Things You Need to Know About RugPull
A rug pull is a crypto scam where a crypto developer abandons a promising project and scampers away with investors’ money. Rug pulls are mostly associated with DeFi (Decentralized Finance) platforms like DEXs (decentralized exchanges). The scammers develop a token, list it on a decentralized exchange, and pair it with ETH, BNB, or another major cryptocurrency.
Rug pulls are exit scams that start as blossoming crypto projects that court great attention and investment. As soon as investors provide liquidity for the project and push up the price, developers withdraw as much liquidity as possible and leave everyone involved on the losing side.
How is a Rug Pull Done?
Malicious crypto developers can take different routes to rug pull unsuspecting investors. Two of the most common rug pull techniques are;
#1. Liquidity Rug Pulls or Scams
Liquidity scams are the most prominent way of rug pulling. The developer lists their altcoin or shitcoin on a decentralized exchange, pairing it with a popular cryptocurrency like Ethereum. They clone an existing public smart contract code allowing them to issue a platform token.
After the token has gained solid ground on a DEX, they promote the project and add liquidity of the token to a decentralized exchange like Sushiswap or Uniswap, etc. As such, they make it possible for people to swap the token for other tokens. The DeFi exchanges allow crypto investors to swap their tokens locked in a smart contract called a liquidity pool.
When the project begins to garner more investors (together with the earliest investors), droves of other crypto investors begin to perceive it as a promising token. As soon as the token becomes a household name, the owners unanimously withdraw their “original” liquidity, bringing the coin’s price to zero. In the end, investors have nobody to hold responsible as they walk away with valueless crypto coins.
#2. Software or Technical Rug Pulls
In a technical rug pull, a malicious developer messes with the programs related to their token on a DEX. They manipulate the ‘approve’ function of their ECR20 token so that buyers can’t spend the token they’ve bought.
Here’s how it works: Anytime you swap a token on a DEX, it initiates or ‘approves’ the smart contract to spend the token. But this fraudulent developer manipulates the approve function to allow you to buy a token and not spend. It’s a very tough place to find yourself in as a crypto investor since the algorithm is at the developer’s side, and there’s virtually nothing you can do.
How to Spot a Rug Pull
The following are several pointers to a possible rug pull;
#1. Shallow Information
An authentic crypto project should provide sufficient information to make its users or investors trust it. You may want to run a background check on any token you want to invest in. Does it have a dedicated website? Are there ‘real names’ of the creators?
Do they have social media profiles (Twitter, LinkedIn, etc.)? Do they have reputable partners, an informative whitepaper, and other meaningful pieces of information? If the answer to most or all of these questions is no, you should be cautious about such a project.
#2. Poor Liquidity Balance
Liquidity pool details are transparent on decentralized exchanges. In other words, they use algorithms to show token prices in a liquidity pool according to the current balance. Any liquidity pool below tens of millions or billions of dollars in total liquidity may be a disaster waiting to happen. Again, the absence of a liquidity lockup is a red flag since it doesn’t protect investors’ interests.
#3. Fast-Escalating Prices
You may want to be careful about tokens whose prices escalate in just a few hours. An outrageous price increase may not indicate an imminent rug pull, but you must do your homework to see why the sudden hike in price. If there’s no significant reason, then it’d make sense not to invest a dime.
#4. Unguided and Purposeless Marketing
Aside from manipulating the unsuspecting potential investors with the fear of missing out (FONO), rug pull initiators also know how to use social media for their malicious activities. They depend so much on diehard social media marketing, mostly using influencers to promote their tokens while masking what would eventually be a rug pull. A popular example is the Save the Kids (KIDS) token–a rug pull that maximized reputable influencers.
How to Avoid Being Rugged in the Crypto Industry
Here are ways to avoid a crypto rug pull;
Verify the project’s liquidity
Watch out for any project that has below 10 million in liquidity, including locked tokens. You can find liquidity details on reputable platforms like UNIswap, PancakeSwap, etc. Also, check the amount of liquidity the creators hold. If they hold the highest amount, then it’s a bad sign.
Check out the team
You may want to be careful about anonymous creators. Research the creator(s’) social media accounts, past projects, track records, etc. The more secretive the creators are, the greater the likelihood of a rug pull.
Read their whitepaper and find them on Github
The whitepaper should help you track their milestones and provide product and service details. It’s okay to be skeptical and not invest if there isn’t active development on the project on GitHub.
Don’t fall victim to rug pulls! They can be frustrating since you have no one to hold accountable. So, you may want to be skeptical about investing your money in any fishy project as described above.