Despite the novel nature of digital assets and its underlying technology, the blockchain, one of the major turn-offs for investors is the risk involved with these classes of assets. The cryptocurrency industry has famously earned itself the title of a “Wild West” due to a lack of regulation, incessant security breaches, and exit scams.
In talking about exit scams and rug pulls, the list is endless. In November 2017, escrow-based crypto startup, Confido, disappeared overnight with $375,000 gotten from its initial coin offering (ICO). Consequently, the market cap of the cryptocurrency fell from around $6 million to $70,000 within a week, leaving investors hanging.
In February 2018, another crypto startup, LoopX, exited the market raising $4.5 million from investors. Stats reveal that in 2019 alone, investors were fleeced of $3.1 billion in crypto exit scams. And then in 2020, amidst other rug pulls, the Decentralized Finance (DeFi) project Yfdex.Finance carted away with $20 million of investor capital only two days after promoting itself online.
2017 and 2018 were more or less the year of ICOs and ICO exit scams were the order of the day. This same maliciousness has been transferred to the DeFi sector following its boom this year. Scammers have once again found new ways to exploit opportunities in the DeFi space. For instance, scammers initiate a “rug pull” by placing liquidity into Uniswap only to exit the market at a future date once they get the required funding. Surprisingly, some of these scams happen as quickly as 30 minutes after the launch of the token. Others may take some days, weeks, or months. For some context, as of August 9, 2020, 631 new tokens were listed on Uniswap. Out of this number, 490 had their liquidity reduced to zero by the end of the same week.
Such incidents are bad for investors, traders, future startups, and the general cryptocurrency industry. Although due diligence is a basic requirement for investors before committing to any project, experience has shown that even the most publicized and seemingly credible offers can be wolves behind sheep clothing. Investors are generally skeptical to support any of these new projects which in turn affect the future of upcoming projects.
Can investors be protected?
Since exit scams and rug pulls have become the order of the day, the next valid question to ask is how investors can be protected. It is in response to this question that the Liquidity Dividends (LID) Protocol was formed. A section of the project’s website reads:
“The Liquidity Dividends Protocol uses new technology that provides solutions for depositing liquidity into Uniswap while also offering a social reward-based staking system.”
LID Protocol offers its services to cryptocurrency projects that need to launch their offerings via ERC20 tokens. Its solution provides locked liquidity combined with a social staking system that incentivizes participants.
Founded on July 12, 2020, by Carlsbad Sunshine, the LID Protocol solution involves three parts – a standardized non-custodial smart contract presale to lock liquidity, LID certification of proof of locked liquidity, and LID staking. In general, all of these features are designed to reduce investor risk, encourage social participation, and increased a project’s credibility.
Talking about projects, LID Protocol already has several success stories under its belt. As of press time, the organization had already launched three successful pre-sales. The most recent, SwapFolio hit its all-time high in late August.
Digital assets are here to stay
All indicators point towards the inevitability of digital assets. The sector is maturing and evolving – from ICOs to IEOs, centralized exchanges such as Binance to decentralized exchanges, the boom of the DeFi sector, and now the influx of institutional investors.With heave players such as PayPal enabling support for cryptocurrencies and hedge funds such as MicroStrategy scrambling for Bitcoin, there is no doubt that digital assets are going mainstream.