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Liquidity Pools: negative aspects and scams

en.cryptonomist.ch 31 August 2020 13:50, UTC
Reading time: ~2 m

While it is true that with the advent of decentralized finance (DeFi) everyone has been given the opportunity to create their own pools independently, as is the case on Uniswap, adding value to their token by putting Ethereum (ETH) as collateral, not everyone knows that Liquidity Pools are often subject to scams. For example, liquidity can be withdrawn.

In fact, considering that DeFi is experiencing a real explosion both for projects and the millions of dollars locked, the industry has started to attract the corrupt actors of society, with criminals devising different strategies to deceive the victims.

Unfortunately, we are witnessing a sophistication of attacks by criminals. For example, one of the strategies to scam users is to create fake tokens of original projects and list them with liquidity pools on DEXs like Uniswap, misleading those who buy a completely fake token but with the name of a real and famous project.

Another problem, more complex to detect, is the one related to backdoors created directly in the smart contract code of a project. When this happens, after placing assets in the pools, the users can have their funds stolen because the criminals can shut down the contracts and steal the crypto assets from them. In this case, the practice of yield farming is exploited, which grants tokens to those who provide liquidity to a particular pool.

The umpteenth scam related to liquidity pools

But there is now yet another trap.

As pointed out by several users, in fact, there is a system called rug pull. Practically, those who put liquidity into the pool can at any time withdraw it and obtain a considerable advantage, although they leave users with a token that becomes worthless.

Here too, one must be very careful and be wary of pools that do not have their liquidity locked because they may be subject to attacks of this kind. 

Finally, it should be pointed out that as the tools in the DeFi sector evolve, tools that are sometimes only accessible to experts due to their complexity, one must be vigilant about the new techniques used for attacks and keep eyes open at all times.

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