There has been a massive growth in the DeFi (Decentralized Finance) space in crypto and an explosion in the number of new DeFi platforms. However, with the increase in the flow of capital in the DeFi market, the number of new crypto scams, especially crypto rug pulls, has also seen a radical jump.
According to data published by CipherTrace, 99% of all crypto scams and frauds include exit scams and rug pulls. In this article, we will discuss what rug pulls are, some recent incidents of rug pull, and how not to get scammed by one.
What is a Crypto Rug Pull?
In simple words, a crypto rug pull is a form of scam where individual crypto developers or groups of developers abandon an ongoing project and flee with investors’ funds. As mentioned before, rug pulls usually take place in the DeFi space. Furthermore, it takes place in Decentralized Exchanges (DEXs), like Uniswap, where unlike Centralized Exchanges with strict regulations, practically anyone can create a token for free without any inspection or audit.
How Scammers Pull Off a Rug Pull
The first step is creating a new token on a blockchain. Ethereum is the number one choice for this. Why? Because it’s an open-source blockchain protocol and is very easy to operate.
The second step is to create hype and FOMO (Fear of missing out) around the token. They do it by first putting a significant amount of liquidity in the pool themselves. Doing this helps win investors’ confidence and trust. After that, they promote the token and create hype with the help of social media and Telegram channels, which soon get abandoned along with the project itself.
Despite the rising cases of rug pulls, most people seem not to care much, or even if they do care, they don’t seem enthusiastic about tracking the scammers down. Even authorities are unable to keep track of all rug pulls, let alone catch the culprits.
The only good thing here is that as the number of scams is rapidly rising, the amount of capital loss is getting lesser and lesser, mostly because these fraudulent projects don’t last very long, but also because more and more people are now aware of rug pulls. Investors are also only investing small amounts in untrusted or new projects.
Some Recent Rug Pulls
A website called Token Sniffer was created by an anonymous individual who is also a victim of one of these rug pulls. It’s a website that detects new scams and rug pull tokens and lists them on its “Latest Scams and Hacks” section. To give you an idea of how many scams are taking place, consider this – the list is updated, and new tokens are added every 30 minutes to an hour.
As of writing this article, the list includes KitCake updated 11 minutes ago, Crypto Farm updated 31 minutes ago, Bull Launchpad token, and Lana Rhoades updated an hour ago.
However, other than these small frequent scams, here are some relatively more significant crypto scams that are worth mentioning –
Amplify.money – A very popular scam, where according to the website, the developers compromised the wallet, collecting 2500 Ethereum from investors. After that, the developers of the website closed the project because they were supposedly getting threats.
Lv.finance – Same old story. Investors put in their crypto but eventually were unable to withdraw it. The team behind the scam has since disappeared.
UniCat – The developers of this token stole around $200,000 worth of crypto even after users withdrew their coins from the pool.
Unirocket – Another similar story. Got investors to put in their crypto, and then abandoned the project and ran away, only never to be found again.
How Not to Get Scammed by a Rug Pull?
No one wants to fall prey to these crypto scams. The guaranteed way not to get scammed is to not engage with DeFi at all, but that seems unfair, right?
However, having the mentality that these scams and frauds are normal, or that it’s the price you pay to be in this business, or that it’s just the nature of crypto, and our personal favorite, you win some and lose some, are also not the right way to approach this problem.
Instead of blindly putting your crypto everywhere, hoping you make good money while not losing much on scams, you can be cautious and lookout for signs that signal potential rug pulls so that you don’t get scammed at all.
The following are some signs which can help you spot a possible crypto rug pull –
Lack of Credibility
Never invest in a project without assessing its credibility first. There are several ways you can judge the credibility of a project or the developers of that project. You can check out their social media, their connections in the crypto space, track record, etc. Other than that, you can also check out their white paper. Compare their white paper to legit and reputed crypto projects. If you find it to be too amateurish or vague, that’s a good sign of a possible scam.
Plus, if you see heavy marketing and promotional efforts on less credible projects, that’s another solid sign of potential fraud.
Too Good to be True
The reason why this phrase is still around is that it’s still valid. If you suspect something to be too good to be true, it’s probably because it is too good to be true. So, if someone makes unrealistic promises of returns, it’s probably a scam.
There are tools out there that can help you find out the relevant information you need to spot a scam. Etherscan is one of them. It’s a block explorer tool that lets you verify the number of token holders. Fewer token holders mean more chances of it being a scam. Coingecko is another tool that will give you all the information you need about a particular coin, including how many DEX platforms it is available in. Once again, the fewer platforms it’s available in, the more the chances of it being a scam.
As a technology that’s based on the decentralization of power and authority, some people will inevitably misuse it to steal from others. All we can do is be aware and protect ourselves from such fraudulent people. And to do that, having the right mindset, strategies and knowledge is the key to not fall into these traps.