Rug pulls are one of the more prevalent ways for cybercriminals to access your hard-earned crypto from crypto markets and this article will show what they are, how they operate, and how you can avoid becoming their victim.
What Is A Rug Pull?
A rug pull scam occurs when an abandoned cryptocurrency project suddenly sells off its tokens for profit before disappearing with their funds, leaving behind valueless assets. This practice is known as rug pulling.
Developers create a new crypto token and artificially inflate its price before selling it off for maximum profit, creating what is known as a rug pull.
An exit scam, also referred to as “pulling the rug out from under someone,” occurs when there is sudden withdrawal of support from something or someone.
Decentralized finance (DeFi) venture tokens can often become volatile because they’re traded on decentralized exchanges (DEXs), while centralized exchanges (CEXs) don’t list tokens without being audited – DEXs provide new projects a great platform to flourish since users or developers can list tokens without incurring an audit fee.
No one needs to be tech savvy to create tokens on Ethereum or other EVM-compatible chains, making it simple for scammers with technical knowledge to create tokens for use in cryptocurrency swindles.
Where Do Rug Pulls Occur?
Let’s first explore where and why rug pulls occur in crypto before discussing some examples.
Small-Cap Altcoins Altcoins that fall under this category are popular among investors seeking high returns; however, these assets also tend to experience more frequent sudden price drops and rug pulls than larger investments.
Low-capitalization altcoins are particularly vulnerable to exit scams due to limited liquidity and only having a handful of large holders.
Blockchain-based protocols that include decentralized applications may issue cryptographic tokens as rewards, governance tokens or protocol tokens as rewards or ways of accessing certain products or services provided on their network.
Protocol tokens issued via Ethereum by anonymous developers often fall prey to rug pull attacks.
Particularly noteworthy is that neither the protocol nor its token have been reviewed by an external blockchain security firm.
While non-fungible tokens (NFTs) may seem immune from fraud schemes, they have nonetheless been targeted by numerous scams.
NFT rug pulls occur when creators of an NFT project withdraw funds after having secured investors to invest. When this occurs, all funds invested become the responsibility of their creator and may leave with them instead of remaining invested with the project.
NFTs have received considerable hype, leading to people feeling threatened by missing out and investing without conducting due diligence on projects’ NFTs – leaving them open to rug pulls and scams.
Examples Of Notable Pug Pulls
Let’s investigate two cases of rug pull in the cryptocurrency markets.
The Squid Game rug pull is one of the biggest and latest crypto scams to hit the scene, inspired by Netflix series Squid. Soon after its initial release, its token skyrocketed over 33,600 percent from a cent to $3.36 – rising from around $2,861 to $3,041, drawing in 43,000 investors before people realized they couldn’t resell after purchasing; then suddenly disappeared without trace, leaving its promoters unreachable.
Luna Yield was established as an ecological liquidity farming project on Solana (SOL). SolPad, a project launchpad that facilitates venture capital investment via Initial DEX Offering (IDO), supported Luna Yield as it believed it would not only gather but also optimise farming yields for users.
Luna Yield took three days after its IDO to submit qualified documents but then abruptly withdrew, sending funds that it had raised directly to Tornado Cash to ensure traceability before closing its website and social media accounts.
Hard Pull vs. Soft Pull
There are two kinds of rug pulls – hard and soft.
Soft rug pulling refers to when founders sell off their project token while still appearing supportive of its goals, while abruptly withdrawing funds is known as hard rug pulling.
How To Spot A Rug Pull
Anonymous or unknown developers
Anonymous Or Unknown Developers
Be wary when investing in new cryptocurrency ventures from unknown or anonymous developers; carefully assess their credibility.
Are the project leaders established entities who have earned their place within their industry, or newcomers with no track record in delivering on promises? How can you be sure they will deliver what’s promised?
If you can’t locate answers to these queries, the risk of unravelling an agreement increases considerably.
Very High Yields
Warning Signal: Very High Yields Any venture promising excessive returns without providing a documented means for attaining them should be seen as a cause for alarm. Any company advertising their “moon” should also be treated with suspicion as this may be part of an elaborate scam and should be approached with extreme caution; potentially even worse may lie ahead!
No Liquidity Locked
Liquidity Lock Any project without a liquid lock on token supply is likely fraudulent. Without liquidity protection in place, project developers could steal its worth and scam investors out of it.
Time-locked contracts should help to protect a project’s liquidity by lasting from three to five years post-token launch, with an optional third-party liquidity locker for added protection.
Limited Sell Orders
Tokens can be designed so as to prevent certain investors from selling it while others do so freely – this is often seen as an indicator of fraud or scam projects, though non-technical investors may find it hard to detect whether a particular token is fraud due to being embedded into its code.
Investors can test this hypothesis by purchasing a small portion of a token and immediately trying to sell it back – if this proves unsuccessful, the project/token may well be fraudulent.