February 12, 2023

Rug Pull Crypto - What is a Crypto Rug Pull & Ways to Skip

In the long run, investing in cryptocurrencies has produced higher returns than most other assets. As an investor, you must be aware of the numerous frauds and scams that are prevalent in the industry. In this overhyped sector, a brand-new fraud, known as a "rug pull crypto," has emerged. When developers create a token coupled with common cryptocurrencies like USDT, post the token on a DEX, and then withdraw all the cash once investors buy in, this is known as a rug pull.

This article addresses rug pulls, how they operate, and how to avoid them. Additionally, it reveals the warning signs to assist you in avoiding being a victim.

Rug Pull Crypto - 8 Ways to Protect Yourself

The rug pull crypto frauds might not always be clear, but there are techniques to recognize these shady schemes and protect yourself.

  • Prefer well-established projects.

Many new ventures lack a track record that would attest to their reliability or safety. Not all crypto rug pull scamers, but some do frequently copy aspects from other well-known initiatives, indicating that the project may lack originality or long-term value for investors. Additionally, centralized exchanges with strict criteria, like Binance or Coinbase (COIN), only list secure and legal assets. However, their listings may not necessarily reflect quality or profit potential.

  • Research initiatives and their creators

Do your research before investing in a hyped-up project, despite the temptation. Before determining whether to invest, it is crucial to carefully assess the project, its personnel, and its blockchain capabilities.

Check out the founders' social media pages and any other available data if their identities are made public. Check to see if they engage with other well-known figures in the area and have loyal followers.

To look out for anything that sounds fishy, it is also helpful to go through a project's website, Discord channel, roadmap, white paper, and related resources to avoid crypto rug pulls.

  • Watch out for projects that promise large profits.

Since DeFi scammers want cash to fund their plan, any initiative that guarantees extremely high profits should be carefully scrutinized. Staking rewards and yield farming are two typical elements of DeFi ecosystems that con artists may try to take advantage of or manipulate.

  • Use Established dApps.

Keep using top-tier dApps like Uniswap or Aave rather than searching for up-and-coming cryptocurrency applications. Projects with a sizable community, a long history, and a solid reputation are more likely to offer sincere tokens and awards.

  • Avoid high liquidity pool yields.

Be wary of very high annual percentage yields (APYs) from liquidity pools; they are usually just a ruse to steal liquidity. Keep in mind to only use well-known dApps with APYs considerably below the triple-digit level.

  • Always be skeptical of a company's motives. 

Invest in firms that offer utility tokens for an immediate return on investment, and make sure the company can do what it sets out to do.

  • Check if the liquidity is locked or unlocked

Checking to see if a cryptocurrency is liquidity locked is one of the simplest methods to tell a fraudulent coin from a real cryptocurrency. Time-locked smart contracts, which should endure three to five years after the token's initial offering, are used to secure liquidity. Although developers can write their time locks using custom scripts, using third-party lockers can offer more security.

The percentage of the locked liquidity pool is another thing that investors should look into. The liquidity pool that a lock secures only partially serves any purpose. This sum, referred to as the total value locked (TVL), should fall between 80% and 100%.

  • Limitations on sell orders

A malicious party could program a token to limit some investors' ability to sell it while leaving others unrestricted. These sales caps serve as obvious red flags for a bogus project.

Because selling limitations are buried in the code, it can be difficult to ascertain whether there has been fraudulent activity. Purchasing a tiny amount of the new coin and then attempting to sell it straight away is one way to test this. The project is probably a hoax if issues are dumping what was just bought.

Crypto Rug Pull Meaning

Crypto rug pull meaning a type of cryptocurrency scam in which con artists deceive the public to secure money before escaping with the digital tokens of the investors.

Rug pull developers aim to attract as many retail investors as they can. On social media, they frequently promote their tokens. Developers transfer depositors' cryptocurrency to their wallets or allow them to cash out on a cryptocurrency exchange once enough individuals have bought into this bogus project.

