It goes without saying that where there is money, there will be scammers lurking around, trying to rob an investor of all they have. The same goes for Decentralised Finance (DeFi) platforms that give liquidity to Decentralised Exchanges (DEXs); the several cases of crypto rug pull have left its unsuspecting victims shattered and bankrupt.
Rug pulls are usually enticing to the victims when they see the massive hype around a token with its rise in value. It’s almost impossible not to partake in the project and secure a significant amount in the hopes that it becomes more in the future.
What is Rug Pull?
Likened to its contextual meaning, imagine standing on a rug with valuable items in your hands, and you have the rug pulled from underneath you. You are going to fall with the items in your hands. Similarly, rug pulls are the same in the crypto world.
A rug pull is a scamming method where fraudulent creators develop a new crypto token or coins, build anticipation and hype around the coin, engaging many people to interact and buy the coin with excellent prospects.
Playing on their FOMO (fear of missing out), the unsuspecting victims buy into these coins, amassing a lot of value into the new token. The rug pull comes when the creators of such tokens suddenly take away the liquidity. Without enough liquidity, the victims with the listed tokens cannot sell their tokens at the original price but a low rate, thereby leaving them with a coin that has no value.
Rug pulls aren’t unusual in DeFi because tokens can be easily created and listed on popular trustworthy blockchain ecosystems like Ethereum and Binance Chain because they have no use of KYC. Hence, making the scammers unidentifiable.
Popular Rug Pulls in Crypto
- Squid Game: Following the release of the famous Netflix series, the developers of this infamous rug pull promised its victims that they would make the play-to-earn game like the series without including a limited number of participants. The world witnessed the SQUID token surge as it amassed massive engagements on social media, and the price increased from one cent to a couple of dollars. The creators rugged the SQUID token and deactivated their website and social media pages, sending the cost of the token from $2,800 to $0. Unfortunately, the anti-dumping feature barred investors from selling tickets anywhere and lost their savings.
- Neko Inu: The Neko Inu project was a play-to-earn game that enabled its players to earn USDT. It was an exciting player-vs-player game which meant anyone could play it. Neko Inu required a lot more referrals than average. The earnings were also overemphasized as it claimed players could make 5% value every 12 hours. Depositing money was quick. However, withdrawing took days with a 5% charge.
How to Avoid Rug Pulls
There are various ways in which one can spot and avoid rug pulls before investing in a new token:
- Diligent Research: Before investing in any new token, regardless of the hype around it, always research its origination, understand the company and the developers that own it, and review the legibility of the whitepaper and the website’s authenticity.
- Sceptical Great Yields: It is probably a rug pull if any new coin promises high yields. When new tokens announce an annual percentage yield in triple digits, investors should be wary of such, as it may be a rug pull or a Ponzi scheme.
- Lacking External Audits: New cryptocurrencies are expected to go through a code audit procedure that a third party performs. Conducting an audit is necessary for decentralized currencies.
- Unlocked Iiquidity: Investors must check if the liquidity is locked to guarantee a coin’s validity. If there is no liquidity locked on the token, it is easy for the developers to escape with gathered liquidity. Also, check for the volume of the liquidity pool that is locked.
- Increasing Price Movement with Fixed Token Ownership: Investors should be careful if there are significant changes in the price of a new token; constant price spikes in new tokens often lead to rug pulls. If there are few token holders, the cost of the token is vulnerable to change.
Thousands have lost their life savings to rug pulls in crypto; it is understandable to want to get on the latest and trending coins. However, there are ways to avoid rug pulls when investing in a new coin.