A crypto fraud is called “rug pull.” Known for “pulling the rug out.” It involves a developer attracting investors to a new cryptocurrency project, then leaving them with worthless money before completion.
Rug pulls are common in decentralized financial ventures that disrupt banks and insurance.
Decentralized finance (DeFi) and crypto have attracted fraudsters and unscrupulous actors who try to entice investors into rug pulls and steal their money.
Rug pulls and hoaxes may be avoided with a disciplined investing mindset and proper inquiry. Crypto veterans advise DYOR, or do your own research, but what does it entail and how can one prevent scams? What are rug pull indications and how can you spot offenders?
What is Rug pull?
A “rug pull” means “pulling the rug out from underneath.” Many of these illicit scams seem promising until the project's creators drain investor cash.
Decentralized finance (DeFi), non-fungible tokens (NFT), Web3, and metaverse initiatives have had rug pulls. Rug pulls stole $2.8 billion from victims in 2021, accounting for 37% of bitcoin scam earnings, according to Chainalysis.
Rug pull scams are common in the developing DeFi industry because to the absence of middlemen and the possibility for enormous rewards. Many new cryptocurrency projects start with a fresh, appealing token and investors pour money into the business believing it will gain in value, making these frauds harder to spot early on.
Spotting Rug Pull
Researching the project team: Always research an asset's originator, person, or organization. Analyzing a cryptocurrency's team may assist determine its inherent worth and supply all the required information, in addition to identifying rug pulls. Anonymous project creators may be suspicious. Since a legitimate cryptocurrency project's white paper contains all the details, it helps demonstrate its authenticity.
No liquidity locked: One of the simplest methods to spot a scam cryptocurrency is by checking its liquidity lock. Nothing precludes project founders from expanding token supply without liquidity lock-in.
Limits on sale orders: A malevolent project designs a token to discourage confident investors from selling but let others. Scam projects have these selling constraints.
Price explosion with few token holders: New coins should be cautiously monitored for sudden price movements. Scams are likely with no token liquidity.
No external audit: Credible third parties should conduct a formal code audit of new coins. Audits should be verified by independent parties.
Transaction and on-chain data analysis: Blockchain networks store crypto asset activity. Recent trade volume, liquidity, and DEXs registered as valid crypto assets are included. A rug pull is probable if the project is only on a few DEXs and has low trading activity.
Maintain cool and avoid FOMO: Fraudulent investors use FOMO to derail projects. One must check their data against asset news. Since most new currencies start slowly and little, heavy promotion might suggest rug pull.
Some Rug Pull Examples
Onecoin:Self-proclaimed “crypto queen” Ruja Ignatova and colleagues founded Bulgarian cryptocurrency startup OneCoin Ltd. Ignatova and her colleagues reportedly lied about the coin's worth to attract investors.Ignatova vanished and the exchange closed unexpectedly in 2017. This platform is suspected of defrauding victims of approximately $4 billion.
Thodex:Centralized According to Anadolu, cryptocurrency exchange Thodex has 400,000 customers since its 2017 founding.After the exchange stopped withdrawing cash in 2021, founder and CEO Faruk Fatih Ozer vanished. The night before the exchange closed, users claimed that dogecoin was trading substantially lower than other cryptocurrencies.Chainalysis reported $2 billion in bitcoin losses.Turkish authorities are seeking prison terms for the exchange's founders and officials, including Ozer, who is still missing, Bloomberg reported in March.
Squid Game:SQUID, a new token, introduced on the strength of the Netflix hit. Play-to-earn tokens were advertised. It sold for $0.01 and rose to $2,861 in a week. Investors could not sell their profits.Some investors investigated and discovered that the founders weren't on LinkedIn or other social media. Additionally, tweeting concerns were prevented, the Telegram and Discord groups were shuttered, and the whitepaper had various outrageous and unverifiable assertions. The creators sold their supply, causing SQUID to drop 99% in a week and leave investors with useless tokens. Rug pull revenue exceeded $3.38 million for developers.
Avoiding Rug Pull
Take the time to read and examine the audit of the token's smart contract. Refer to the LCX audits that Certik has released.
Ensure that the firm in question is a real entity and that it have a registered address. An example of this would be LCX publishing an imprint that includes the company's name, address, and all registrations.
It is important to verify that the management and individuals engaged are genuine and do in fact exist. For example, you may check to see whether the team is on LinkedIn (LCX on LinkedIn) and Twitter, and you can also check to see if the names are the same.
It is quite probable that a Ponzi scheme is being perpetrated if the earnings on a new coin are disproportionately large and the coin does not turn out to be a rug pull.
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