One of the things that I love about crypto is that there's always something new to learn.
This article is brought to you by the letters L and S, for liquidity and slippage, things most of us here in cryptopia kinda sorta understand and know how to work with, but not really.
Liquidity
Liquidity is, in a nutshell, how easily you can swap one token for another without causing a wild price swing. The greater the token's liquidity, the less impact large buy and sell orders have on the token price.
Making sure there is enough liquidity when you launch your token is crucial, because you don't want to put people in a position where they can't exit when there's a good opportunity. This is the primary reason why when I launched WOMPWOMP even though it was up 12,000% at one point, I didn't take profits - it was still early and I didn't want to screw anyone who was in there making money.
When you're evaluating a token and deciding whether to add it to your portfolio, you want to look at these things:
Liquidity - how much money is in the bank
Fully diluted valuation - total token supply minus the burned supply multiplied by the price
Market capitalization - circulating supply multiplied by the price
You can find this information on any of the dexes like DexScreener or CoinGecko.
The quick and dirty way to analyze token liquidity is to compare the liquidity value to the market cap and think about it this way: if everyone wanted to sell their tokens at one time, could the treasury cover that demand?
Because this is crypto, the answer to that question is usually no! This also means that if a whale decides to divest of all their tokens at once, this will have a dramatic impact on the price of that token.
So we have a follow up question: do you believe in the project and team enough to assume the risk of buying a token with low liquidity?
This is why when you see people launching tokens, they usually announce when they add liquidity to the pool. This is a signal to anyone buying the token that should they want to sell them, there will be enough funds in the treasury to cover those transactions. It also signals the team's commitment to the longevity of the project, in that they're making efforts to stabilize the token price during the early hype cycle.
This brings us to...
Slippage
If you try to sell a token that is undercapitalized (has low liquidity) when there is a high selling demand, you may have issues selling the token.
I can tell you ALLLLLLL about that!
The easiest way to understand slippage is this:
Hugamonster, at the bank: Hi! I'd like to withdraw 3,000,000 tokens please.
Bank: Uh...hold on lemme go check. Nope. Sorry. Can't have em.
Hugamonster: Ok, well like, how about 1,500,000 tokens?
Bank: I'm sorry ser, we're fresh out of tokens today, try again later.
Hugamonster: Ok, what if I'm willing to accept less tokens just so I can be done with this?
Bank: YES! That we can do! Here are 168,000 tokens, we'll keep the rest, would you like large bills?
This is what happens when there is WAY less liquidity than there is demand for token sell orders, which can be a result of either a small liquidity pool, a huge token pool, or a combination of both. So when you see peeps in telegram demanding that the devs burn liquidity, this is why.
If you want to sell undercapitalized tokens you're gonna take a loss. Not a value loss -- you get roughly the same market value for your swap. But the tokens you lost to slippage go back into the pool, as far as I understand things. This means down the road, should this token moon, you will have sold your tokens for less than the full value of the actual number of tokens you held.
You can fine tune slippage easily on Uniswap. It's typically low, less than 1%. I've bumped it up as high as 5% in the past.
Never have I ever had to bump it up to 20%, which is what I ended up doing to get rid of the mooning goat token staring me in the face when I woke up this morning.
Under any other circumstances I'd have been THRILLED by this turn of events.
But, since I'd made such a huge deal about not being able to swap these tokens after numerous attempts, using various wallets, Uniswap, attempts to swap into different tokens, adjusting slippage, you name it I tried it, it only meant one thing to my pre-coffee brain: omg, so many people are gonna get screwed by this and get stuck with tokens they can't swap.
I knew what happened without even looking - someone big had hyped them, because after all the liquidity had been hoovered out of the pool a few days ago the token value was a snoozefest.
I was really disappointed to see who it was, because his post was just hours after he told me he wasn't involved with it after I expressed concerns. Disappointed wasn't the word. This hugamonster was PISSED, again, and also feeling invisible and diminished, similar to the way the token's team made me feel when they told me I shouldn't be in crypto if I couldn't handle people calling me names.
I took a few sips of coffee and went to work trying to swap my tokens again. I was so so careful, I'd already double-checked contract addresses and transactions repeatedly leading up to this point, because I would never want to say something that was untrue about a project. My experience was this: I was doing everything right, and it wasn't working, I couldn't swap those tokens.
I wasn't the only one who had this issue - there are a LOT of people who don't know to or wouldn't swap a token at 20% slippage, that is bonkers (I sacrificed 3,196,501 tokens in the process). It wouldn't have occurred to me either, not at that cost, had y0b not offered to play around with it and help me. (Thank you, you are a gem.)
In the end, this token was not a rug, just severely undercapitalized. At this point I'm so exhausted with it all I can't tell you whether the dramatic, immediate decrease in token value a few days ago was the team taking profits, a whale divesting, or something else.
But this, coupled with my reaching out to the team with questions about it (along with many others) and all of us being met with name-calling and "you should buy more" and seeing casts by people expressing concern disappearing...this all looked very much like a rug.
This is crypto, and as I've said before this is financial advice: everything is somehow a rug -- every DM, every email, every project, every everything -- until proven otherwise. I wish that weren't the case, but the "what's in it for me and how can I extract more value?" culture is pervasive here. It's a hard way to go through life, navigating this with an open mind and an open heart, but here we are.
I apologized and sent Richard 0.1 ETH, the profit I received from selling the tokens, to support his goats. I loved the project enough to support it in the first place. I still do, but the way the team interacts with the community is not the vibe when you're doing important work like what this project is attempting to do, which unfortunately means their work may be less impactful unless they make some changes.
Crypto bro bro culture is toxic and you especially can't have that in a charitable project.
SO!
Thus ends Jen's horrible, very bad, craptastic, awful, no-good day.
It took a lot of effort to find some perspective and a sense of humor about this but it's not like I arbitrarily declared myself the CEO of Rarible or anything.
I evaluated a token poorly, mistakenly conflated low liquidity with rug in the context it was addressed, learned differently with the help of a friend, apologized, made amends, and now there's nothing left to do but move on.
I mean...all this attention to the goat token might have even helped them, all things considered. Maybe I'm your contra 😜
Off to eat some humble pie.
