5 risks to be aware of when entering Solana memecoins – Cointelegraph Magazine

It's all fun and profitable until your developer tweets: “Whoops.”

Solana's recent growth and DEX developments have brought a new wave of excitement to its decentralized applications.

Memecoins are at the forefront of the DeFi resurgence in the network.

In the past week alone, more than 19,000 new Solana tokens have become somewhat liquid, according to trading data platform Birdeye.

The reason these tokens are so popular is that they offer a small chance of providing life-changing benefits at a relatively low cost, leading some to call the memecoin movement a “lottery” on Solana.

But unlike the traditional lottery concept, where hopefuls buy cheap tickets in hopes of winning millions of dollars, memecoin investors can lose everything they have — and more.

Here are five risks to consider before joining Solana's winning streak.

1. Memecoin creators are usually completely wrong.

Memecoins are often created by the same people who invest in them – immature dignitaries who have no clue what they're doing. The recent fat finger incident that burned investors is a perfect example of this.

On March 18, the developer of memecoin Slerf burned $10 million worth of investors' presale tokens instead of distributing them.

While it was a nightmare for pre-sale investors, it quickly became a win for Slerf as media coverage spread awareness and centralized exchange listings poured in.

Several exchanges, including HTX and Bitget, have announced that transaction fees from Slerf transactions on their platforms will be used to refund pre-sale investors. It's a great convenience for pre-sale investors, the magazine spoke to.

“Even if my money is returned, I will not feel satisfied,” said one investor, who did not want to be named.

“You see, Slerf made 10x on the presale, and I lost the opportunity,” he added.

Slerf's dramatic transformation has prompted industry participants to question the reason behind the “accidental” fat finger phenomenon, with some raising the possibility that it was a marketing stunt.

Slurp points out that this is a mistake, and many note the crying Dave at the Spaces event after the event seemed real.

Winston Ma, a law professor at New York University, told the magazine that if such a mistake occurred in a regulated environment, the case could fall under tort law. In such cases, an error resulting in “gross negligence” may require the institution to compensate investors for their losses.

“In some cases, people say that compensation is not a perfect contract,” says Ma.

Instead, they were pleading for specific performance.

For specific performance, it requires the court to order the parties to perform their contractual obligations as agreed, instead of pursuing monetary compensation.

2. Fake names mean you never know which scammer created the coin.

Memecoin creators and investors often work under pseudonyms. There are legitimate reasons for this, such as protecting themselves from $5 breakout attacks or investors losing money when the price falls.

“People can win a lot, and people can lose a lot, and that can create bad feelings,” Roman Big_Cat, the unnamed head of product at the Solana-based memecoin project, told the magazine.

“Someone can come to your house [and] That's why I keep my sense of impersonation,” he adds.

But even as a way to protect identity, defamation offers new opportunities for fraudsters.

Anyone can create an online persona and disappear after committing a successful memecoin scam. The same person can return the next day with a different pseudonym and fresh memecoin. There were 19,000 new memecoins created this week. It seems unlikely that they were all created by first-broaders.

DeFi is mostly anonymous and has limited regulation. This allows fraudsters to carry out schemes without being easily identified or held accountable.

Big_Cat estimates that 95% of the contracts on Solana were created by malicious actors.

“This is a harsh reality,” he said.

3. Rug Pulls are more likely to go to the moon than your memecoin.

Carpet pulling is a type of scam that can take many forms. Generally, it happens when developers walk away with the project money, leaving their communities with nothing or worthless assets.

According to security firm Hacken, BNB Chain's 149 reported far-fetching events led the sector last year, with Solana not even cracking 10.

However, in its annual security report published in February, Hacken said the expected run-up on Solana was “primarily due to the explosion of new tokens created on the network” — 100,000 in December alone.

For memecoins, investors should keep an eye out for those who pull the rug over liquidity pools.

In this case, a developer creates a new token and lists it on a decentralized exchange.

This token can start trading if it has a liquidity pool, where the developer can pair their new token with a proven cryptocurrency, such as Solana's native token SOL or stablecoins.

Investors can buy the new memecoin by trading in the combined tokens, increasing the value of the liquid pool in the process.

At any time, the developer can perform a carpet pull by removing all the assets in the liquid pool and disappearing into the anonymous void.

Investors have ways to protect themselves by ensuring that the project locks in liquidity, ensuring that developers cannot exit the pool.

On Solana, investors can check the liquidity status of a project through bots available on various online channels such as Discord and Telegram.

4. Presale is riskier than investing in normal memecoins.

Many of the most successful memecoin fundraisers on Solana have happened through presales. In DeFi, this can happen when investors send money to an account and hope to receive new tokens in return. This could be more risky and vulnerable to a run for the money for Davis.

As of March 19, 33 Solana projects have collected around 796,000 SOL (currently $149.2 million) in pre-sales, according to chain analyst ZachXBT's calculations.

At least four of these projects resulted in carpet pulling and scams.

A potential issue under contract law is whether these investment contracts should be treated as securities based on the Howey test.

According to Ma, pre-sale campaigns promoted on social platforms such as X can be seen as public solicitation.

“The public demand is very clear, and that easily helps Hawaii's challenge,” says Ma.

If the asset is a security, the United States Securities and Exchange Commission may require public presale registration.

This is great to know, but since most memecoin investors don't have the money to take legal action, it's a minor point.

Pre-sales offer investors opportunities to get in on the property, often at a lower price, before it comes on the market.

The allure of quick profits overshadows due diligence for investors amid Solana's memecoin frenzy and draws comparisons to 2017's ICO boom.

An ICO, or initial coin offering, is a blockchain startup's way of raising capital. During the ICO boom seven years ago, many startups raised huge amounts of money, often within minutes of launching their ICOs. This boom has attracted scrutiny and criticism for being out of control.

A 2018 study by consulting firm Satis Group found that 80% of ICOs during the boom were scams.

5. Memecoins only have feelings; In most cases there is no utility.

Although memecoins offer overnight millionaire opportunities for the retail sector, industry veterans are highly critical.

Ki Yang Ju, CEO of blockchain analytics firm CryptoQuant, has been openly critical of the memecoin movement, stating that the lure of “easy money” could distract developer talent from building useful products and overshadow legitimate projects.

“Memecoins are definitely interesting, but because they don't have a product, this industry won't grow,” Ju tells the magazine.

On the other hand, the sheer amount of fun and money-making opportunities they offer attract many people to crypto.

Laika Big_Cat claims that memecoins' intangible utility is the entry of retailers into the crypto market.

Leica aims to encourage investors in its main mission, which is to send a helium balloon into low Earth orbit and release images there.

It then plans to launch its own layer-1 blockchain to build the memecoins ecosystem.

Ju admits that new investors entering the memecoins industry can often have a “very bad experience”.

“However, it will not be a problem if there is a legitimate founder to lead the memecoin project for a long time,” Ju added.

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John Yun

Yohan Yun is a multimedia journalist who has been reporting on blockchain since 2017. He has contributed as an editor to crypto media outlet Forkast and covered Asian technology stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking and experimenting with new recipes.