Currently, the crypto industry continues to grow actively. Many crypto projects are being launched and developed worldwide, which will be a great form of investment now or in the near future.
More and more users invest in such projects because they see the new projects as an ideal opportunity for profit. But it is not so simple. With cryptocurrency investments, risks and losses exist. An inexperienced cryptocurrency investor can lose funds. Therefore, it is necessary to understand the issue in detail to prevent such an outcome.
The decentralized world of finance is the place most vulnerable to attack and fraud. A lack of experience and information can lead a future investor to unimaginable losses. Among the most serious risks in the DeFi world is rug pull. This post will teach you about this scam, how to detect it, and, most importantly, how to avoid it.
What Is a Rug Pull?
Rug pull meaning is a type of scam targeting investors in the cryptocurrency market. The name speaks for itself. Rug pull refers specifically to the action of a sudden loss of liquidity, resulting in a massive sell-off by liquidity providers or investors looking to save their money. In this dead-end scam, the decentralized exchange’s or DEX’s liquidity pool is emptied, leaving token holders unable to sell their tokens back.
Simply put, a rug pull crypto is a situation where the owners or developers of a project abandon it and run away with investors’ money. Rug pull scams are very well disguised by active advertising, which attracts a considerable flow of investors. As a rule, the project then uses excuses, such as the presence of bugs in the software, which gives the project owners time to fix these bugs. Finally, they just leave the invested money and disappear from the project. And the investors of this project will not see and will not get back their investment.
Most of these rug pull scam projects work according to a particular scheme. For example, a DeFi project is launched, which issues its project token. The developers link this token with other well-known cryptocurrencies, such as ETH, USDT, and others.
The project then offers users to exchange their crypto-assets for the project’s new native token, luring investors with higher rewards and benefits from this token.
Finally, when, in the opinion of the project owners, the number of investors reaches its peak, they simply abandon the project and disappear with the investors’ money. As a result, only deceived users and an empty project remain.
Rug Pull Examples
Sadly, a victim of the rug pull scam usually finds out only at the final stage, when the fraud has already happened, and the investor is left with nothing.
Here are examples of three clear cases in which investors were left without their money:
The exchange THODEX, at the end of April 2021, closed access to user accounts without any notice. According to the exchange, this decision to restrict access was due to a “partnership offer” received. Its founder, according to preliminary reports, absconded with $2 billion. As a result, more than 390,000 users lost their money.
Compounder Finance joined the ranks of decentralized financial (DeFi) projects that ended up being fraudulent, stealing $10.8 million from users by replacing “real” smart contracts with malicious ones.
Meerkat Finance was an offshoot of another DeFi Smart Chain protocol from Binance, Alpaca Finance (ALPACA). The project offered “income farming” services in MKAT-BNB pools, steaking, and other passive income tools. In its Telegram channel, the project team announced that Meerkat Finance’s infrastructure had been attacked and all funds had been stolen. As a result, $31 million disappeared without a trace from the accounts of the project’s users. During the investigation, it was found that the private key became available to third parties. Presumably, the project owners themselves decided to get rich quickly at the expense of investors.
How to Avoid a Rug Pull In Crypto
As with any crypto rug pulls, there are ways to identify such projects and protect your investment before it is too late.
Check Project Liquidity
With this quick and easy way, you can determine if the project is worth trusting. The higher the liquidity figures, the more reliable the project is. However, this is not enough; you must also find out who is behind the project.
It is necessary to be responsible for researching the history of the products’ owners. You should not blindly follow the developers who have just appeared on the market; there is no information about them. Before investing in a project, we need to know who the founders are, who supports this project, the background of these people, and whether there were any problems with this or other projects owned by this person.
Unexpected fluctuations in the price of a cryptocurrency. Of course, a price rise is a good sign for investors, but in projects of this category, a sharp increase in the price of a new coin is not a good sign. Such a rise is called a “jumping coin.” Hence, if you notice a sudden surge on the same day, it can be a trap to attract investors.
Investors should be wary of high rewards. Unfortunately, many DeFi protocols often start offering high rewards on their pools to investors when they launch their project while entering the game.
At this point, you shouldn’t be left thinking that if a project is offering fabulous rewards, you shouldn’t invest there. This is because they need more liquidity to run their scam.
Cryptocurrency scams lead to unthinkable losses from which no one can escape. There are scammers in almost every industry with funding, so you should not blindly trust any project. Even the most experienced crypto specialist can fall into this trap by letting their guard down. So, research a new project before investing and remember the main signs of such scams.
Disclaimer: This text is written for information purposes only and never constitutes a call to action. All financial transactions carried out by you are made at your own risk. The Guarda editorial staff reminds you of the risk of speculation in all financial markets.
+ What does a rug pull mean?
Rug pull is a fraudulent scheme aimed at cryptocurrency investors when the owners or developers of the project in which investors are investing abandon the project and run away with investors’ money.
+ Are rug pulls illegal?
Yes, they are illegal. The problem is that the activity is usually discovered when it has already been committed, making it harder to track the scammers.
+ How can I prevent rug pull in crypto?
In order to avoid falling into the rug pull trap, it is necessary to study the project in which you want to invest responsibly. It is necessary to study the composition and history of the development team, the number of coins and their value, and the availability of liquidity.
+ What happens after rug pull?
As a rule, after the rug pull, there is the same picture on the token value chart for all such stories - a sharp drop to almost zero. In addition, after the fraud is committed, all social media platforms and websites that could somehow lead to the founders are deleted. And the most important thing that happens for investors is the traceless loss of the funds they contributed to this project.