Crypto Rug Pull

Given the rapid growth of cryptocurrencies in recent years, it's not surprising that some with bad intent are attempting to participate. The crypto rug pull is one of the ways they employ, and it's something that may deter many individuals from investing in cryptocurrencies.

Crypto rug pull: what is it??

A rug pull is a deception strategy in which individuals are duped into purchasing a fraudulent product. In this situation, an investor is lured to deposit their hard-earned money (or, in certain circumstances, Bitcoin and other cryptos) into a token by an offer of an exceptional deal.

The token developers essentially exit the enterprise, taking their investors' money and leaving little to no trace—thanks to the anonymity provided by the exchange.

The crypto rug pull works in what way??

Because there are fewer regulatory entities involved in a cryptocurrency transaction, a rug pull might succeed. This is why the majority of cryptocurrency rug pulls take place on decentralised exchanges (DEXs).

DEXs are platforms that only allow transactions between the two parties involved. That implies no one is present to oversee the transaction and ensure that all parties adhere to the rules. Remember that a rug pull can occur not just on DEXs, but also on Centralized Exchanges (CEXs).

The different types of crypto rug pulls?

Understanding how these frauds are perpetrated will help you protect your finances. A rug pull can be classified into one of two categories:

Technical manipulation?

Rug pulls of this nature are more technical, luring the victim into purchasing tokens that can only be purchased, not used. They accomplish this by tweaking the function of the code that "allows" transactions to be performed using the token.

The smart contract built in the code of these tokens requires this consent for token transactions. Users who own these tokens will realise that they have no value without such approval.

Liquidity fraud?

People will try to pull this method more frequently because it takes less technical understanding. People attempting this rug pull will link an altcoin with a famous cryptocurrency, like as Bitcoin, rather than modifying the token's code.

Following that, the developers of the new token copy the contract code of other tokens. This raises awareness of their token, ensuring that it is trending and attracting an increasing number of buyers. They'll increase the token's liquidity on DEXs, making the offering far more appealing than it should be.

What to watch out for when it comes to crypto rug pulls?

Now that we've described what a rug pull is and how it may be done in different ways, let's look at some warning indicators to avoid falling into the trap.

There are no details about the development team?

Remember what we stated about the token creators' anonymity? When there is no information available, keep an eye out for signals of problems. This is especially true if all of their accounts were created recently.

In their whitepapers, they only offer vague or ambiguous information?

Token developers will frequently include a whitepaper with their token to give their audience a better understanding of how it works. It may be time to consider other solutions if there is no clear technique or aim.

Returns or yields are too high?

If either the anticipated or initial yield appears to be too good to be true, it most likely is.

The emphasis on marketing is disproportionately directed at creating hype?

Social media and crypto influencers may have a significant impact on the enthusiasm surrounding a token or cryptocurrency. Be on the lookout for these patterns, as they could be part of a fraud scheme.

The liquidity pool from investors is not locked?

Token creators should really have a stake in the token you're contemplating and invest a specific amount of their own money in it. It could be a rug pull if this isn't the case.

Crypto rug pulls in the real world?

Let's now take a look at some successful rug pulls that have actually happened, in the real world.

Compounder Finance?

Compounder Finance, a Decentralized Finance (DeFi) platform, stole 10.8 million USD from customers in 2021. This rug pull occurred as a result of the developer team replacing secure and audited contracts with faulty equivalents, allowing them to abandon the project and all of their investors' funds. The fact that they used the name of a valid DeFi protocol, Compound Finance, could be a major issue.

Thodex?

In the same year, Faruk Fatih ?zer, the founder of Thodex, fled to Albania with an estimated two billion dollars in customer funds after the DEX was suddenly closed in April. Their customer base of 390,000 people is the reason they were able to get away with so much money.

Squid Coin?

The Squid token recently attracted enough investors to raise the value of their token from 628.33 to 2,856.65 USD in under 10 minutes. Prices decreased to just 0.0007 USD not long after that. After all of the commotion had died down, individuals were left staring at an empty website with no leads on the token's developers.

Crypto rug pulls: how to avoid them?

As a crypto trader, your task now is to figure out how to avoid all of the traps that have been set up by others. Don't worry, we've got a few pointers for you:

Examine all documentation, code, and whitepapers?

Prevent rug pulls by learning everything you can about the product you're buying. The importance of documentation cannot be overstated, therefore don't be put off by the amount of reading required. Take some time to learn about the origins of the project, why the creators are doing things the way they are, and what the developers' ambitions are.

Visit their social media accounts to learn more about them?

Find out as much as you can about any previous successful projects they've worked on. Performing this due diligence could be crucial in determining who is behind the token. Getting a sense of who the developers are will help you better grasp how they work.

Check token liquidity?

Keep in mind that most authentic tokens on the market come with millions of dollars in liquidity. As a result, this should be one of the variables to examine when looking for tokens to acquire, ensuring that the liquidity of the token under consideration is within the right range.

Get information about coin holders?

Keep in mind that the majority of coin holders should not be the devs. The reason for this is that the higher their stake in the company, the greater their control over the market.

If all of the coin holders are the developers, it's a hint that the token's value is set only by the creators and not by the actual demand of traders like yourself.

Final thoughts?

What's the bottom line? It is beneficial to conduct your own study. The problem is that, while technology might help people gain financial independence, it can also empower the wrong people. Before you make your next token buy, exercise caution; if anything seems too good to be true, it most likely is.

Stick to the safer option and play your cards wisely. Mediated trades may result in a small loss of revenue, but at the end of the day, they protect your money.