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Important Detail To Distinguish A Good Token And Scam Token

Written by: Mustafa Mulla

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Mustafa Mulla

Mustafa has been writing about Blockchain and crypto since many years. He has previous trading experience and has been working in the Fintech industry since 2017.

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Nov 29, 2021

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Today, there are more than 10 thousand cryptocurrencies, the average person knows a maximum of 5-10 of them.

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An active crypto investor would name several dozen. And what about the rest?

Low-cap coins (under $1 billion) have one huge advantage and one equally huge disadvantage.

The advantage is their growth prospects. From top cryptocurrencies such as BTC or ETH, we can expect 3-5, perhaps ten times growth in a year.

At the same time, altcoins can be expected to grow up to x100 per year or more. Having managed to invest in the right asset on time, you can exaggerate your capital many times over.

The disadvantage is the risks associated with such tokens. Cryptocurrencies like BTC or BNB, for example, are relatively reliable (as much as possible in the context of a cryptocurrency).

Meanwhile, small altcoins can collapse forever at any moment, and then investors will lose their investments.

  • The risks of investing in altcoins include:
  • High vulnerability of an asset to pumps and dumps
  • A significant proportion of an asset can be stored in multiple wallets
  • Low liquidity
  • Etc

It turns out that risks and prospects balance each other. The question arises — how to distinguish a good asset from a bad one? And here we come to the most interesting part.

Liquidity pool

When evaluating an asset, you should certainly look at the big picture: the number of real holders, the daily trading volume, the reputation and prospects of the project, and so on.

However, there is one detail that distinguishes a true decentralized cryptocurrency from a scam token. This is a pool of liquidity. Or rather, whether it was burned.

First, let’s figure out what a liquidity pool is as such.

A liquidity lool (LP) is a kind of storage where a reserve of assets is accumulated, which is used to quickly exchange one resource for another.

A striking example of this is a currency exchange office in a mall or airport. The exchanger allows you to come and change one currency for another at any time, without waiting for the direct buyer.

For example, you want to exchange dollars for euros. Then you just come to a currency exchange office.

Otherwise, you would have to look for someone who wants to exchange euros for dollars — it would take time.

Cryptocurrencies need something like that as well. There are different ways to provide liquidity to a trading pair, and one of them is a liquidity pool.

To ensure the liquidity of the token, you need to add to the pool both cryptocurrencies that participate in the pair.

A cryptocurrency development team can do this temporarily. In this case, liquidity will only be maintained as long as the team wants and get liquidity tokens back one day, making conversion impossible and crashing the token rate.

Burning a liquidity pool means sending liquidity tokens to an invalid address, thereby leaving liquidity in the pool forever without the ability to get it back.

This was done, for example, in the Snake Token (SNK) liquidity pool — the game token of the play-to-earn game Cryptosnake.

Liquidity was added at the start of trading on PancakeSwap (October 28, 2021) and was burnt in less than a month (November 25, 2021).

The video of the burning and a link to BSCScan with confirmation has been posted in the community official channels.

Thus, the Cryptosnake team cut off access to liquidity tokens for a total amount of over 910,000 BUSD. This was an important public step that gave the community confidence in the honesty and transparency of the project.

When the liquidity pool is burned, there are a number of advantages to it:

  • A pool cannot be withdrawn
  • A pool cannot be hacked
  • Nobody, including the development team, has access to liquidity tokens
  • A coin rate is fully regulated by supply and demand
  • A development team has less influence over the token, which makes it more decentralized

When you want to buy a new altcoin on a decentralized cryptocurrency exchange like PancakeSwap, check to see if the liquidity has been burned.

This is a very important indicator that testifies to a lot!

Smart contract audit

Another important indicator of the reliability of a new altcoin is the audit of smart contracts. First of all, it is desirable that they be published in the public domain, that is, it should be an open-source project.

In the world of the crypto industry, this is considered important. Most of the successful projects are open source.

However, an ordinary investor, not being a technical specialist, is unlikely to understand something in the code of smart contracts.

Therefore, as confirmation of reliability and safety, an audit is carried out by an external company. External analysts should review smart contracts and publish their opinion.

This is exactly what the Cryptosnake team did. The result of the Smart State audit in the form of a 53-page pdf document was published in the official channels of the project on November 26, 2021.

The burning of liquidity and the publication of the audit results were a powerful signal for the growth of the SNK token rate.

Prior to these events, on November 24-25, the rate was held at about $0.33/SNK. However, on November 26, the token broke through the $0.45 / SNK mark. Growth — over 35% in less than two days.

The growth is also supported by the fact that the release of the game is approaching. The start of the play-to-earn game Cryptosnake is scheduled for November 30.

The SNK token is traded in a pair with BUSD on the PancakeSwap exchange.

Conclusion

Paying attention to the liquidity pool and the smart contracts audit results of smart contracts can help to draw conclusions about the reliability of a project and make a more informed decision about whether to invest in an altcoin.

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Mustafa Mulla

Mustafa has been writing about Blockchain and crypto since many years. He has previous trading experience and has been working in the Fintech industry since 2017.

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