Unlocked liquidity is one of the biggest risks there is. Completely unlocked liquidity means that the token founder can withdraw all BNBs from the supply at for example Pancakeswap. When that is done, all tokens become worthless, and the token founder basically steals all investors’ money.
There are also much more subtle ways of stealing the investors’ money, such as locking 90% of the liquidity, and provide this as evidence for the LP tokens being locked– while secretly slowly removing BNB from the LP by using the 10 % unlocked LP tokens. When this is done, a complete rug pull (removing all the BNBs from the LP) can’t be done – but 10 % of it can be removed, and this can be done pretty discrete, because this won’t have any price impact, since both tokens and BNBfrom the LP is being removed.
I would first like to write a short explanation of what a liquidity pool is. For an in depth explanation, please see our article about this subject: https://www.rugbusters.net/academy/how-liquidity-pools-work
For a token to have a price and be tradable at a decentralized exchange such as Pancakeswap, it needs to be paired with a token of actual value (usually BNB onBinance Smart Chain).
If I start a token, let’s call it token X, that has a supply of 100 tokens, anddecide to have 10 tokens for myself and 90 tokens to the market, I need to pairthese 90 tokens with BNB. If I pair those 90 tokens with 90 BNB, 1 token isworth 1 BNB. If I pair those 90 tokens with 10 BNB, 1 token is worth 0.11 BNBs.This ratio determines the price of the token.
How large part of the token supply that is added to the LP also decides the initial market cap(which is determined by the price per token(decided by ratio between token X and BNB in the LP) x total token supply. More on this subject in another academy article.
Whenever someone buy token X, token X is removed from the LP while BNBs are added. This changes the ratio of the LP and impacts the price in a positive direction,fewer token X is equal to more BNB. When someone sell token X, BNB is removed from the LP while token X are added, which changes the ratio and lowers theprice.
This pair,placed at a DEX(decentralized exchange, like Pancakeswap) is what is called a liquidity pair – often referred to as LP or liquidity.
When I provide the liquidity(creates the pair by storing tokens with BNB at a certain ratio) – I get “keys” to the LP, and those “keys” are called LP tokens.
When people speak about locked liquidity, what they refer to is if those LP tokens are locked or not.
If those keys(LP tokens) are locked, I can’t access them and remove the BNB and tokens from the LP. If all LP tokens are “unlocked”, the dev has them in his wallet and can access all BNB and tokens(the entire LP) and remove it.
What does locked LP tokens really mean? It means that the tokens are stored in a lock(for example DXlock, Unicrypt and many more) which is a smart contract that doesn’tlet you withdraw the LP tokens after a certain timeframe decided by the token founder the time the LP tokens are getting locked in it. You can lock LP tokens for any time between a day and 900+ years.
This is something that you soon will be able to check easily at scamorgem.io and here at Rug Busters(version 2 of Ruggy Buster, the scam detection bot). Until then,follow those steps below:
1. Go to bscscan.com
2. Enter the contract address of the token you are investigating in the field shown below:
The contract address can usually be found at the token’s website.
3. Click on the token tracker(example below)
4. Click on “holders”
5. Click on Pancakeswap V2
6. Click on “filtered by token holder”
7. Click on token tracker Pancake LPs
8. Click on holders
9. Now you see all the LP token holders and how many % of the LP tokens they hold:
In this example, you see that the biggest LP holder has 99.9 % of the LP tokens, and that the holder is a smart contract(see the logo inside the black circle). The holder 2 and 3 that holds 0.0 something of the LP tokens are regular wallets. It is pretty usual, that random people add liquidity to the LP– and when the numbers are so small, it doesn’t do anything.
If you see a holder, that isn’t a smart contract, that has more then 5 %of the LP tokens, your research is complete – don’t invest in the token.
If all looks good, >95 % of the LP tokens belongs to a smart contract, you are ready to proceed to the next step, which is asking the dev for proof(picture of to the lock that shows how long it is locked).
We recommend you follow the process though. To filter out the obvious scams and to see that the locked wallet holds the vast majority of the LP token supply. If you ask for a picture of the lock directly, you might receive it – but what if it not contains >95 % of the LP tokens?
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