Rug pulls are a regular occurrence in DeFi (decentralized finance) apps. DeFi's intrinsic decentralization and lack of regulation make it simpler for scammers to conceal their identity and make off with a sizable quantity of cryptocurrency. However, not all scammers are required to stay anonymous.

The autonomy of smart contracts is another factor contributing to rug pulls' increased frequency in DeFi. Smart contracts on fraudulent dApps can contain malicious code written by skilled developers (decentralized applications). Rug pulls are frequently literally coded into a project's source code.

Why does Crypto Rug Pull Scams Happen?

Crypto rug pull scam is the term for any dishonest action taken by developers to end a project and walk away with all the money from investors. Even such rug pulls are unethical and occasionally illegal, they frequently present as legitimate, fooling investors into believing there are no hidden dangers. Rug pulls can occur with any project, although they mostly affect Web3's DeFi, NFT, and Metaverse sectors.

A typical rug pull strategy is simple to implement. A token with a catchy name and ground-breaking promises is made by developers. They assert that their coin satisfies nearly all user requirements and can increase investors' investments by 10, 100, 1,000, or even more X. When the price of the scam token rises, more funds are added to the project until the pool is so large that the developers decide to take the entire sum of money.

Developers sell or eliminate all liquidity from the project, driving the price to zero, which is the stealing process. Back doors in smart contracts could be used by scam artists to steal money from investors.

Types of Rug Pull Crypto

Every rug pull crypto scam involves attackers stealing cryptocurrency from unwary investors. However, there are three main ploys used by con artists:

  • Liquidity pool rug pulls

Many decentralized exchanges (DEXs) and crypto financing platforms depend on liquidity pools. Anybody can add cryptocurrency to these pools with smart contracts to increase the total value locked (TVL) on a Web3 protocol.

Although crypto liquidity pools have a lot of advantages, scammers frequently use them. Developers can withdraw the funds from the protocol into their wallets and give up on the project if they forget to incorporate transparent locking mechanisms in their code.

  • Restricting sell orders

Unsavory programmers can pre-program cryptocurrencies to only sell when they tell it to. On DEXs, anyone can purchase these modified tokens, but they cannot sell them. To ensure that only they have control over when to sell these digital assets, developers can add commands to the code.

Scammers can use their sell rights and cash out once enough ordinary investors have invested in this cryptocurrency with malicious malware. This rug pulls tactic, also known as a “limited sell order” scam, prevents token buyers from selling their tokens.

  • Pump-and-dump tactics

Although “pump and dump” tactics are common in the stock market, they have a strong association with cryptocurrencies. The “pump and dump” approach does not require as much technical expertise as the previous two rug pulls.

Although “pump and dump” scammers can develop an altcoin, they often aim for a small-cap token that is already in use. Once the con artists obtain a significant amount of their chosen cryptocurrency, they can start promoting it on social media. Since these cryptocurrencies have such a small market cap, it doesn't take many buyers to significantly raise the price.

The con artists can dump all of their tokens onto the market whenever they are happy. The price of a cryptocurrency is driven down by this strong sell pressure, leaving retail investors with bags of useless tokens.

Was Terra Luna a Rug Pull?

Luna and TerraUSD, commonly referred to as UST, are sibling coins that operate on the same network. Luna coins are created by Terra, a blockchain network that is comparable to Ethereum or Bitcoin. Terraform Labs' Do Kwon and Daniel Shin founded the network in 2018. Chief Technology Officer of Tether and Bitfinex Paolo Ardoino claimed that the Terra (LUNA) project was "poorly designed," not intentionally meant to be a rug pull.

The UST coin was backed by an algorithmic stablecoin rather than a real US dollar. It was thought that Terraform Labs might sustain the peg of the UST without the support of the USD by using cunning procedures and enormous Bitcoin reserves.

You must burn Luna to produce UST. So, for instance, you could exchange one token for 85 UST when the price of the Luna token was $85. To guarantee that Luna would experience long-term growth, this deflationary technique was created.

UST could always be exchanged for $1 worth of Luna to maintain its peg. If UST fell, traders might profit by purchasing UST and then trading it for Luna.

Once UST lost its tie to the dollar, which made it a stablecoin, both Luna and UST fell.

