Should Memecoins, the “Risky Casino”, Be Regulated on Solana, Base?

GameStop Frenzy Reignites Wild West of Crypto

Fueled by the roaring return of social media influencer Keith Gill, a memecoin named GME, a parody of gaming giant GameStop's stock ticker, has rocketed in value alongside the real GameStop shares.

Keith Gill, also known as, The Roaring Kitty.

This unofficial token, GME, capitalising on the nostalgia of the 2021 GameStop frenzy, skyrocketed over 3100% in a week, fueled by both investor interest in the real GameStop stock and its listing on popular exchanges. Currently trading at $0.01745.

This isn't a one-off story. 2024 has been a year of memecoin madness, with tokens based on internet jokes like Pepe the Frog (PEPE) and Dogwifhat (WIF) experiencing parabolic surges.

Investors are throwing money at these seemingly nonsensical tokens, with some even turning rags into riches overnight.

But is this a new era of financial revolution or a recipe for disaster?

Experts warn of a growing number of "rug pull" schemes, where creators abandon projects after raising millions from unsuspecting investors.

What are Memecoins and Why are They Risky?

Memecoins are a subclass of cryptocurrency that often lack the underlying utility or real-world application of established projects. Their value is primarily driven by hype, community sentiment, and often, celebrity endorsements. This inherent volatility makes them riskier investments compared to established cryptocurrencies.

Abandoned Presales and Million Dollar Mistakes

A recent exposé by blockchain detective ZachXBT revealed at least 12 Solana memecoin projects that raised a combined $26.7 million through presales have vanished without a trace.

These "rug pulls" involve developers promoting a memecoin, collecting funds through a presale, and then abandoning the project altogether, leaving investors holding worthless tokens.

"I Like This Coin" Turns Sour

The most egregious example is "I like this coin" (LIKE), whose anonymous founder, pokeee.eth, absconded with a 52,220 SOL, valued at around $7.7 million presently, haul after the coin's value tanked over 90% within hours of launch.

Despite a splashy debut with a $577 million market cap, the project's social media channels went silent after launch, leaving investors with a worthless memecoin.

The latest reports indicate that LIKE's price has now dropped by 99.2% from its original value.

According to online reports, activity has ceased on both its official X account and from its founder, pokeee.eth, since 31 March.

A Repeat Performance

Another project, MOONKE, mirrored LIKE's trajectory. Launched by RockyXBT, another anonymous individual, MOONKE peaked at a valuation of nearly $500 million before collapsing to a fraction of its launch price.

It raised 37,470 SOL, currently worth about $5.39 million and never launched.

Just like with LIKE, both RockyXBT and the project's social media channels have gone radio silent since the debacle.

A Broken Promise

Perhaps the most blatant scam involved a project that raised $812,000 but never even delivered a token. Investors entrusted their money to a project that vanished without a trace, highlighting the lack of accountability and regulation in the memecoin space.

Memecoin Maniafizzles

These abandoned projects are just the tip of the iceberg. The broader memecoin market has witnessed a significant decline in enthusiasm in recent weeks.

Several prominent Solana-based memecoins, including Dogwifhat (WIF), have shed over 40% of their value since April.

This crash echoes concerns raised by market experts who see parallels to the disastrous Ethereum ICO boom of 2017, where many projects raised millions but ultimately failed.

The Slerf Debacle: A Cautionary Tale

The story of Slerf (SLERF) further exemplifies the absurdity and risk associated with memecoins. In a bizarre twist, the developer accidentally burned the entire presale allocation, essentially destroying $10 million worth of tokens.

Despite this blunder, the project inexplicably gained a cult following, rallying to a market cap of $750 million before inevitably crashing.

Memecoin Mania Runs Rampant on Base, But Are You Playing with Fire?

Coinbase's Layer 2 solution, Base, has seen a surge in activity thanks to the Dencun upgrade's drastically reduced fees.

This activity, however, is largely fueled by a tidal wave of memecoin speculation, mirroring the degenerate gambling seen on Solana.

But unlike Solana's established memecoin scene, Base appears to be a breeding ground for scams. A disturbing investigation by Magazine revealed that a staggering 90.8% of 1,000 newly launched Base tokens displayed security vulnerabilities.

These vulnerabilities expose users to significant financial losses.

What's lurking in the Memecoin Shadows?

The security flaws identified fall into three main categories:

1. Unsecured Liquidity Pools:

A whopping 90.5% of the analysed tokens lacked locked liquidity pools. This opens the door to "rug pulls," where developers vanish with all the funds in the liquidity pool, essentially stealing investor money.

