Crypto rug pulls or DeFi rug pulls have been on the increase, especially now that interest in crypto assets has skyrocketed. On several occasions, investors have been left scratching their heads after a crypto project’s developers run away with their funds without prior notice.
Over the years, stories have been told about how an average income earner became an overnight millionaire by investing early in crypto.
However, people who did not have the opportunity to join these popular projects at the time of their launch, are eager to jump on the next one, with the hope of making huge returns within a short time.
The desperation has prompted many people to invest in projects created by bad actors that have only one agenda – to swindle them off their hard-earned money.
Several cryptocurrency investors have continued to fail to conduct due diligence on newly launched projects and ended up getting rug pulled.
This article will help you identify potential crypto rug pull projects going forward, and ways to avoid being scammed by these illicit actors.
That said, let’s look at crypto rug pull meaning.
What is Cryptocurrency Rug Pull?
A rug pull happens when developers of a cryptocurrency steal investors’ funds from its pool by exploiting its code and subsequently abandoning the project, forcing the token price to crash to zero.
Developers, when creating the token, leave a backdoor that will enable them to remove liquidity at any time, which mostly occurs when enough capital has been invested in the project.
Rug pulls usually occur on decentralized exchanges, such as Uniswap, PancakeSwap, etc., because, unlike centralized exchanges, individuals are allowed to create and launch tokens on these platforms without any restrictions.
Before and after these malicious projects go live, developers usually create temporary hype across various social media platforms, including Facebook, Telegram, and Twitter to lure unsuspecting victims into investing in the project.
Most Notorious Crypto Rug Pulls
The project’s team may sometimes add some amount of liquidity into the pool to gain potential investors’ confidence.
The crypto industry has been rife with reports of numerous rug pulls that have occurred over the years. For the purpose of this section, let’s take a look at two of these illicit schemes that happened recently.
Squid Game Token (SQUID)
Squid Game (SQUID), a memecoin launched after the popular Netflix TV series Squid Game, left several investors in tears after its developers carted away an estimated $2.1 million in Binance Coin (BNB) from the liquidity.
Following the hype around the Netflix TV series, several cryptocurrency enthusiasts showed massive interest in the token, which launched on PancakeSwap, a decentralized exchange built on Binance Smart Chain.
The token’s value surged tremendously to a whopping 230,000% in just two weeks because the developers had prevented investors from selling. According to the team, investors were restricted from withdrawing due to the anti-dumping mechanism that was in place. SQUID, which was valued at $2,861 moments before the rug pull, crashed to $0.005.
Popular decentralized finance (DeFi) project SushiSwap’s pseudonymous founder, Chef Nomi, caused panic last year after pulling the rug on investors, which saw him convert a large amount of SUSHI tokens into Ethereum (ETH).
The unfortunate incident caused a sharp drop in the price of the cryptocurrency at the time. However, while investors thought they’d lost their funds, Nomi made an unexpected move by returning all 38,000 units of ETH, valued at $14 million at the time, back to the project’s treasury.
Nomi tendered an apology to the SushiSwap community, acknowledging that his previous move was driven by greed and fear. He also declared publicly that he would no longer be in control of the project going forward, however, he would continue to render technical and administrative support. .
Five (5) Ways to Know About a Crypto Rug Pull
While it is almost impossible to recover your funds lost as a result of a DeFi rug pull, it is advisable that you tread carefully in order to avoid being rug pulled.
We’ve highlighted five ways to help you identify a rug pull and possibly avoid it. They include:
Little or No Information About the Developers
Since you will be investing in the project, it is advisable to conduct due diligence to get to know the founders and developers of the project. If there is no concrete information about who the founders are, then it is a red flag and it is possible for the cryptocurrency creator to pull the rug on you in no distant time.
In addition, if there is information about the developers of the token, you should consider checking to ensure all members of the team have a good reputation or whether they have been involved in any shady deal in the past.
Check the Project’s Social Media Accounts
Most rug-pull cryptocurrency projects do not have the patience to build a genuine social media following for months before eventually launching the token. Social media accounts are usually created a week or two before the cryptocurrency is launched. Although sometimes the account may seem to have a good following, you should study the communication flow. If people get banned when technical questions are asked about the future of the project then it is possible that the token is a scam.
As long as the project is genuine, it will ensure that its activities are audited by a reputable third-party service company that would vouch for its authenticity.
If there is no audit for the cryptocurrency project, then it is possible that the developers have a whole lot to hide, such as adding a bug that can be later used to steal your funds.
The team may not want third-party companies to discover these illicit codes during auditing. Although audits may be expensive for small crypto companies, it is important that the project gets audited. It is recommended that you take your time to read through the audit to know its content once the project’s audit report is available.
Inability to Sell
After swapping your ETH or BNB for the token, try to check whether you are allowed to sell the token. Some illicit actors usually prevent investors from selling just like in the case of SQUID, where the creator claimed they added an anti-dumping mechanism to prevent people from crashing the price.
As a matter of fact, it is advisable that you first add a fraction of your capital to the liquidity pool in order to test whether you can sell or not.
Reputable cryptocurrency developers usually do not have control of the liquidity pool. They lock the pool within their blockchain or through a third party. With the liquidity locked, you are sure that the team cannot transact the tokens in the pool and as such prevent a potential rug pull. However, should you notice that the project’s liquidity pool is unlocked, then it is a red flag and you need to tread carefully.
Frequently Asked Questions
How Does a Crypto Rug Pull Work?
Malefactors pull the rug on unsuspecting victims by first creating a worthless token that has no utility. The developers then proceed to list the token on a decentralized exchange like Uniswap, PancakeSwap, etc. The token is usually listed on decentralized exchanges because there is no restriction to what can be launched on such platforms. When the token is launched on the DEX, it is traded within a liquidity pool against popular cryptocurrencies like ETH, USDT, BNB, etc.
The project’s team may sometimes add a substantial amount of liquidity into the pool in order to boost the token’s value and also launch adequate marketing for the coin in order to lure more investors. As more investors deposit these popular tokens in exchange for the newly launched ones, the token value surges, thus attracting more investors.
When scammers feel comfortable with the amount of funds deposited in the pool, they proceed to drain the pool of all ETH, USDT, or BNB, and disappear with the funds, causing the new token’s value to crash to zero.
What is the Difference Between a Crypto Rug Pull and DeFi Hack?
While rug pulls and hacks are the two types of crime affecting the DeFi space, it is worth noting that both of them are not the same. Crypto hacks are usually perpetrated by external actors who exploit the token’s code to steal some of its liquidity, while a DeFi rug pull is carried out by the project’s creators themselves, as they knowingly leave an exit door that will enable them to cart away with users’ funds and disappear.
Can I Recover Funds Lost in a Crypto Rug Pull?
It is almost impossible for you to recover the funds lost in a rug pull. This is because the real identity of the criminals behind the heist is mostly not known and it will be difficult for authorities to trace their whereabouts unless the team is sloppy in its tactics. Even though it is rare for crypto rugs to pull perpetrators to act in the same way as SushiSwap’s founder who returned the 38,000 units of ETH previously withdrawn out of the pool, there is a possibility that you may be lucky to have the funds returned out of the scammers’ benevolence.