Because TerraUSD was not backed by cash, Treasury securities, or other conventional assets like the well-known stablecoin tether, it was dangerous. Algorithms that connected the value to Luna provided the stability of UST. Many experts questioned whether an algorithm could maintain the stability of two tokens.

How Rug Pull Crypto Scams Work

Rug pull crypto scams take place in DEXs, where project founders withdraw funds from a liquidity pool. Let's take a quick look at the operation of liquidity pools to better comprehend this.

A liquidity pool is an array of investor funds locked in token pairings to allow trades between different digital assets. Since they are well-established crypto assets with high usefulness and liquidity, token pairs contain famous cryptocurrencies like USDT, BNB, and ETH. DEXs levy trading fees on transactions to induce investors to lock their assets and serve as liquidity providers (LPs). In exchange for supplying liquidity, LPs receive a specific share of the trading commissions. An LP creates more benefits with more locked-up money.

The builders of the liquidity pool entice more investors by guaranteeing bigger percentage yields. They withdraw money from the pools or take it out to other locations once they have accumulated enough money there. The money is transferred to other transactions, making it invisible to the victims. USDT, ETH, and BNB are traded on nearly all exchanges. So transferring them to other wallets and establishing a “distance” from the source is simple. This removes all the assets from the pool, leaving the pool empty and the LPs in a miserable situation.

Smart contracts are used in cryptocurrency ventures. If this arrangement lowers transaction costs, it might be profitable. But if things don't work out, it makes it challenging to locate or retrieve funds.

There is a lot of enthusiasm surrounding new projects with large profits. This may lead to investors being taken advantage of by developers using scams like rug pulls.

Crypto Rug Pull Scams - Ways to Spot It

Knowing the warning signs is the best defense against crypto rug pull scams. The “it's too good to be true” rule applies to all investments, but there are signs you should look out for. It'll be easy for you to spot potential scams and keep yourself safe. It would be ideal if you distance yourself from the situation during a period of excitement to establish the truth.

The following are some typical indications of rug pull:

  • Whitepapers with unclear goals: Every serious crypto project needs to have a well-written whitepaper. It should have a clear set of attainable goals and tactics. A whitepaper is likely to be a scam project if it is unclear or riddled with grammar mistakes.
  • No independent audit: If a dApp has a formal evaluation from a reliable auditing company, you can be more confident in its code.
  • Anonymous developers: When the creators of a new cryptocurrency project are doxxed, law enforcement can hold them responsible and identify rug pullers with ease.
  • Excessive social media marketing: If a new initiative seems to be online spamming people too much, that could be a red flag.
  • Suspicious price movement: If you see abrupt fluctuations in a token's price history or trading volume, it could be a hint that market manipulators are at work. Always exercise caution when prices suddenly increase without being supported by substantial project-related news.
  • Uneven Token Allocation: You can see who controls the largest number of coins and how they are distributed by looking at the token allocation on blockchain explorers. A few wallets controlling a sizable portion of the coin supply make it simple to dump the tokens rapidly, increasing the likelihood of price manipulation and rug pulling. Therefore, it is safer to invest in a coin the more widely disseminated it is.
  • Unlocked Liquidity: The owners of well-known cryptocurrency projects frequently give up the management of liquidity pools by locking them in a reliable blockchain or with a trusted intermediary to foster trust and increase the public perception of their legitimacy. Locked liquidity is the term used to describe the procedure. It makes it impossible for project owners to withdraw any of the assets from the pool. The probability of a rug pull decreases the longer the liquidity pool stays closed. On the other hand, nothing prevents the owners from draining the liquidity and rendering the project useless if it is left open.

Biggest Rug Pulls Scams

Crypto's history is full of many multi-million-dollar rugs pull scams. Here are some notable examples:

OneCoin Crypto Rug Pull

OneCoin was a Ponzi scheme based on cryptocurrencies. OneCoin Ltd. and OneLife Network Ltd. were the organizations responsible for the plan. The company's main line of business was the sale of course materials. It operated similarly to a multi-level marketing system, where it would pay customers to bring in new customers. However, you couldn't use this coin to make any purchases. 

