As is traditional, let’s start with an explanation. The term “rag-pull” literally means “pulling the rug out”, and in this case we are talking about liquidity. As we already know, decentralised exchanges like Uniswap operate on the principle of an automatic market maker, i.e. using a liquidity pool. This essentially means a certain volume of tokens used by other people to conduct transactions. And a feature of such decentralised exchanges is the requirement for an equal volume of cryptocurrencies within a trading pair within the liquidity pool.


In other words, if there is 100 ethers in pool for ETH-USDT pair, so there must be dollar equivalent of this sum in USDT, i.e. 155 thousand USDT (100 * 1550 USD for ETH) at current exchange rate. We wrote more about the principle of liquidity provision on Uniswap in a separate article.


So, the rag pool is about liquidation of liquidity from pools by developers. They essentially sell coins from the pool, causing the second coin in the trading pair to depreciate, well, investors get the token without any value.

Cryptocurrency hacker

Uniswap itself became particularly popular in 2020, as it was at the centre of the so-called DeFi-let. Decentralised finance projects were trending at the time, so their tokens often appeared on Uniswap. However, according to analysts, there are too many useless coins on this platform.

How money is lost on cryptocurrencies

The statistics from Uniswap were posted on his Twitter page by Nick Almond, head of protocol at FactoryDAO. The overall study was conducted back in 2021, but was only published the day before. So, according to the document, 97.7 per cent of projects on Uniswap could be called “rag pools”. Just under a year has passed since the first publication of the study, although it is unlikely that the situation on Uniswap has changed dramatically by today.


Note that anyone can add cryptocurrency to the decentralised exchange Uniswap and other similar platforms. Usually developers choose such trading platforms for launching, because it allows them to raise money and at the same time to shine among a certain community of traders. In addition, there is not much to do for trading: you only need to add liquidity, i.e. tokens from existing trading pairs to make trades.


The study published by Almond deepens the work done by another team of analysts in 2021. They used a machine learning algorithm to analyse transaction data and find tokens on Uniswap that turned out to be fraudulent. However, this algorithm could only detect suspicious tokens after the fraudulent scheme itself had already been committed.

Buying cryptocurrencies

An analysis of another 20,000 tokens and new machine learning techniques have been added to the old publication that can “detect potential fraudulent activity before it happens” with 99 per cent accuracy. Of the nearly 27,000 tokens that were analysed, only 631 were found to be “non-malicious”.

The researchers used the Infura archive node and the Etherscan API to collect transaction data of all tokens available on Uniswap V2 between 5 April 2020 and 3 September 2021. The research paper details the methods used, which include the Herfindahl-Hirschman index, used by federal agencies to assess markets. It also argues that other fraud detectors like Token Sniffer and Rug Pull Detector give unreliable results.

For example, it is common in decentralised finance to include liquidity blockers like UniCrypt in tokens as a guarantee that developers cannot withdraw funds from a smart contract once investors have deposited them. But this is hardly a guarantee against fraud, the researchers write, arguing that “90 per cent of tokens that use blockchain contracts end up becoming a rag-pool or malicious token”.

Uniswap decentralised exchange mascot

According to Decrypt’s sources, the second “enhanced” study was published in March 2022 on the Multidisciplinary Digital Publishing Institute (MDPI) portal. The front page of the digital copy of the document has a date of January 2022. The MDPI version is three pages longer and has additional token attachments on Uniswap V2 until 3 September 2021.

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In the comments to Almond’s tweet, DeFi committee vice-president at L’Adan Mark Zeller made a good analogy – regulators lowering the minimum required capital to register a limited liability company (LLC) to €1 in France. This makes it very easy to set up fly-by-night companies. Here’s a relevant cue.

A long time ago in my country there was a law to reduce the capital for incorporating a company to one euro. Back then people used to say: “Idiots and crooks will set up companies – it’s a bad idea”. That was true, but it was also true that some of these one-euro companies became “unicorns” because of the internet boom and all that.

With blockchain, it’s even easier than registering such a company. Anyone can create a token, and it doesn’t even require any deep programming knowledge – you can just copy the code of another protocol, changing its name and some parameters in it, like the maximum number of tokens.

Promotion of the third version of the exchange Uniswap

All that is left for the rag pool is to make a nice website, hype the social media and release “promising” project plans, then release the token on Uniswap, where the first investors will start buying it. But they will only acquire empty promises, because in fact there is no fundamental value behind such a project. The scammers only have to sell enough tokens and disappear. Moreover, the same attackers can run a similar scheme several times and remain anonymous.

We believe that such a figure is quite high, but it is not the fault of the Uniswap platform. However, anyone can pour in a token and start trading it, so the fraudsters are exercising that right. Investors in this situation need to be as careful as possible, make sure they do their research and only invest what they are theoretically prepared to lose.

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