The rise and fall of the crypto Squid Game (SQUID)

Squid game? Why do we write about a netflix series now? Those of you who have not watched Squid Game on Netflix, have probably heard of it during the last months. According to Netflix (2021), viewers watched around 1.6 billion hours of Squid Game during the first 28 days since release. We do not want to spoil the people who still intend to watch it, but to give you some basic context: It is a Korean series that takes Hunger games to the next level as the participants of a deadly tournament have to play several levels with a vanishingly small chance of winning the tournament. The winning prize is money - a lot of it. Therefore, many cannot resist to risk their life for it and play the game. 

So what does this have to do with crypto? At the end of October a token on the Binance Smart Chain (BEP20) appeared that bore the name SQUID and it was not affiliated with the show, but anonymously created. The initial price per token was less than 0.02 USD and traded mainly by the SQUID-BNB pair on Pancakeswap, a decentralized exchange. The whitepaper gave very limited information about the tokenomics and technical features. The focus laid more on the parallel that it had to the Netflix show with six games that token holders could enter by paying X amount of an entry fee. The entry fee for the first game would be 456 SQUID token growing each game until the last which would require 15000 SQUID + the NFTs (Non-Fungible Tokens) that each winner would receive in the previous rounds. The team would be rewarded with 10% of the entry fee and 90% would go to the reward pool for the final winner of the last round. Although they announced an audit before the pre-sale for the project, this has never happened. 

Chart is retrieved from coinmarketcap.com

The token price started to grow exponentially a few days after the TGE (Token Generation Event) as the hype was fueling the demand. When it hit 32 USD on October 31. it had already recorded a 1600% rise from the initial price of the token. Major media news channels like BBC and CNBC released news on the crypto and drew more attention to it while not making clear that there was no connection to the Netflix show. On November 1. The total market cap amounted to 3.36 million for just a bit of time and then suddenly, the liquidity pool of the PancakeSwap exchange disappeared almost instantly. It led to a price less than 0.004 USD per token and people that bought the token before the instant drop had basically lost all their investment to the scammers. In crypto jargon this is called a rug pull: Developers create a crypto currency and market it until enough (in their eyes) people have invested into it, only with the purpose to cash out and abandon the project. 

Chart is retrieved from coinmarketcap.com

What could have prevented people from losing all their investment to scammers? 

There is a simple answer to that: Audit. If publicly traded companies are audited, then the same should be done for tokens to protect investors from scams. It would not need a Big Four company, but an independent organization that knows the risk areas in the crypto space well and can verify the legitimacy of such a project. 

The following facts would have shed light on the unknowing by a proper audit.

First of all, the disproportionate token distribution of the project. For rug pulls the token distribution is to some extent dubious as either the project itself retains most of the tokens or a relatively high percentage of total supply is allocated to the team members. In the case of SQUID the total supply amounts to 800 million token whereas 45.6% were allocated to the pre-sale, 39.9% for the listing, 5% for airdrops, 6.96% to administration & marketing and burning around 1.73% as stated in the whitepaper. There is a big question mark to what extent this corresponded with the actual distribution, but even if 45.6% were allocated, it would not mean much as the remaining 54.4% would still remain in the wallet of the project and therefore, in full control of the project team.

Another crucial aspect is the liquidity on exchanges as a price does not mean much without sufficient liquidity. Without liquidity pools, the slippage can become costly due to the difference of the expected price of a trade and the price at which it is executed by smart contracts. The liquidity pool for SQUID existed, but it was not locked and therefore, easy for the liquidity providers to manipulate. Legit projects with liquidity pools will pass on the control to a trusted third party meaning it is locked and consequently, prevents developers of the project from transferring the tokens. The liquidity pool for SQUID disappeared within a few seconds and it is probable that one of the eight wallets that held most SQUID tokens (a few with more than 3% of the total supply) “pulled the rug” by taking advantage of the illiquid market.

Furthermore, an audit could have given an insight about the business and the project members themselves. An anonymous team does not necessarily mean that the project is a scam or intended to pump and dump the token, but it can be an indication for you as an investor to be cautious and look for more hints. If a team wants to stay anonymous due to regulatory issues and uncertainties, it could do that and still ensure that the project is audited by an independent organization. 

At CoinRisk we can audit a project on various aspects and validate that promises in public are made by a competent team that can fulfill its promises. Important areas that should be covered are technology, tokenomics, finance & operations. They will be analyzed diligently and ratings on each will deliver a truthful picture of the project. The report can be made accessible for the public to provide the community and investors with transparency. For legit projects, this comforts both sides as trust is established by an independent party. The project can work closely together with us to mitigate or avoid potential risks. 

Feel free to contact us, if you are part of a project that should be audited or an investor who would like to have risk analytics for projects.