Crypto Rug Pulls: How to Spot and Avoid Financial Fraud in DeFi

Rug pulls have become a prevalent and concerning phenomenon in the cryptocurrency world. Countless users fall victim to these schemes yearly, losing millions of dollars.

To prevent this, let’s delve into the mechanics of rug pulls and discover tips on identifying and avoiding these deceptive schemes. So let’s get started!

What Is a Rug Pull?

A rug pull, or “rug pulling,” is a type of financial fraud where a project’s team suddenly abandons it and vanishes with investor funds. Each year, users lose millions of dollars in cryptocurrencies to cybercriminals, with many scams occurring in the DeFi ecosystem, particularly on decentralised exchanges (DEXs). These platforms make it easy for scammers to promote tokens for “pumping” without stringent checks.

Rug pulls are common on DEXs because these platforms allow coins to be listed for free without the mandatory auditing required on centralised exchanges (CEXs). Additionally, creating coins on Ethereum or Solana smart contracts doesn’t require advanced technological knowledge, making it easier for scammers to exploit. Scammers particularly benefit from the popularity of meme tokens. When launching a fraudulent “joke” project, developing a fake business plan or road map is unnecessary, making the scam even more straightforward.

How Does a Rug Pull Work?

Typically, developers begin by heavily promoting their coin through influencers and other marketing tactics to create FOMO (fear of missing out) and drive impulsive purchases without prior analysis. Scammers might promise massive profits, offer cheap allocations of unreleased coins, or lure investors with fictitious technologies and other enticing claims.

Once people show interest, the scammers stake the token and create a liquidity pool (LP) on decentralised exchanges like Uniswap or PancakeSwap. They might also artificially inflate the asset’s value using their funds. Investors then trade ETH or other cryptocurrencies for the scam token. Once a significant amount of funds is pooled, the project team withdraws all the money and disappears, leaving investors with worthless coins.

What Are the Types of Rug Pulls?

Although all rug pulls aim to steal money, the methods can differ. They are typically categorised into two main types: hard and soft.

• Hard Rug Pulls: This type occurs suddenly and without warning. The coin’s value plummets to zero, and investors cannot sell it due to a lack of liquidity.
• Soft Rug Pulls: These are more gradual. Developers delay their “escape” to attract more victims over time.

Additionally, rug pulls are divided into three categories based on the method used:

1. Liquidity Theft: This is the most common and easiest method. Developers withdraw all assets invested in the project from the liquidity pool (LP). Since the token team controls its smart contract, it can grant itself unlimited access to the coin pools on decentralised exchanges (DEXs).
2. Sales Restrictions: A stealthier tactic involves modifying the token’s smart contract to limit holders’ abilities. For example, once fraudsters accumulate sufficient liquidity, they might prohibit selling the coin. Then, they drain their assets at any convenient time, leaving investors with a useless token.
3. Dumping: This type resembles the traditional Pump & Dump scheme. Developers promote the token to attract investors and stimulate trading using marketing strategies like contests, sweepstakes, and social media advertising. They sometimes organise communities and additional activities but eventually sell their coins and abandon the project.

What Famous Cases of Rug Pulls Are Known?

There were many rug pull cases in the crypto field. Here are some of the most famous examples:

• AnubisDAO: Launched in 2021, this DeFi project was positioned as a fork of OlympusDAO. Just hours before the end of the token sale, developers withdrew all liquidity from the ANKH/ETH pool, resulting in an estimated $60 million loss.
• SQUID: Based on the popular Netflix series Squid Game, the price of this coin skyrocketed to $2,856 shortly after launch. However, investors soon found they couldn’t sell their tokens on PancakeSwap. Eventually, the price plummeted to $0.005.
• PEPE Incident: In August 2023, a multi-signature meme token wallet reduced the required confirmations from five to two and transferred over 15.7 trillion coins to exchanges, causing the price to collapse by 20%. The remaining PEPE developer claimed three former team members were behind the theft of $15 million in assets.
• Bot Scheme: In early 2024, Blockfence analysts uncovered a scam involving over 1,300 fraudulent tokens. As a result, scammers stole over $32 million from approximately 42,000 users through rug pulls. Experts noted that the creation of these coins was almost entirely automated, with an algorithm selecting and issuing tokens that closely resembled legitimate assets from existing companies or projects.
• Presale URF: This scam occurred on the Solana network. The meme coin team collected about 2,400 SOL (~$450,000 at that time) during presales and then vanished with user assets without even launching the coin.

How to Determine a Rug Pull?

Identifying potential rug pulls requires attentiveness and caution. Here are some steps to help spot these fraudulent schemes:

1. Research the Team and Project: Study the project’s team, goals, and surrounding community. Be wary of unknown developers or a lack of transparency.
2. Look for Audits: Reputable projects often undergo third-party audits by security firms. Check for detailed reports on token vulnerability tests online. If such data is unavailable, it’s a red flag.
3. Check Liquidity: Digital assets with liquidity locked for a certain period are relatively safer.
4. Engage with the Community: Interacting with the project’s community on social media or forums can provide insights. Many active participants are a positive sign, but remember that ordinary investors might not always know the developers’ real intentions.
5. Watch for Unrealistic Promises: Be cautious of projects that make unrealistic promises or heavily inflate FOMO. Aggressive marketing and profitability claims in the hundreds of per cent per month indicate potential dishonesty.
6. Monitor Project Developments: Sometimes, projects may not start as scams but can turn into ones if developers decide to drain the coin as the project fails.

By following these steps, you can better protect yourself from falling victim to rug pulls and other fraudulent schemes in the crypto space.

Conclusion

In conclusion, rug pulls seriously threaten cryptocurrency, leveraging decentralised exchanges (DEXs) to deceive investors. Awareness of their tactics, recognition of various types, and learning from high-profile cases are crucial for staying vigilant. Conducting thorough research, seeking audits, and being wary of unrealistic promises can safeguard against these scams. Protecting investments requires constant awareness and diligence.

About Concorpad

Concorpad stands at the forefront as an innovative launchpad platform operating on the robust Concordium blockchain, poised to revolutionise the IDO landscape for inventive ventures. Our core mission is firmly rooted in bridging the divide between visionary concepts and the market, providing an all-encompassing framework from initiating token launch to its seamless listing. At Concorpad, our unwavering dedication revolves around cultivating growth and propelling innovation within the expansive realm of the blockchain ecosystem.

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