The Dark Side of the Memes: Rug pulls, FOMO, and the Dogefather effect

The following is a guest post by Max Jones, CEO & Co-founder of Memepad.

The rise of memecoins has been a wild ride. Doge, Shiba Inu, and countless dog-themed (and not-so-dog-themed) coins have captured the public imagination, promising astronomical returns and fueled by social media frenzy. The first quarter of 2024 alone saw a staggering 169% increase in market cap, pushing it closer to its all-time high – with estimates placing its current value between $60 billion and $75 billion. But beneath the veneer of fun and internet jokes lurks a darker side: rug pulls.

So, how exactly do these scams work? In a rug pull, developers create a memecoin with a catchy name and leverage aggressive marketing tactics across social media platforms. Often, they dangle promises of features, functionalities, or even real-world applications – all with the singular goal of inflating the price. Once a critical mass of investors piles in, lured by the fear of missing out (more on that later), the developers vanish into thin air, taking the investors’ money with them.

Here’s the deceptive twist: rug pulls exploit vulnerabilities within cryptocurrency markets. Liquidity, which essentially allows investors to easily buy and sell tokens, is manipulated. The developers will often add a large amount of their tokens to a liquidity pool, which thickens liquidity, making it easier for investors to buy and sell tokens. However, an issue arises when these tokens are unlocked without proper use of the project’s funds for development or community incentives. In such cases, projects might leverage marketing to temporarily inflate the price before withdrawing their tokens from the liquidity pool, causing a rapid price drop.

How to Avoid the Abyss

So, how can we spot these scams before they happen? Legitimate projects have revealed teams with experience and a reputation to uphold. Anonymous developers are a major red flag. Look for teams with a public track record and expertise in blockchain technology.

Also, unaudited smart contracts are a breeding ground for vulnerabilities that scammers can exploit. Having them audited by independent security experts is crucial. Security audits (preferably performed by reputable firms) can help identify and mitigate potential risks.

If a project promises “to the moon and back” within a short timeframe, be skeptical. Sustainable growth takes time and a clear roadmap for development. And if a project seems too good to be true and is being relentlessly shilled across social media platforms, it probably is. Be wary of projects that rely solely on hype and marketing gimmicks to attract investors.

FOMO, or the fear of missing out, plays a major role in the success of rug pulls. Social media is a breeding ground for hype, where users can easily get caught up in the herd mentality. Scammers exploit this by creating a sense of urgency, urging investors to buy before they miss out on the next big thing. Fear and excitement cloud judgment, leading investors to make impulsive decisions without proper research.

Major issues plaguing investors are block 0 snipes and dev dumps, which result in significant losses for unsuspecting participants. For example, a developer launches their own token and manipulates the system to grab most of the initial supply at launch (block 0). They can then quickly sell these tokens for a hefty profit, leaving regular investors holding the bag. A recent example of this is the “Water Coin” scam, where developers pocketed a staggering $5 million within an hour.

Participating in its own launch and locking these tokens for an extended period is a proactive approach for the project to prevent others from executing a block 0 snipe, which ensures a more fair distribution for all investors.

In a rug pull case, the solution is to utilize a secure “raise smart contract.” When investors contribute funds, 50% goes directly into the liquidity pool. A scheduled smart contract then automatically burns a portion of the liquidity pool after the token goes live. This prevents a non-launch or a rug pull by ensuring locked liquidity from the get-go. How does this mitigate dev dumps? First, 50% of funds are liquidity pools. This creates a solid foundation for the token by providing immediate liquidity and reducing volatility. The second is automatically burning a portion of the LP after launch, which restricts developers from manipulating the liquidity pool and rug-pulling respectively.

Another way is to go beyond smart contracts by using multi-signature wallets for projects launching on their platform. This requires multiple approvals for transactions, preventing excessive “dev dumping” or unauthorized access to project funds.

Platforms like Pump.fun, Pinksale, and GemPad do not offer a robust due diligence process like criminal background checks, KYC, legal agreements, and a thorough evaluation of project legitimacy. This, combined with tech features, aims to significantly reduce the chances of scams and increase the success rate of projects launched on the platform. Remember, prioritizing vetting and expertise to build trust within the crypto community compares your project favorably to some decentralized launchpads where “anyone can come and list anything.”

The Dogefather Effect

Then there’s the “Dogefather effect.” Celebrity endorsements, like Elon Musk’s tweets about Dogecoin, can send memecoin prices soaring, just like an 80% surge in May 2021. However, this volatility is a double-edged sword. While celebrity endorsements can attract new investors, they can also lead to massive sell-offs if that same celebrity changes their tune. The market becomes susceptible to the whims of influential figures, making it difficult to predict long-term trends.

What Makes a Memecoin Last?

Okay then, which memecoins will survive the hype cycle? It’s difficult to say for certain, but some factors might indicate a project’s long-term viability. First, a clear and well-defined roadmap outlines the project’s goals, development milestones, and future plans. This allows investors to understand the project’s vision and assess its potential for long-term success.

Look for projects with a strong and experienced team that has a proven track record in blockchain technology or relevant industries. A team with expertise inspires confidence and trust. Lastly, the utility. Memecoins with a focus on building a legitimate product or service have a higher chance of surviving beyond the initial hype. Utility creates long-term value for investors.

One recent research unearthed startling results: a whopping 91% of memecoins are scams, rug pulls, or harbor serious vulnerabilities. This alarming statistic highlights the urgent need for increased security and investor education in this burgeoning yet chaotic market. Remember, a real project strives to create value, not just hype. It should prioritize building a sustainable ecosystem with a strong community and a clear path to growth.

While many memecoins are scams, some offer genuine attempts at innovation and explore new functionalities within the DeFi space or leverage meme culture to build strong communities. The rise of memecoins has undeniable social implications. They’ve democratized access to investment opportunities and fostered a strong sense of community among enthusiasts.

Most memecoins – unless they reach “memedom”(meme kingdom/ the hall of meme fame) – have a certain shelf life. Regardless, it faces a huge churn rate of users as there are no retention mechanisms besides the community aspect, which usually falls apart quickly if the project has setbacks or poor token performance.

To combat this, there are retention tools, providing activities for users to complete. But more importantly, all the projects launching on the platform must have a product, game, or utility user flow system that involves the token, is memeable, and has a purpose that is likely to excite the community.

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