According to a report by Elliptic, nearly $10 billion were stolen in DeFi scams and thefts only in 2021, representing an 81% rise compared to 2020, and rug pulls accounted for over 35% of all crypto scam revenue. That reason why rug pulls are arguably the most infamous in all of many types of scams that take place regularly within the cryptocurrency community.
What is a Rug Pull in Crypto World?
Let us say you are standing on a rug, and it’s unexpectedly pulled out from under you. You would obviously fall on the floor and spill everything you are holding on to. This is exactly what happens in the crypto world with some people.
Rug pulls are usually executed by cruel scammers who construct hype around their coins and then abandon the project, sprinting away with the money.
These cryptocurrencies are generally done on trustworthy utility blockchains like Ethereum or Binance Chain. This is because investors who exchanged their ETH for the listed token allow the token creators to withdraw the ETH quickly and liquidate them.
Scammers will pursue wherever the money goes. Particular elements of the DeFi ecosystem, such as the comfort of creating and listing new tokens, have made rug pulls easier to pull off than ever before.
As DeFi has opened a completely new world of finance for millions across the world, it has also opened up for potential victims of vicious scammers. The rise in Defi rug pulls should not be taken with a pinch of salt.
How Do You Know That Is A Rug Pull?
There are numerous red flags we can spot in a DeFi project.
As a side note, before investing in a cryptocurrency project, always make sure you do your own due diligence and research to avoid losing a considerable amount of money — and always invest what you can afford to lose.
Anonymous Team
This is a critical factor you should consider. An anonymous team or pseudonymous profiles frontrunning a cryptocurrency project is a sign to suspect. A fully doxxed team without a proven track record can be an even bigger red flag. Therefore, it’s important to navigate these circumstances very carefully.
In any case, investing in a project led by people who are anonymous and have no previous track record significantly increases the risk profile of your play, and you should most certainly be aware of that.
Incomprehensible, Unclear Whitepaper
The project might have a whitepaper (a document that outlines its purpose and its technical components) written in an incomprehensible, ambiguous way and with a non-existent working model, meaning it’s more conceptual with no actual product.
Keep an eye on this one, too: the whitepaper might be written in a way that looks more like a marketing play than actually offering something useful or innovative to the DeFi ecosystem.
Disproportionate Token Allocation
If the token distribution favors developers, stay away from the project. Make sure you check out the token allocation and the supply release schedule.
You can use block explorers like Etherscan to see how the tokens are distributed, the number of token holders, and how much each of them holds.
A balanced token supply distribution usually translates to a safer investment.
No Lock-Up or Vesting Periods
After an IDO, developers renounce ownership of the tokens by locking up the liquidity pool, guaranteeing that the liquidity remains untouched for a sufficient period of time. No lock-up periods mean that developers can drain the liquidity at any given time, forcing investors to sell at a loss.
A lack of a comprehensive vesting period, on the other hand, might mean that the early backers and the team themselves are misaligned with the project’s goals. This might translate to the so-called “slow rug.”
This is a situation where seed investors who have no interest in supporting the project’s long-term vision but have entered just because they had an opportunity to be early, slowly sell their tokens over time, essentially crashing the price.
Low Liquidity and Total Value Locked (TVL)
Always check the liquidity of the DeFi project by looking at its 24-hour trading volumes. If it is low, then it’s easier for the development team to manipulate the token’s price.
If the project that you are researching has some sort of staking mechanism or allows you to provide liquidity, then you should also consider the total value locked (TVL) in it. This metric is pretty much self-explained – it shows you how much money is staked/locked in the project at that time. The higher this number is, the more people have faith in it.
Ends
Despite how common they are, money lost in crypto rug pulls is practically never recovered, and in most of the cases, the scammers are able to vanish without a trace.
Does it mean you should stay away from cryptocurrency altogether? Definitely not! We say ‘hate the player, not the game’ and this applies to cryptocurrencies as well. So stay awake and stay vigilant!
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