Crypto fraud is known as “rug pull.” known for “pulling the rug out.” It entails a developer luring investors into a new cryptocurrency project, only to abandon them with worthless funds before its completion.
Rug pulls are popular in decentralized financial initiatives that undermine traditional banking and insurance.
Decentralized finance (DeFi) and cryptocurrency have attracted scammers and unethical actors who attempt to dupe investors and steal their funds.
Rug pulls and hoaxes may be avoided with a disciplined investment approach and thorough research. Crypto veterans recommend DYOR, or do your own research, but what does it include and how does one avoid scams? What are rug pull symptoms, and how can you identify offenders?
What is Rug pull?
According to Wikipedia, a “rug pull” is equivalent to “pulling the rug out from underneath.” Many of these illegal schemes seem appealing until the project’s founders divert investment funds.
Initiatives like as decentralized finance (DeFi), non-fungible tokens (NFT), Web3, and metaverse have all faced setbacks. Rug pullers took $2.8 billion from victims in 2021, accounting for 37% of bitcoin scam revenues, according to Chainalysis.
Rug pull scams are widespread in the burgeoning DeFi business because to the lack of intermediaries and the potential for large payouts. Many new cryptocurrency businesses begin with a new, enticing token, and investors pour money into the firm expecting it to increase in value, making these scams more difficult to detect early on.
Spotting Rug Pull
When researching the project team, always look into the individual or organization who created the asset. Analyzing a cryptocurrency’s team may help establish its underlying value and provide all of the necessary information, as well as detect rug pulls. Anonymous project developers could be suspicious. A credible cryptocurrency project’s white paper provides all of the facts, which helps to show its credibility.
No liquidity locked: One of the easiest ways to identify a fraudulent cryptocurrency is to examine its liquidity lock. Nothing prevents project founders from increasing token supply without a liquidity lock-in.
Limits on sale orders: A malignant initiative creates a token that discourages confident investors from selling while allowing others to. Scam initiatives have these selling limits.
Price explosion with few token holders: New currencies should be closely watched for unexpected price changes. There is a high likelihood of scams with no token liquidity.
No external audit: Credible third parties should do a formal code audit on new currency. Audits should be validated by independent parties.
Transaction and on-chain data analysis: Blockchain networks keep track of crypto asset activities. Recent transaction volume, liquidity, and DEXs that have been registered as genuine crypto assets are provided. A rug pull is likely if the project is only listed on a few DEXs and there is little trading activity.
Maintain your calm and avoid FOMO: Fraudulent investors use FOMO to destroy ventures. One must compare their data to asset news. Because most new currencies begin slowly and modestly, strong advertising may resemble rug pulling.
Rug Pull Examples
Self-proclaimed “crypto queen” Ruja Ignatova and associates created Bulgarian cryptocurrency business OneCoin Ltd. Ignatova and her colleagues allegedly misled about the coin’s value to attract investors.Ignatova disappeared and the exchange abruptly collapsed in 2017. This platform may have defrauded $4 billion.
Thodex:Centralized Since 2017, cryptocurrency exchange Thodex has 400,000 clients, per Anadolu.The exchange ceased withdrawing currency in 2021, and founder and CEO Faruk Fatih Ozer disappeared. The night before the exchange shuttered, users said dogecoin was trading much lower than other cryptocurrencies.Bitcoin losses totaled $2 billion for Chainalysis.Bloomberg reported in March that Turkish authorities want to imprison the exchange’s founders and administrators, including Ozer, who is currently missing.
SQUID Game: Netflix’s blockbuster spawned a new token. Ads promoted play-to-earn tokens. It went from $0.01 to $2,861 in a week. Investors couldn’t sell gains.Some investors noted the founders weren’t on LinkedIn or other social media. Tweeting concerns were blocked, Telegram and Discord were taken down, and the whitepaper made outlandish and unverifiable claims. SQUID dropped 99% in a week after founders liquidated their supply, leaving investors with unusable tokens. Rug pull revenue topped $3.38 million for developers.
Avoiding Rug Pull
Read and analyze the token’s smart contract audit. Certik’s LCX audits are available.
Verify if the company is authentic and has a registered address. Example: LCX publishes an imprint with its name, address, and all registrations.
Verify if the management and participants are real. You may verify whether the team is on LinkedIn (LCX on LinkedIn) and Twitter, and if the names are the same.
If a new currency earns abnormally well and is not a rug pull, a Ponzi scheme is likely.