A “rug pull” refers to a scheme in which founders or developers of a project fail to fulfill their promises after receiving funds. The founders simply run away from investors after they receive an investment. This can happen with both crypto currencies and NFT projects.
Different types of crypto rug pulls
These frauds can be avoided by understanding how they are committed. There are two types of rug pulls:
These rug pulls are more technical and lure victims into buying tokens that cannot be used but can only purchased. This is done by altering the function of the code to allow transactions to be made using the token.
This consent is required for token transactions. These tokens are worth nothing if they don’t have this approval.
Heists on liquidity
This is the most popular type of rug pulling. The liquidity pool must be available for cryptocurrency tokens to trade. Therefore, the scam coin is often paired with an actual token, usually Ether (ETH). It is then listed on a DEX such as Uniswap or Pancakeswap.
The most common way to create a scam coin is to copy and paste the code from another token and change a few lines. The scam coin is then followed by a social media blitz to promote a project that never happens.
These paired tokens can be temporarily locked up and investors are not able to sell them for a time. People will buy the new token and then exchange their tokens. This drives up the price. Once the price rises enough, scammers will dump their tokens in order to make ill-gotten gains by selling the legitimate token.
The Mint and Move: Large stakes, low integrity
Some scams involve a founder who mints the fake token and then gives a large portion to themselves or buys at a low price pre-ICO. False value propositions lure investors to invest in the project, causing the coin’s value to surge.
This type of project might place emphasis on some sort of deliverable innovation, which gives the scammer a veneer of plausible denial. The con job is very similar to a liquidity scam, but the promises are false.
Developers will start with their withdrawals when the token’s value reaches the desired level. These withdrawals may be gradual. Investors will ultimately be left with the bag.
What to be aware of
We’ve now described the rug pull and what it can be done in various ways. Let’s take a look at warning signs to avoid falling for this trap.
No details are available about the development team
Remember our previous statement about token creators’ anonymity. If there isn’t any information, be alert for signs of trouble. This is especially true for accounts that were created in the recent past.
They only provide vague or ambiguous information in their whitepapers.
To give their audience an understanding of the token’s workings, token developers often include a whitepaper along with their token. It may be time for other solutions if there isn’t a clear strategy or goal.
Yields and returns are too high
It is possible that either the initial or anticipated yield seem too good to be true.
Marketing is heavily focused on creating hype
Social media and crypto influencers could affect the enthusiasm for cryptocurrencies and tokens. These patterns could indicate fraud.
The liquidity pool of investors is not locked
It is a common practice for developers once a project is up and running to build trust. This ensures that there is no central authority controlling the liquidity pool. It is often difficult to access or delegated to third parties.
Developers cannot steal tokens from the liquidity pool and quickly reduce the project’s value if it is locked. The lower the likelihood of a rug being pulled, the longer the liquidity pool remains locked.
Crypto rug pulling in the real world
Let’s take a look at some rug pulling successes that actually took place in the real world.
Compounder Finance, which is a Decentralized Finance platform, took 10.8 million USD in 2021 from its customers. The developer team replaced secure, audited contracts by faulty counterparts, which allowed them to abandon the project. This also led to the withdrawal of all their investors’ funds. It could have been a problem that they used Compound Finance as the name of a valid DeFi protocol.
After the exchange suddenly closed in April, Faruk Fatih Ozer (the founder of Thodex), fled to Albania in the same year. He allegedly had two billion dollars worth of customer funds. They were able to escape with their 400,000 customer base.
Recently, enough investors have flocked to the Squid token to increase its value from 628.33 USD to 2,856.65 US Dollars in just 10 minutes. Shortly thereafter, prices dropped to 0.0007 USD. After the commotion subsided, individuals were left staring at an empty site with no leads about the token’s developers.
How to Avoid Crypto Rug Pulls
Your task as a crypto trader is to find ways to avoid the traps set up by others. We have some tips for you.
Review all documentation, code and whitepapers
Rug pulls can be avoided by knowing as much information about the product that you are purchasing. It is important to understand the documentation requirements. Don’t let this put you off. Learn about the history of the project, the reasons behind the decisions, and the developers’ ambitions.
To learn more about , visit their social media pages
Learn as much information as possible about their previous successes. This could help you determine who the token is being issued by. It will help you to understand how developers work.
Check to see if there is any token liquidity
Remember that authentic tokens are worth millions of dollars. This should be a factor to consider when searching for tokens to purchase.
Information about coin holders
Remember that not all coin holders should be devs. This is because the more they own in the company the more control they have over the market.
It’s possible that all the coin holders are developers. This is a sign that the token’s worth is determined only by creators, and not by traders like you.