From theblock by Daniel Kuhn

Like many airdrops and token generation events, the launch of Pudgy Penguin’s Solana SOL +0.94%-based token, PENGU-54.68%

, has been a windfall for many. Just two hours after debuting on Tuesday, the token has rocketed to a fully diluted market capitalization of over $3.5 billion and garnered more than $290 million worth of trading volume.

In other words, the PENGU launch is “free money” for many fans and speculators of the famed Pudgy Penguin NFT series. But not everyone will walk away from the event in profit.

Onchain data shows that one unlucky trader looking to capitalize on the buzzy airdrop managed to turn $10,000 into less than $5 in a matter of seconds. At 12:54 UTC, about five minutes before the token dropped, a trader placed an order to swap over 45 wrapped solana tokens for PENGU tokens. Unfortunately, due to a quirk in how decentralized exchange aggregator Jupiter JUP -4.18% works and the timing of the trade, he only received 78 PENGU tokens — worth less than $3 at press time.

Although it is unclear who has been bestowed this great penguin-related misfortune, it appears that the unlucky trader was able to locate the PENGU token address prior to launch. These types of traders, often referred to as “snipers,” use automated trading bots to try to capture the lowest prices immediately following an airdrop. 

Low liquidity causes costly mishap

However, because his trade was placed before the token was officially released, it appears to have been routed to an unofficial PENGU liquidity pool on Raydium, which gave him an inflated price due to low liquidity. At the time the trade was executed, PENGU had an artificially inflated market cap of $14 trillion due to the low circulating supply.

Decentralized exchanges typically set prices using a “bonding curve,” a mechanism that increases the price of a token as demand grows. But when liquidity is low, even small trades can cause wild price swings, making the market less predictable and riskier and causing slippage, where the execution price diverges from the expected price of an asset.

While it is suspicious that someone was able to spin up a liquidity position prior to the official PENGU airdrop, the actual PENGU tokens and the contract were created in late November, several weeks ahead of the official airdrop, according to CoinGecko. 

“Somehow some of the tokens were leaked to others wallets,” allowing someone to spin up an LP early, crea, a pseudonymous trader familiar with the memecoin ecosystem, told The Block in a direct message. “And with that the trading started.”

“As the [contact address] was already publicly known, I checked it myself some minutes before the official launch and saw people trading it (at a $14 trillion market cap) so there has to be a lot more people with negative PNL's like the one this guy had,” crea said, adding that he doesn’t think the trader was using an automated trading bot. “I don't think he tried to ‘snipe’ it, he just saw it tradeable five minutes before launch and thought ‘damn its already live I might be early’ - without checking the MC).”

Warning to traders

Funnily enough, Jupiter first disclosed the contact address Monday night in a social media post while also alerting users to avoid potential scams. “Stay patient, stay safe, wait for the real one,” the company wrote.

That said, the trader appears to have made several legitimate purchases following this flub and now holds some 62,585 PENGU, worth around $2,000, in addition to several other memecoins. 

Of course, this is not the only way to lose out while trading new crypto tokens. Solana has several features and applications that make it easy to spin up counterfeit versions of tokens. For instance, a brief search on the popular Solana wallet SolFlare turns up over two dozen unverified tokens that share the ticker PENGU or something similar, many designed to trick unsuspecting traders. 

This is to say nothing of other human errors while “investing” in memecoins, like forgetting your private keys or suffering a “fat finger” error. 

PENGU Tokenomics and Future Plans

PENGU has a max supply of 88.88 billion tokens, 23.5% of which are allocated to the airdrop, while the rest will go towards funding community development, rewarding early contributors and the team, as well as providing DEX liquidity. After launching onchain, the token will be listed by exchanges, including Binance, Bybit and OKX.

Pudgy Penguins, an NFT series owned by Igloo Inc., is the second largest NFT series by market capitalization, according to The Block’s data. The Pudgy floor price has cratered by over 50% since the airdrop on Tuesday morning to an average of 15.63 ETH (around $60,000), though the price is up over 50% over the past 30 days. 

Approximately 7 million eligible recipients have just 88 days to claim their PENGU tokens before they are burned and removed from the circulating supply. Igloo plans to launch PENGU functionality for Ethereum and its Abstract Chain Layer 2 chain, which is still under construction.