Key Insights:
Fake liquidity pools like Meerkat Finance often use high returns, FOMO, and hype to lure investors.
These can be avoided with due research, avoiding hype and FOMO, and always earmarking funds that you can afford to lose.
Liquidity pools enjoy high trust because they provide a safer way to invest in crypto with a decent yield reward.
Liquidity pools are a safe way to invest in crypto with little to zero risk and reap returns higher than traditional bonds or even staking. This has given rise to a crypto passive income strategy called Yield Farming.
It involves moving your funds across high-yield liquidity pools to get the market's highest possible yield.
However, sometimes, liquidity farmers fall prey to fake liquidity pools, where they eventually get rug-pulled and lose all their funds. Such incidents also happen with beginners who, in the hope of maximizing their returns, fall prey to such scams.
A well known example of such a scam was Meerkat Finance which was eventually rug-pulled and its users ended up losing $32 million. According to several reports, there were enough signs from the beginning that this project was indeed a scam.
Meerkat Finance Yield
Meerkat Finance was supposed to be the highest-yield liquidity pool, offering around 900% APY. The platform advertised itself via several influencers, who pitched it as a genuine project with high traction, whether knowingly or not.
However, as soon as it was launched, the project was found to have been rug-pulled, and all its $32 million user funds (14 million BUSD and 73.6k BNB) were found to have been drained by a smart contract compromise. The Meerkat Finance team announced the news.
It was later found that the smart contract was altered by the same wallet that had deployed it, i.e., someone from the internal team. Soon, the website and Telegram account were shut down, and the project virtually vanished.
The primary way these fake liquidity scams attract people is via super-high returns. Since liquidity pools have the least risk and are equivalent to bonds in traditional markets, people easily trust them. Most unsuspecting users fall to their high yield rates thinking they have found a safe way to earn high passive crypto income.
Genuine liquidity pools have a limited yield because they have to further lend the money as a loan to exchanges or DEXs to earn. Exchanges and platforms that need this liquidity often look for the lowest APY pools to reduce their own cost. Hence, the lower the yield rates they offer, the higher their demand will be.
Sometimes, fake liquidity pools ask users to transfer money to this account or connect their wallets to invest. When new users follow these instructions, the bugs and algorithms in those protocols drain the wallets.
Most users only come to know that they have been cheated when they come to withdraw their invested funds or when it is the time to get the yield rewards.
Intense influencer-led promotions make some projects appear genuine in front of others. Meerkat Finance was one such project that targeted small-time influencers so that they could easily push their agenda without arousing suspicion. Many large influencers often perform cross-checks to avoid tarnishing their image, and hence, it becomes difficult to lure them into promoting.
We have all seen promotional articles in which a certain project or token is predicted to rally several thousand percent in a week or month. These tokens are then projected as being the next Bitcoin, XRP, or Solana. Parallels are also drawn with viral tokens like VIRTUAL or PNUT to lure unsuspecting new crypto users.
A common feature of all these projections and predictions is that there is a very limited time to invest in such pools or tokens. Further, this is deliberately pushed during bull markets when the FOMO is already high.
As a result, sometimes even seasoned investors fall prey to these projects.
An easy way to avoid such FOMO is to avoid investing during a market high or even if you are, then doing quick market research on forums and social media platforms act as a lifesaver.
A new trend in creating the illusion of a once-in-a-lifetime opportunity is the news (fake or real) that the project is going to be launched on a major exchange/DEX. Since several projects like DOGS have already seen high success after listing, many users fall prey to these pre-launch hype.
Unfortunately, it is very difficult to detect such scams but the best thing a user can do is to invest only a small amount in such pre-launch projects and keeping the amount limited to what they can afford to lose.
Genuine liquidity pools like Rocketpool will offer Liquidity Provider (LP) tokens that you get after investing your crypto in these pools. You can easily check the validity of these tokens by using a token explorer like EtherScan.io, BSC Scan, or the blockchain explorer on which the LP token was issued.
LP tokens are the collateral that you receive and are similar to other cryptocurrencies but can be used for a single purpose only i.e., to claim your funds back from the pool.
Fake projects will often avoid issuing tokens or even if they do, they will do so on an obscure blockchain.
Also, the LP tokens must be issued in proportion with the size of the pool they maintain. If a LP token's market value is too high a compared to its size, the pool could be a scam.
Liquidity pools are crypto platforms where hundreds and thousands of users pool their funds together. The pool then lends the funds to a platform at a certain rate. When the platform pays the interest rate to the pool, the users get to keep most of this yield, and the platform charges a small fee.
Since, the lending is always collateralized, such investments are considered to be the safest in the crypto markets. This is the primary reason why users find it easy to trust liquidity pools.
Another reason why liquidity pools are popular is because you get to keep the cryptocurrency(collateral value) and also earn an extra interest income while you hold it in the pool. If the token value appreciates, you get to real double benefits.
Disclaimer: Voice of Crypto aims to deliver accurate and up-to-date information but will not be responsible for any missing facts or inaccurate information. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.