• Fri. Jun 21st, 2024

What is a Rug Pull? – Everything You Know About the Crypto Scam

Louise Villalobos

ByLouise Villalobos

Jan 19, 2024
What is a Rug Pull? - Everything You Know About the Crypto Scam

The crypto sector is filled with bad actors, just like other industries. Web3 enthusiasts have lost billions of dollars over the years to scammers. In this guide, we will show you how fraudsters execute rug pulls and the various ways to detect them.

Understanding Crypto Rug Pull

A cryptocurrency rug pull occurs when a developer introduces a token, hypes it up to attract investors, and after they buy it, the developer disappears with their money.


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Most rug pulls happen within a very short time to reduce the chances of crypto analysts and investors noticing that the project is a scam.

Scams in the DeFi Sector

The decentralized finance sector has seen the most scam cases in recent years. In 2023, blockchain analytics firm Chainalysis reported that crypto users had collectively lost $6.1 billion to DeFi scams the previous year.

Moreover, the company revealed that 25% of the digital currencies launched in 2022 were scams.

How Rug Pulls Work

Considering that decentralized exchanges do not conduct background checks on developers listing their tokens, it has become very easy for bad actors to execute pump-and-dump schemes.

Here is how fraudsters execute rug pulls:

First, they promote their scam tokens on social media platforms like Discord, X, Facebook, and Instagram. Also, they use crypto influencers to build trust. After the investors inject funds into the token, the bad actors dump their tokens, leaving everyone else with worthless digital currencies.

Given the decentralized nature of the crypto sector, it is difficult to trace the scammers once they disappear with investor funds.

What Are Signs of a Potential Rug Pull?

There are several red flags that you need to look out for before buying a token. They include:

Anonymous Developers

Legitimate developers do not mind sharing their details to build credibility. However, scammers remain anonymous intentionally to ensure no one finds them after rug-pulling investors.

Community Interactions on Discord and Telegram

Always pay attention to conversations taking place on the project’s Telegram channel or Discord server. If you notice that the moderators ignore critical questions or offer shallow answers, that should serve as a red flag.

No Audit on Smart Contract

Any legitimate project would consider hiring a reputable auditor to conduct an audit on its smart contract. The auditor helps to identify vulnerabilities in the code. So, if a project hasn’t done an audit, it could be because the developer wants no one to detect the vulnerabilities they plan to use to defraud investors.

Lack of Time Lock

Time lock is a security mechanism that blocks developers from removing 95% of funds locked in a liquidity pool. If a project does not have a time lock in its code, then do not bother buying the token.

Top Crypto Rug Pulls

OneCoin

Billed as the bitcoin killer, OneCoin caused investors a combined loss of $4 billion after its creator, Ruja Ignatova, abandoned the project. Ignatova remains on the FBI’s list of the Ten Most Wanted.

Thodex

In 2021, the founder of this crypto exchange, Faruk Ozer, disappeared with $2 billion in investor funds. He was arrested in Albania a year later.

Squid Game Token

When the popular Netflix series Squid Game was the talk of the town, a scammer saw an opportunity to exploit investors by launching the Squid Game token. The crypto asset only traded for six days, and afterwards, the developer removed liquidity worth $3.4 million while claiming that the project was hacked.

Frosties NFTs

When investor interest in non-fungible tokens grew in 2021, the creators of the Frosties NFTs, Ethan Nguyen and Andree Llacuna, made massive promises to investors to persuade them to buy their unique tokens. But at the start of 2022, the pair executed a $1.1 million rug pull.

Mutant Ape Planet NFTs

This was a copycat of the famous NFT collection Mutant Ape Yacht Club. Its creator, Aurelien Michel, made away with $2.9 million in investor funds.

Conclusion

As long as the crypto industry maintains its decentralized nature, bad actors will continue to exist. So, it is your duty to do proper research before investing in any project.

Louise Villalobos

Louise Villalobos

Louise Villalobos is an adept writer, renowned for her compelling articles that illuminate and engage. Her prowess in breaking down intricate subjects provides readers with clarity and nuance. With a vast and varied portfolio, Louise has solidified her standing as a distinguished voice in contemporary journalism.