2. Unverified Contracts

Nearly a quarter (230) of the tokens lacked verified contracts. Unverified contracts are like black boxes – investors have no way of knowing what code lurks within, making them susceptible to malicious manipulation.

3. Honeypots

This nasty scam lures investors with the promise of high returns but then prevents them from selling their tokens. Magazine found 121 potential honeypots hiding amongst the memecoin frenzy.

A Darker Side to Memecoins

While some of these security weaknesses might stem from a lack of knowledge by memecoin creators, the picture gets bleaker when we consider the significant portion (16.9%) flagged for malicious intent.

These projects employ deceptive tactics like exorbitant "sales taxes'' that essentially steal from investors, alongside honeypots designed to trap unsuspecting users.

The ease with which these scams are created and deployed is concerning. The prevalence of copy-and-paste projects and AI-generated tokens means vulnerabilities are easily replicated and even new ones are introduced.

Memecoins and Regulatory Challenges

In an insightful analysis by Chris Dixon, a general partner at Andreessen Horowitz, he delves into the paradox of regulatory treatment within the cryptocurrency market.

Dixon highlights the proliferation of memecoins, characterised by their humorous origins and speculative nature, contrasting them with more substantive blockchain innovations.

He criticises the current regulatory landscape in the United States, which seemingly favours memecoins over projects with tangible utility.

Dixon emphasises the regulatory hurdles faced by entrepreneurs striving to develop lasting blockchain solutions, citing a lack of clarity and the risk of sudden reclassification as securities by the SEC.

He terms this dichotomy as the "computer vs the casino," illustrating the divergence between blockchain's potential for innovation and its exploitation for speculative gains.

Dixon advocates for better regulation rather than less, proposing solutions such as tailored disclosures and longer lock-up periods to mitigate risks associated with memecoins and ensure fair market practices.

A ‘Risky Casino’?

Eddy Lazzarin, the chief technology officer at Andreessen Horowitz, echoes concerns about the surge in memecoin investments, likening them to a high-stakes gamble that threatens the reputation and regulatory progress of the broader cryptocurrency market.

Lazzarin highlights the meteoric rise of memecoins like Book of Memes and Dogwifhat, emphasising their lack of real-world utility and susceptibility to market manipulation.

He warns of the disproportionate risks faced by investors, particularly newcomers drawn to tales of overnight fortunes.

Lazzarin's critique underscores a growing unease within the crypto industry regarding the impact of memecoins on investor protection and market stability.

As discussions around regulatory oversight intensify, the future integration and regulation of memecoins within the cryptocurrency landscape remain uncertain.

The UK Regulates Memecoin Marketing

The Financial Conduct Authority (FCA) is taking aim at misleading cryptocurrency promotions, particularly those spread through viral memes on social media.

The FCA now requires financial influencers ("finfluencers") to gain approval before posting memes about cryptocurrencies and other investments.

This aims to ensure transparency and prevent hype-driven promotions that could mislead consumers.

The rise of crypto memes on platforms like Telegram and Reddit has spurred the FCA's action, highlighting their concern about unregulated financial advice spreading virally.

This is part of a larger effort by the FCA to combat financial scams that have grown alongside the online investment boom.

Memecoins – Engine of Growth or Recipe for Disaster?

The memecoin surge has ignited a heated debate within the crypto industry.

One camp views memecoins with disdain, highlighting their lack of utility and the high prevalence of scams.

Security experts like David Schwed of Halborn emphasise that the security vulnerabilities observed on Base are symptomatic of a wider trend within the memecoin space.

On the other hand, some see memecoins as a gateway drug for new investors, bringing fresh blood and talent into the crypto ecosystem.

Arthur Hayes, co-founder of BitMEX, argues that memecoins, despite their perceived frivolity, can generate positive value by attracting new users and developers.

But here’s the question:

When you see a memecoin price skyrocket, is that a sign of genuine investor interest or something more orchestrated?

The reality is, the massive losses some reports reflect might not be the whole story.

While some unsuspecting individuals certainly get caught in the hype, there's a strong possibility of manipulation at play.

The mastermind behind the project, along with a select few associates, could be inflating the price themselves by buying and selling large amounts of the coin. This creates the illusion of high demand and massive gains, enticing others to jump in.

Memecoin trading is inherently risky, akin to gambling, and most savvy investors wouldn't risk significant capital on a new, unproven project.

While regulatory frameworks are necessary to safeguard investors and promote market integrity, they should be crafted in consultation with all stakeholders involved.

Empowering project parties and community members to voice their perspectives through avenues like hearings or public opinion polls could foster a more inclusive and balanced approach to regulation.

Ultimately, the dialogue between regulators, industry participants, and the community must continue to evolve to address the complexities and risks inherent in the memecoin phenomenon.