So, you are thinking about getting into the crypto space. You’re seeing crypto commercials everywhere, celebrities are releasing NFT projects and you’re looking to get a piece of the pie. You’re tired of being left on the sideline with the purchasing power of the dollar diminishing.
However, that one time your friend got rug pulled leaves a sour taste in your mouth. He has told you that the entire space is a scam and you don’t know what to think now. Or, maybe you have been in the crypto space for a while and have experienced a rug pull firsthand. You are now worried that it will happen again.
Let’s set these worries aside for a second and look at it from a bird’s eye view. The crypto space is complex with many moving parts. Like any industry, there are those in this space looking to do good and those looking to do bad.
The goal of this article is to help you make educated decisions when investing in the crypto markets. Although scammers do exist, there are numerous ways to protect yourself as a crypto investor and we outline them below.
But first, what exactly is a rug pull anyway?
A rug pull is a type of cryptocurrency scam where developers raise funding from investors through false promises and then flee from the project taking all the cash for themselves.
Investors of the project are left with broken dreams and often have a lot of self-reflecting to do. Many investors in the cryptocurrency space have financial freedom on their mind and this can greatly affect decision making.
Decentralized finance (DeFi) has become popular amongst those looking to go from living in a one-bedroom apartment cooking ramen noodles for dinner to getting guacamole in their burrito bowl without batting an eye at the upcharge. Needless to say, there are many projects in the DeFi space offering the world to investors. If it sounds too good to be true, it most likely is.
DeFi operates without regulation and is entirely run by users thanks to blockchain technology. As a result, projects can be created by anyone and be listed on decentralized exchanges (DEXes). DEXes provide the most amount of freedom. Developers can promise anything and if investors think they see value, they are able to invest. It is important to note that these DEX’s do not require any prior verification or certification from projects before listing tokens on their network.
So, if someone wants to create a project to scam investors, they are able to do so with ease. Amongst the most popular DEX’s are Uniswap and Sushiswap. On the other hand, there are centralized exchanges (CEXes) that offer less freedom for developers and do require projects to be audited before their tokens are listed.
The Growing Crime Rate In DeFi
Elliptic has been an industry leader in crypto asset security since 2013. Their 2021 annual report showed a 1700% increase in DeFi services over the past year.
The total capital locked in DeFi surpassed $247 billion in 2021 alone. This exponential growth brought with it an increase in Decrime, a term Elliptic uses to describe fraudulent acts carried out using DeFi tools. Since 2020, losses due to theft on DeFi platforms surged 600% totalling over $10.5 billion in 2021 alone.
That number is up from $1.5 billion in 2020. It is clear that DeFi is becoming extremely popular for those who do not want to deal with banking institutions, however, this technology is still in its infancy stages making it a stomping ground for criminals to exploit.
How are these rug pulls happening?
As mentioned previously, there are many people in this crypto space looking to make money quickly. Instead of doing the proper research on a project’s team, tokenomics, long term vision and asking speculative questions.
Many investors are experiencing FOMO (fear of missing out) and throwing themselves into projects in hopes of making quick gains. Oftentimes, rug pull projects create a tremendous amount of hype through social media.
They pay big influencers to promote the project to their large followings. This creates excitement for the token and is perfect bait for those new investors looking to make life changing gains over night. The value of the tokens surge in price and once satisfied, developers will “pull the rug” on investors running away with all the funds.
But, how do they do it? These malicious developers often write secret code into the smart contracts that allow access to staked or locked tokens.
Those who don’t get out early are left holding worthless tokens. This is becoming far too common in the space and investors need to take precaution!
A typical rug pull may play out like this. A developer creates a useless token called MOON by copying the code from another token and then changing a few lines to make it distinct.
The token will then be added to a DEX such as Uniswap. Let the marketing campaign begin. Misinformation about the project will be promoted on the various social medias such as Discord, Twitter and Telegram.
The project will begin promising unrealistic returns for investors causing FOMO and demand to skyrocket. The price of the token will rise sharply with investors adding tokens of real value to the liquidity pool.
At any moment the developers can run away with the valuable tokens. They often wait until the project has reached peak hype and then execute the rug pull on unsuspecting investors.
Examples of infamous rug pulls
Squid Game is one of the biggest rug pulls in history and played off the hype of the hit Netflix series. Everyone was talking about the show at the time which sparked an unknown developer to drop Squid token.
On October 26, 2021, the token was placed on PancakeSwap for a penny. At its peak, the token reached $2,861 according to the crypto pricing website CoinMarketCap. The project then disappeared. The website was destroyed, and the project promoters were nowhere to be found.
A total of 43,000 investors were unable to sell their tokens due to an anti-dumping mechanism created by the developers. As a result, helpless investors watched their investment plunge from being worth thousands of dollars to less than a cent in a matter of minutes. This will be a learning experience for many as the lost funds will not be recovered.
SaveTheKids is another classic rug pull that involved Faze Clan, one of the most notorious influencer groups on the internet.
These influencers have massive power in this NFT space because they can reach a large audience at the touch of a button. As a result, they become an excellent target for malicious developers looking to create hype for their scam tokens. SaveTheKids was a project being promoted to help raise money for kids’ charities.
In June 2021, multiple Faze Clan members began posting on their social media accounts hyping up the project. Due to the Faze Clan members’ involvement, investors had strong belief in the token.
Well, were they ever wrong. After the initial pump, Faze Clan members are suspected to have dumped all their tokens. The project is now worthless, and investors got wrecked. Faze Clan responded by kicking out Faze Kay, one of their most popular members.
The group denied any involvement in their team members actions. This goes to show that you cannot put all your trust in these big-name influencers!
They are willing to scam their own fans. Look for influencers that have notoriety in the crypto space and have had previous success with past projects when investing.
So, how do we spot and avoid these rug pulls?
It is relatively easy to avoid these rug pulls when you do proper research on a project before investing. Below are some red flags to watch out for.
Anonymous Teams
This one is relatively straight forward and is the easiest way to spot a potential rug pull. If you are unable to find real names of the people developing the project, avoid it at all costs. Legitimate projects looking to solve real problems in the crypto space will have nothing to hide.
Crazy Overnight Hype
If you have never heard of the project before and all of the sudden it is receiving a crazy amount of hype overnight, avoid it. These rug pull projects often use meme marketing and cultural trends in order to reach a mass audience quickly.
Promising the world
If it sounds too good to be true, avoid it at all costs. In order to bait investors, these projects will try to create promises that are difficult to resist. Stay away from projects that are offering guaranteed profit or an absurd amount of return for staking.
Bad tokenomics
Before investing in a project, always check the token allocation! If only a few wallets hold the majority of the token supply, be extremely speculative. Those few wallets are able to manipulate the price of the token and possibly dump tokens on other investors. You can check token allocation on websites like Etherscan.
Sketchy roadmap
A roadmap is designed to show investors that a project is serious in intent and has a strategic plan in place for future growth. The roadmap should show the achievements to date of the project and specific development goals for the future. If the roadmap is vague with unrealistic goals, avoid it. Also, it is an immediate red flag if the project does not have a road map.
Not listed on a CEX
Rug pull projects do not want to go out of their way to get it listed on a CEX. The process to get listed on a CEX is time consuming and capital inducing. As a result, scammers generally only list their tokens on DEXes.
Remember To Always Do Your Own Research
Now that you understand what a rug pull is, have seen some examples and know how to spot them, the onus is on you. Before investing in any coin, make sure you are doing your own research!