Horizons

Blockchain Horizons: Five Risks to Consider Before Diving into Solana Memecoins

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Memes for Solana are entertaining—until they aren’t.


CryptoCaster Quick Check:

Everything is good and exciting until your developer tweets, “Uh Oh.”

Solana’s decentralized applications are experiencing a renewed sense of excitement due to its recent boom and advancements in its DEX.

Memecoins are at the vanguard of the network’s DeFi comeback.

According to trading data platform Birdeye, more than 19,000 new Solana tokens with some kind of liquidity were introduced in just the last week.

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Some have referred to the memecoin movement as a “lottery” on Solana because these tokens are so popular because they provide a small but unlikely chance of yielding life-changing gains for a relatively small investment.

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In contrast to the conventional lottery model, in which participants buy inexpensive tickets with the expectation of winning millions of dollars, memecoin investors run the risk of losing everything they own.

Before entering the Solana sweepstakes, take note of these five risks.

1. Memecoin developers are frequently utterly incompetent

The same immature degens who invest in memecoins frequently set them up; they have no idea what they’re doing. An excellent illustration of this is the recent fat finger incident that disappointed investors.

Rather than giving away $10 million worth of presale tokens purchased by investors, Slerf, the creator of memecoin, burned them on March 18.

For presale investors, it was a nightmare, but Slerf soon turned it around when centralized exchange listings flooded the market and media attention helped raise awareness.

A number of exchanges, such as Bitget and HTX, declared that they would use trading fees from Slerf transactions on their platform to reimburse presale investors. Though Magazine has spoken with presale investors, this is hardly consoling.

“Even if my money is returned, I won’t be satisfied,” an investor who requested to remain anonymous told Magazine.

“You know, Slerf outperformed me during the presale, and I lost out on the chance,” he continues.

2. Pseudonyms mean you never know which scammer created the coin

The people who create and invest in memecoins frequently use pseudonyms. This is for good reason—for example, to defend against $5 wrench attacks or angry investors who lost money when the price crashed.

“There is a chance for significant gains and losses, which could lead to negative feelings,” said Roman Big_Cat, the product chief behind the anonymous Laika memecoin project based in Solana.

He continues, “Because someone can come to your house, I’m also keeping my pseudonym.”

Although pseudonymity protects one’s identity, it also gives con artists new avenues to operate.

Anyone can set up an online profile, pull off a successful memecoin scam, and then vanish from sight. The same individual may come back the following day using a new memecoin and a different pseudonym. This week, 19,000 new memecoins were created. They don’t appear to have been all made by novices.

DeFi has little regulation and is mostly pseudonymous. This makes it easier for con artists to carry out their plans without being discovered or held responsible.

According to Big_Cat’s estimation, malevolent actors are responsible for roughly 95% of the contracts on Solana.

He states, “This is the harsh reality.”

3. Rug pulls have a higher probability of going to the moon than your memecoin.

Scams like rug pulls come in a variety of shapes and sizes. It usually happens when project developers abscond with project funds, leaving their community with nothing or assets that are worthless.

Security company Hacken reports that last year’s 149 recorded rug pull incidents at BNB Chain led the industry, with Solana failing to even make the top 10.

But according to Hacken’s annual security report, which was released in February, the anticipated spike in rug pulls on Solana is “particularly concerning” because of the network’s massive influx of new tokens—100,000 in just December alone.

Investors should watch out for rug pulls on liquidity pools when it comes to memecoins.

Here, a new token is developed by a developer and listed on a decentralized exchange.

If this token has a liquidity pool, which it can have by combining it with an established cryptocurrency like stablecoins or Solana’s native token SOL, then it can begin trading.

By exchanging in the paired tokens, investors can purchase the new memecoin, increasing the liquidity pool’s value.

4. Compared to regular memecoin investments, presales carry even greater risk.

Pre-sales have been the mode of operation for many of the most successful memecoin fundraisers on Solana in recent times. This can apply to DeFi transactions where investors deposit money into an account with the expectation of obtaining new tokens in exchange. This might even be riskier, with a higher chance of the developers taking off with the money.

As of March 19, 33 Solana projects had raised approximately 796,000 SOL ($149.2 million at the time) through presales, based on calculations made by on-chain detective ZachXBT.

Of those projects, at least four ended in scams and rug pulls.

According to Ma of New York University, a possible case under contract law would examine whether the Howey test should be used to determine whether these investment contracts qualify as securities.

Memecoins are primarily driven by sentiment, lacking practical utility in many instances.

Memecoins give retailers the chance to become overnight millionaires, but industry experts are very critical of them.

CryptoQuant CEO breaks down the public’s view on memecoins. (Ki Young Ju)

The CEO of the blockchain analytics company CryptoQuant, Ki Young Ju, has been a vocal opponent of the memecoin movement, arguing that the promise of “easy money” may divert talented individuals from creating worthwhile products and eclipse worthy endeavors.

Conversely, more people are drawn to cryptocurrency because of the opportunities for earning money and the sheer dumb fun they offer.

Big_Cat from Laika claims that the widespread onboarding of retail traders into the cryptocurrency market is the memecoins’ intangible utility.

Laika’s main objective is to launch a helium balloon into low Earth orbit and broadcast video from there in an attempt to attract investors.

After that, it intends to introduce its own layer-1 blockchain in order to create a memecoin ecosystem.

Ju acknowledges that novice investors who learn about the market via memecoins frequently have a “very bad experience.”

Ju continues, “But it won’t be an issue if there’s a legitimate founder who can lead a memecoin project for a long time.”


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