The creator transferred ownership to her brother Konstantin Ignatov in 2017 after an arrest warrant was issued for her. The latter was detained in 2019 and ultimately admitted to money laundering and fraud.

Thodex Rug Pull Scam

Turkey launched an inquiry in 2021 into Fatih Faruk Ozer, the creator of the cryptocurrency exchange Thodex because he may have committed fraud and started a criminal enterprise.

The platform posted a notice on its website saying that a “partnership offer” had forced them to halt operations. It also guaranteed subscribers that service will be restored in five working days. Sadly, this never actually occurred.

Before it fell offline, Thodex's trade volume was allegedly worth billions of dollars.

Scam of Anubis Dao Rug Pull

A decentralized reserved currency, backed by bond sales and fees from liquidity providers, was the project's claim to fame.

The squad didn't have a website, but it did have an active Discord server and a very popular Twitter account.

In exchange for the ANKH token, investors contributed $60 million in ETH during the inaugural token sale. The investment pool's money was sent to a different address after the sale had been going on for twenty hours, and it was never received back.

Defi100 coin Rug Pull Scam

This stands out as one of the crypto community's most egregious rug-pulling instances. A DeFi protocol was the Defi100 project, which was based on the Binance Smart Chain. On May 22, 2021, a message reading “we scammed you guys, and you can’t do shit about it” was posted on the coin's website.

Cryptoanalysts claim that the developers disappeared with $32 million in investor money.

Sturdy Rug Pull with Magnet

Over $27 million is thought to be worth the rug pull from the Stable Magnet automated market maker (AMM). The technique used a novel attack strategy that took the use of the verification models for Etherscan and BscScam. The stable magnet fraudsters were able to use a different code library than the one mentioned in the source code thanks to this vulnerability to drain pairs and transfer tokens.

Luna Yield Rug Pull Crypto

The yield aggregator that Solpad launched disappeared with over $6.7 million in several digital currencies.

With strong backing from the Terra ecosystem, Luna yield positioned itself as an authentic initiative dedicated to gathering and optimizing yield farming for users.

To avoid being found and shutting down its website, Luna transferred money to Tornado cash three days after its initial DEX offering (IDO).

Are Crypto Rug Pulls Illegal?

Yes, Crypto rug pulls are illegal. Liquidity pool withdrawals and restricting sell orders are typically prohibited. It is obvious from both of these tactics that developers built their coins or dApps to ensnare retail investors. Because the fraud is “hardwired” into the code of a cryptocurrency project, both of these schemes are frequently referred to as “hard rug pulls.”

Contrarily, “pump and dump” tactics fall under a murky legal umbrella. Although “pump and dump” rug pulling is unethical, it might be more challenging to demonstrate scammers' involvement in illegal behavior.

It's not always against the law for people to purchase cryptocurrencies on the open market and advertise them online. This is particularly relevant if the con artists behind a “pump and dump” scheme invested in a token that they did not help create. Some people refer to “pump and dump” schemes as “soft rug pulls” because there is nothing in the project's coding that predisposes it to failure.

Greater Manchester Police in the United Kingdom arrested two people, ages 25 and 23, in connection with the StableMagnet rug pull in 2021. Following the acquisition of intelligence that directed them to hardware wallets housing the money, the enforcers seized $22.25 million in ETH.

Concerning the OneCoin rug pull, international law enforcement pounced hard on some leaders. Chinese authorities allegedly punished 98 individuals connected to the initiative and seized $267.5 million in cryptocurrency, according to South China Morning Post.

Final Word

There are ways to avoid investing in shady projects, even as scammers and hackers continue to target DeFi technologies. Additionally, law enforcement organizations and regulators are keeping up the pressure on cryptocurrency fraudsters, demonstrating a wider commitment to holding fraudsters accountable and deterring unethical conduct.

In the end, none of these strategies are 100% reliable for rug pull crypto, so we suggest that you always exercise caution. To move around the sector safely, be sure to secure your accounts and educate yourself about different kinds of crypto frauds.

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