Without the protection or oversight of any central authority, investors are largely left to fend for themselves should anything go wrong. As such, it is critical to exercise proper due diligence before investing in a DeFi project, especially when it appears too good to be true. Rug pulls operate similarly to pump and dump schemes as they both take margin trading in cryptocurrency advantage of the lack of regulation in the crypto space, misinformation, shilling, and the fear of missing out (FOMO).
Currency Exchange Rates
The large majority of rug pulls are run by anonymous or pseudonymous teams. If the project’s website doesn’t have any meaningful information (such as real names, previous crypto experience, LinkedIn profiles, etc.) on the team, you should exercise caution. Consider if the project has any partnerships with reputable organizations, or if its whitepaper makes any sense (if it even has one).
The DeFi world is entirely user-run, thanks to the autonomous nature of blockchain networks. Here, anyone can create a project with a promised use case, and if you think it has value, you can buy-in. For example, if a couple of hands what is a forex crm control 60% of the supply, they could easily sell them in one sitting and crash the token price. This is generally how a rug pull is executed in DeFi, albeit with a few variations and extra steps. Community Takeover (CTO) in crypto refers to a situation where the original creators or developers of a cry… “TITAN” experienced a liquidity issue, which resulted ina severe devaluation.
Read on to learn what crypto rug pulls are, how they work, and how you can identify and avoid them. Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility. Now that we have shed light on the steps needed to avoid falling prey to crypto scams, it is important to note these don’t totally guarantee the safety of your funds.
How we make money
Read our Essential Security Tips for best practices on protecting against scams and keeping accounts safe. Perpetual futures are like futures (derivative contracts or agreements to buy or sell a commodity at a spec… Permissionless market creation refers to 5 reasons to invest in ethereum a system in which anyone can set up a financial market that facili…
However, you should still gather as much information about the project as you can. This could include the developers’ backgrounds, including past projects and experience. For those with coding and blockchain experience, look into the project specs.
A scam is a fraudulent or deceptive scheme designed to trick individuals into giving away their money, personal information, and/or other valuable assets. Scammers use various tactics and strategies to manipulate their victims into believing they are dealing with a legitimate opportunity, service, or product, when in reality, their intentions are dishonest. Another major characteristic of a possible rug pull is a coin skyrocketing in price within hours. This trick is meant to drive FOMO that leads more people to invest in the token.
Liquidity stealing
A genuine crypto project must have its smart contracts audited by an independent security firm, preferably before they list their token or allow investors to gain exposure. Other projects may deviously postpone the auditing process, but put it somewhere in the roadmap to give investors unwarranted confidence. An unaudited smart contract could hide bugs that allow the founders, or someone else, to steal user funds through a backdoor. A report from blockchain analytics company CipherTrace found that 99% of all major fraud that occurred during the second half of 2020 stemmed from DeFi rug pulls and other exit scams. The immense amount of money flowing into DeFi (up from $1.7 billion in early 2020 to $130 billion by May 2021), has attracted no short order of malicious actors. Security analysts have noted a similarity in the tactics used with the initial coin offering (ICO) mania of 2017.
On the other hand, rug pulls involve insiders taking off with the majority of user funds by pairing their token with another (valuable) token such as Bitcoin (BTC) or Ethereum (ETH). After investors have swapped their tokens for the scam token, the developers drain the liquidity pool of the valuable tokens, thereby “pulling the rug out” from under investors. Uranium Finance was a DeFi project that promised to provide investors with exposure to uranium mining, but it was yet another rug pull.
This crashed SUSHI’s price from over $9 to just over a dollar in less than a week. Chef Nomi eventually sent the funds back but after extreme community backlash. They create a project, promise a particular result (a future NFT, for example) and begin to generate hype – and crypto – from investors who want to get involved.
- Perpetual futures are like futures (derivative contracts or agreements to buy or sell a commodity at a spec…
- If a digital asset offering doesn’t have a disclosure, but seems to fit the description of a security, beware.
- After inflating a coin or NFT’s value, the developers rapidly sell off their own supply, tanking the token’s value.
- All examples listed in this article are for informational purposes only.
The difference is that pump and dumps typically operate within a shorter time range, revolve around the price action of low-volume tokens, and do not require the involvement of the token’s developers. While both a rug pull and a failed project arrive at the same destination, the routes are decidedly different. Despite a team’s best enterprising efforts, many projects fail without dishonest intervention.
With enough traction, a platform’s reach increases alongside its token’s value. Once the price peaks, the core development team dumps its share of the tokens, making its way out with the treasury of investor funds. Projects hosted on a DeFi trading platform typically require a pool of crypto tokens for trades and loans. These tokens are ostensibly secured with smart contracts, but developers can build loopholes into the contracts allowing them to steal the pool of tokens from their investors. This is considered a hard rug pull, as the developers created the project with malicious intent baked in. Another example of a hard rug pull, this scheme relies on a project’s developer including restrictions on selling in their tokens’ code.
Rug pulls are often accomplished through backdoors intentionally written into the project’s smart contracts that allow developers to drain and manipulate staked or otherwise locked tokens. In any case, the rug pull quickly drives the price to zero, leaving any investors that didn’t get out early with a bunch of worthless tokens. Also known as “pump-and-dump” schemes, these rug pulls operate off of fabricated public hype, often fueled by social media. Their aim is to lure swaths of eager crypto investors, enlisted to balloon the value of a shiny new token tied to a trending, up-and-coming project.
The easiest way to protect yourself from a rug pull is to check the amount of liquidity in the pool. Legitimate tokens tend to have tens of millions (if not billions) of dollars in total liquidity, along with a significant amount of tokens locked for a certain period of time. Executing a rug pull often involves exploiting a blockchain’s smart contract functionality. Here, developers may exploit self-executing programs responsible for transaction verification by using nefarious code, literally writing traps into a project’s programming.
Rug pulls may occur shortly after a project’s launch, or it may play out over a longer period of time, extending the investors’ misery. Whether scammers choose to cap sale amounts or rewrite code that wholly reconfigures a native token’s viability, the end goal will always be to run with the highest amount possible. This list of red flags begins with unknown or anonymous project leaders, a barren, low-quality website and a guarantee of high returns. Lofty goals to be completed in an unreasonably short timeframe may decorate a startup’s homepage, accompanied by suspicious social media activity, littered with buzzwords and a desperate sense of urgency. Adding distrust in a market already plagued by volatility, con artists are part of what categorizes crypto — and the DeFi ecosystem at large — as a digital Wild West.