How to profit from newly launched crypto tokens
Hazel Project is built with education as a core value that’s why, as a member of the Hazel Team, I would like to share an interesting story about trading new listed pairs on decentralized exchanges.
As a curious developer who is always trying to beat the market, especially the crypto market, from time to time, I come up with rather crazy ideas. In this article I will be presenting one of them.
Have you ever wondered how many ERC-20 tokens were released to the Ethereum Blockchain up until now?
I did, around 450.000 [source: https://etherscan.io/tokens]. If we assume that the interest in releasing new tokens didn’t change over the period of 5 years of Ethereum’s existence, it will mean that there are around 250 ERC-20 tokens released every day, a promising figure for my idea.
If there are around 250 new ERC-20 tokens released every day, there must be at least a couple of them that will be exchanged directly on decentralized exchanges (e.g., Uniswap, SushiSwap, etc.) that I can scan for and buy just a few seconds after the liquidity is provided. This way, I was basically going to acquire the tokens before anyone else and if the token was meant to be traded only within that Liquidity Pool, the profit was almost certain and the biggest possible loss that could happen would amount 2x swapping fee.
The envisioned system would have been pretty easy to build from scratch, but being a bit overwhelmed at that period I decided to check the internet for something similar. I didn’t find an exact solution but there was a website that was listing newly listed Uniswap Liquidity Pools, good enough. All I had to do was to write a simple automation script that will check the website for new listings and swap some fractions of ETH for the targeted token. A couple of hours later I had the entire setup ready, I started it and hit the gym. When I came back, I couldn’t believe what I saw, the bot that I wrote already bought 6 tokens with around 400USD and some of them were already a lot higher in price (2–18x).
Time to cash out! But surprise, surprise, when I tried to swap the first token back to ETH, Uniswap threw an error. I tried again, same error “There is an issue with the output token”. Oh dear, the developers must have made a mistake. I tried to swap one other token with positive return, same story. I tried to swap the other 4 tokens with the exact same result.
All 6 tokens had the same line of code added to the Transfer, TransferFrom and MultiTransfer methods:
require(msg.sender == _owner, “!owner”);
At that moment I was feeling overconfident for some reason and I said, ok, no worries, I will read the smart contracts later that day and I will certainly find a bug that will allow me to sell back the tokens to those nasty developers who tried to scam people.
Did I manage to find a bug? I didn’t need to, when I came back to this experiment about 6 hours later, the liquidity pools were already depleted, I’ve been played, the owners withdrew their liquidity and successfully ran with my money, and a lot more money from other victims, the average market capitalization of those token was 2 million USD.
One thing that isn’t right and I need to investigate, is why DexTools still displays a big pooled amount of both WETH and one of the 6 tokens, about a week after the liquidity was withdrawn.
The next two screenshots illustrate this discrepancy. I censored the details of the fraudulent token because it was designed to impersonate a popular project that currently is one of the top 100 tokens on coinmarketcap.com.
At this point I decided to stop the bot from performing any other purchase and to shift my focus on creating a token. My belief at this moment was that there are such bots already buying as soon as new liquidity pools are created, otherwise why would such tokens exist? Some would argue that they tried to scam people, but how many people can you convince to buy an unknown token within less than a day.
To save up some some costs, I decided to create the coin on Binance Smart Chain. Being anxious to find out what is going to happen and also intrigued by the token deployers that you can use to create a token in just a few seconds, I decided to use such a service, but the details of this story will be presented in another article.
After deploying my token to BSC, I decided to pair the minted amount with 0.6 BNB on PancakeSwap. I thought that if there are bots crawling for new pairs, they will certainly scan PancakeSwap because it is the most popular swap on BSC. A few seconds after receiving the confirmation of the liquidity deposit, a swap of 0.25BNB was already executed. The trade was executed from an address that had over 40 tokens that I didn’t even heard of and executed more than 1000 trades in less than 30 days.
Within a couple of hours there were 9 other addresses that bought my token. Some of them bought a large amount and sold 5 to 10 equal chunks after I bought some tokens myself (I lost another 80 USD on this experiment), other addresses are still holding to this day. I personally believe that all these addresses are bots because they execute a lot of trades, most of them with fresh pairs and small amounts of BNB.
My conclusion is that creating a bot that buys fresh pairs presents a high risk but also high return strategy for traders who are looking for hidden gems but it needs some improvements from what I’ve described in this article.
Instead of building it to interact with Ethereum Blockchain, I think it makes a lot more sense to do it on a low fee blockchain, such as BSC.
To reduce the risk of getting your funds trapped, a good idea would be to implement a mechanism of contract validation that will exclude tokens that cannot be sold back. It can be a simple low value buy and sell before a more substantial one is performed, it will cost under 1 USD on BSC or a more sophisticated one that will compile the solidity code of the smart contract and will perform unit tests that will validate the transfer and transferFrom methods, alongside minting and blacklisting.
If your bot manages to be the first buyer of a token that cannot be minted and the developers will not withdraw their liquidity from the pool, the risk will be minimal and the upside maximal.
At the moment I am not particularly interested in developing applications that interact with BSC so I will have to pass on this idea for the moment, but I would love to hear some success stories.