannot be withdrawn by the project team). Common methods of destruction include sending tokens to a black hole address or transferring owner rights to a black hole address.

Currently, there are two common black hole addresses:

0x0000000000000000000000000000000000000000

0x000000000000000000000000000000000000dead

These black hole addresses are like wallets that no one can claim. The assets deposited into these addresses cannot be controlled (or withdrawn) by anyone.

Conversely, if a token's liquidity is not locked, it means that the creator has the authority to directly withdraw all funds from the liquidity pool, which can easily lead to liquidity theft (the creator running away with the funds). Once this happens, all tokens purchased by investors will become worthless.

Therefore, if the liquidity pool can be locked (specific checks on the percentage of locked liquidity are still needed), it will significantly reduce the risk of the creator directly withdrawing the pool and running away.

Currently, many tools provide functionality to check the liquidity pool's locking status, such as Rugcheck (suitable for the Solana chain), as introduced in previous articles. The tool is very simple to use; just paste the corresponding token's contract address into the input box on the website, click the check button, and you can see the specific detection details. If you see the detection result marked as Good, it means the risk of Rug Pull is relatively low (but it does not mean there is no risk; some deeply hidden malicious tokens may not be detectable).

3. Token Holding Amount

Generally, when developers create a contract, a portion of the tokens is allocated for liquidity, while the developers may retain the rest. Therefore, in addition to checking the locking status of the liquidity pool, it is also essential to pay attention to the token holding amounts.

If a large portion of the token supply is held by a few holders (such as insiders), it can make the token's price susceptible to manipulation. They may quickly raise the token's price while selling their tokens to unsuspecting investors, resulting in those investors exchanging their real money (SOL/ETH) for a bunch of worthless tokens.

So, if you are skeptical about a token's price trend, you might want to use the corresponding block explorers to check the number of token holders, such as etherscan (Ethereum explorer), bscscan (BSC chain explorer), solscan (Solana explorer), etc.

Here, we will demonstrate using solscan as an example:

After entering the solscan website, paste the token contract address you want to check into the search box, then click on the Holders tab button on the page to see the specific holding proportions, as shown in the following image.

We should focus on observing the data in the Percentage column on the Holders page. If the distribution of holders is relatively even and no single or few wallets hold a significant share, it indicates that the project has a relatively low chance of experiencing a Rug Pull.

4. Correlation of Holding Wallets

The previously mentioned relatively even distribution of holders is only a theoretical hope, as there is another issue we cannot ignore: even if we may not find single or few wallets holding a large proportion, it does not rule out the possibility that they (insiders) have distributed the tokens across multiple wallets.

For example, if developers distribute 10% of the token supply across 5 wallet addresses, with each wallet containing only 2% of the tokens, they can create a façade of good token distribution. In such cases, it is challenging for ordinary users to intuitively discover this through the Holders page on the blockchain explorer.

Therefore, we also need to use some third-party tools to check the correlation between key wallets, such as Arkham, breadcrumbs, bubblemaps, etc., mentioned in previous articles.

Here, we will demonstrate using bubblemaps as an example:

After entering the bubblemaps website, first switch to the corresponding chain in the upper left corner, then paste the token contract address into the search box for querying. You can observe the connections between each wallet through a bubble chart, as shown in the following image.

5. Existence of Malicious Code in the Contract

In some cases, creators may add special code to the contract to achieve some ulterior motives, such as continuing to mint more tokens, preventing sales (honey pots), etc.

Several individuals have been scammed by participating in honey pot projects. For example, someone might recommend a MemeCoin that is performing well, encouraging them to buy it. After purchasing, they quickly find themselves earning 2x, 3x, or even more. At this point, they believe they are just one step away from their dream of getting rich. Coupled with the brainwashing and persuasion from the person who recommended the coin, they invest even more money. However, when they try to sell, they discover that the coin can only be bought and not sold.

For such malicious code tokens, there currently seems to be no perfect solution. The only way to deal with them is through the following methods:

• Test Transactions. For example, you can first purchase a small amount of the token and then try to sell it immediately. If you cannot sell it, please stay away from that token.

• Honey Pot Detection. There are many tools available to check for honey pots, such as rugdoc (supports BSC chain), honeypot (supports Ethereum, BSC, and Base chains), rugcheck (supports SOL chain), solsniffer (supports SOL chain), bscheck (supports Ethereum and BSC chains), etc., as shown in the following image.

However, it is also important to note that on-chain tools can only serve as an auxiliary measure, as these tools conduct routine checks on smart contracts. I have previously tested the same contract address with malicious code, and some honey pot detection tools were able to detect it, while others showed it as normal. Some tools reportedly allow you to pay to have the corresponding detection modules display normal data. Therefore, determining whether a project is a scam may require a comprehensive assessment rather than relying solely on the results of a single tool.

6. Creator's Sniping of Token Purchases

The five points mentioned above can at least be checked through observation or with the help of some tools, but the behavior of creators bulk buying tokens is currently one of the most challenging to check and judge.

For example, although we may see that the creator (developer) has already injected 100% of the token supply into the LP, we cannot rule out the possibility that after creating the LP, they use technical means to employ multiple new wallets that have no connection to each other to snipe the tokens (prioritize buying).

In this way, for the creator:

First, they will prioritize obtaining a large portion of the token supply through sniping, and this process will not raise suspicion (ordinary people also find it hard to find evidence of suspicion), while this operation also directly drives the rapid increase in the token price.

Second, because the creator already controls a large portion of the tokens in the LP, they can easily continue to raise the token price and, with effective promotion and publicity, further attract people's attention and FOMO, leading many to buy the token under the influence of FOMO.

Third, developers may also utilize special tools to sandwich user wallet transactions based on MEV (the core attack method of MEV is sandwich attacks) to gain more benefits.

In response to this situation, we can attempt to make some auxiliary judgments through the following methods (using etherscan as a simple demonstration):

Step 1: Paste the LP address (which can be found on the DEX trading details page) into the block explorer for searching, then go to the Token Transfer button, as shown in the following image.

Step 2: Click the Advanced filter button on the right, and you will find the transaction statistics chart (bar chart) on the new page that opens, as shown in the following image.

Step 3: Continue to click on the trading chart for the first day (the first trading bar chart), then click on the Last page number tab in the lower right corner to view the changes in trading data after adding liquidity, as shown in the following image.

This page mainly displays the wallets involved in front-running trades. You may also find that many transactions are executed using bots (such as Banana Gun). If you can identify suspicious wallets here, you can further use tools like Arkham, Debank, and alphatrace, as mentioned in previous articles, to check whether the corresponding wallet addresses are newly created wallets (i.e., their transaction history only includes this token).

Generally, normal users do not use multiple new wallet addresses to conduct bulk transactions for a single token. Therefore, if such trading behavior exists, it does not rule out the possibility of insider operations (of course, this is just a speculation and does not mean that all new wallets belong to insiders).

In summary, through the above methods, you can avoid participating in those Rug Pull projects to a certain extent. However, this is only an auxiliary measure; the most important thing is still your risk management and position management. I maintain my previous advice: if you enjoy taking risks, participating in MemeCoins is certainly fine, but it is recommended that investments in such projects should not exceed 10% of your position, and you should be mentally prepared for the possibility of total loss at any time.