In 2020, Decentralized Exchanges, also known as DEXs have rapidly accelerated in 2020, with numerous months where the trading volume of these exchanges has more than doubled from the previous month. With such an accelerated rate of growth, it would be hard to imagine that there could be any problems with DEXs, which are quickly becoming a contender to fight against traditional centralized cryptocurrency exchanges.
Unfortunately, there is a big problem that is threatening to kill off the spectacular progress that DEXs have made in the past year. We need to find out a way to have a DEX that doesn’t have rug pulls. These rug pulls have become an endemic problem to many DEX platforms across the world and they have been losing people a lot of money.
What is a Decentralized Exchange? How Is It Different To a Centralized Exchange?
A Decentralized Exchange has a number of ways in which it is different from a regular centralized exchange. The first difference is that with a DEX, customers won’t have to worry about their funds being stolen via a cyberattack on the DEX. This is because a DEX does not hold the user funds, as the transactions take place on a peer-to-peer basis, there is no middleman to hold the funds.
Furthermore, due to the nature of the way in which the decentralized server network works, hosting for these services is spread across multiple nodes, so if one node of the server was to fail, there would still be no risk of downtime. This means that users will have a much better service experience as they will never have to miss out on trades as a result of the server downtime.
Furthermore, another benefit to the users is that users gain a much higher degree of privacy due to the fact that the users do not have to provide any contact information regarding their purchases and sales. The only exception to this rule is when they make payments or receive payments to a bank account. Then, in this circumstance, the other party would have access to that information.
In a future where there are big concerns over privacy and the increasing likelihood of cyberattacks, DEXs provide a really enticing offer that could be the future of asset exchanges.
How Do Rug Pulls Happen and How Bad Can They Be?
A rug pull scam is a horrendous form of new investor scam which occurs when a project listing its token on a DEX is put up for the sole purpose of gaining investment for the token, to then pull all of their liquidity from the project. This, in turn, results in a rapid price crash that prevents investors from pulling out their funds in time. The scammer then runs away with the proceeds of the scam and the investors are left with a massive loss.
There have already been a number of notable rug pull scams that have been pulled off. For example, in September 2020, Yfdexf.finance committed a rug pull scam when they had received $20 Million worth of investment and ran away with the money, shutting down their website and Twitter account shortly after. This highlights the potential scale of the scams that are being pulled off and the damage in trust to both the cryptocurrency market and DEXs are massive.
Another example of a rug pull scam occurring can be found in DistX, which was a trading platform for tokens. On December 16th, 2020 it was reported that their token market cap reduced from $1.5 Million to $15,000 once the founders of the project took their liquidity out. They also deleted their social media accounts in the aftermath.
The implications for DEXs are even more damning when you consider the fact that certain people in the community are of the opinion that 99.99% of listings on DEXs are scams. Even if this number is vastly exaggerated, it still shows the frequency with which people are getting scammed out of their money when using DEXs.
How Would You Make a DEX Without Rug Pulls?
So, it seems that the solution to this whole problem would be to create a DEX on which it is impossible to commit a rug pull scam. This may be harder than it sounds, as such a solution would have to be built into the DEX itself and be a part of how it operates. Thankfully, there is a company that is close to launching such a DEX, the company is called Rootkit.
The technical aspects of how Rootkit is solving the problem of rug pulls stems from the way in which they use their ERC-31337 protocol. This manipulates AMM mechanics and will essentially rewrap Ethereum that creates an unbacked token price and a vault for storage. To reiterate, this actually makes rug pull scams impossible due to the liquidity under the price floor being unbacked. This solves the biggest problem plaguing DEXs at this time.
The first of these tokens that have been released for their DEX was by Rookit themselves, in the form of the $ROOT token. This token carries with it a transactional tax which is used to pay the development team and the vaults needed to further development token launches on their DEX.
The concept itself, in more detail, works by utilizing liquidity locking mechanics that are paired against Rootkit’s kETH token. This token is unique and wrapped to Ethereum. Ethereum that is stuck under the price floor gets sent to one of Rootkit’s vaults and the kETH tokens remain in place to ‘spoof’ the liquidity. Anything in the vault can be used for project developments, buybacks, and DAO systems.
After the success of the initial $ROOT token, the startup is now looking to develop their launchpad so that their ecosystem can be expanded to include more projects that are actually seeking investment, rather than seeking to scam. This launchpad will be the flagship LGE generator in the industry which will distribute Ethereum to create pools of $ROOT, wETH (wrapped Ethereum), and kETH.
Any token that launches on their ecosystem and eventual launchpad will be automatically listed on the upcoming DEX being developed by Rootkit. All of these projects will also have a transactional tax, to further increase the development of projects and growth of their individual vault. It may seem expensive, but when you compare that to the losses you would make if you used Uniswap and suffered a rug pull, it’s not that bad.
Closing this article, it is evident that DEXs have the potential to be powerhouses for cryptocurrency and token trading. The biggest problem that they need to overcome if they are going to be certain of success and avoid losing users and potentially dying altogether, they need to adapt to the ongoing epidemic of rug pull scams that are occurring on numerous DEX platforms.
Rootkit is the first provider that is going to create a DEX completely free from rug pulls and users will be able to operate knowing that they are investing in a legitimate opportunity, rather than knowing that they may lose their entire investment. Upon the launch of their DEX and launchpad platform, Rootkit will probably see a swarm of people looking to trade in a decentralized manner that is safe for their money.
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