What is a rug pull?
A rug pull is a type of crypto scam in which the developers of a new project abandon it and run away with investors’ funds. This is done by selling all of the project’s tokens, which causes the price to plummet.
Key takeaways
- Rug pulls are crypto scams where developers abandon a project and run away with investors’ funds, typically by selling all the project’s tokens and causing the price to plummet
- Red flags for potential rug pulls include unknown or anonymous developing teams, fake media hype, no liquidity locking, limits on sell orders, suspiciously high yields, and a lack of external audits.
- The Safemoon scam is a common and notable example where stakeholders lost millions, highlighting the need for thorough research and caution when investing in crypto projects.
Types of rug pull
Two primary types of rug pulls are liquidity stealing and limiting sell orders.
Liquidity stealing
Liquidity stealing is when the developers of a project create a fake liquidity pool, which is a pool of funds that is used to buy and sell assets. Once stakeholders have bought into the crypto project, the developers withdraw all of the assets from the liquidity pool, leaving investors with worthless tokens.
Limiting sell orders
Limiting sell orders is when the developers of a project put restrictions on sell orders, making it difficult or impossible for investors to sell their tokens. This is done by setting high minimum disposal limits or by requiring stakeholders to wait a certain amount of time before they can dispose of their tokens.
Examples of rug pull
Squid Game Token
Squid Game Token was a rug pull that took place in October 2021. The token was based on the popular Netflix series Squid Game, and it promised investors high returns. However, the developers of the token abandoned the project shortly after it was launched, and the price of the token plummeted to zero.
Beefy Finance
Beefy Finance was a rug pull that took place in November 2021. The DeFi yield farming platform promised investors high yields on their investments but abandoned the project, and people lost millions of dollars.
Baller Ape Club
Baller Ape Club was an NFT project scam that promised investors high-value NFTs. The project’s website claimed that the NFTs would be used to access exclusive benefits, such as early access to new projects and airdrops. However, shortly after the project launched, the developers abandoned it and ran away with investors’ funds.
The rug pull was widely reported in the news, and it led to a loss of confidence in the NFT market. Many investors who had purchased Baller Ape Club NFTs were left with worthless tokens.
The Baller Ape Club scam is a reminder that investors need to be careful when investing in NFTs. Several red flags can indicate a rug pull, such as:
- The developers are anonymous or have no prior experience in the NFT space.
- Ape Club’s project website is poorly designed or has grammatical errors.
- Baller Ape Club’s roadmap is vague or unrealistic.
- The project promises high returns with little or no risk.
How to discover rug pull scams
There are a few things you can look for to help you discover a rug pull:
Unknown or anonymous developers
If the developers of a project are unknown or anonymous, it is a red flag. Legitimate enterprises will typically have the names and contact information of their main crew prominently displayed on their website.
Fake media hype
If a project is being heavily promoted on social networks, but there is no real substance behind the hype, it could be a rug pull. Rug pullers will often create fake social media accounts and posts to generate excitement about their venture.
No liquidity locked
Liquidity locking is a process that prevents developers from selling all of the tokens in a project’s liquidity pool. If a project does not have its liquidity locked, it is more likely to be a rug pull.
Limits on sell orders
If a project has limits on disposal orders, it could be a rug pull. This is because it makes it difficult for investors to dispose of their tokens, which makes it easier for the developers to dump their tokens and abandon the project.
Skyrocketing price movement with limited token holders
If the price of a token skyrockets in a short period, but there are only a limited number of token holders, it could be a pump-and-dump schema. This is because rug pullers will often pump the price of their token artificially before they abandon the project.
Suspiciously high yields
If an enterprise is promising investors suspiciously high yields, it could be a rug pull. Legitimate projects will typically offer yields that are in line with the market.
No external audit
If an enterprise has not been audited by a reputable third party, it is more likely to be a rugpull. Audits can help to identify potential security vulnerabilities, which can help to protect investors.
Additional information
Smart contracts
Rug pulls often involve smart contracts, which are self-executing contracts that are stored on the blockchain. Self-automated agreements can be used to automate the sale of tokens, which makes it easier for rug pullers to abandon and run away with investors’ funds.
Blockchain analysis
Blockchain analysis can be used to track the movement of tokens and identify potential rug pulls. It can help to identify wallets that have been used in rug pulls, and they can also help to track the coin flow of funds in and out of an enterprise.
Reporting rug pulls
If you believe that you have been the victim of a rug pull, you should report it to the relevant authorities. You can also report rug pulls to the websites of major crypto exchanges, such as Binance and Coinbase.
The Safemoon Rugpull
Safemoon was a decentralized finance project that was launched in March 2021. The project quickly gained popularity, and its token, Safemoon, reached a market capitalization of over $1 billion. However, in May 2021, the Safemoon team was accused of pulling the rug on investors.
#PeckShieldAlert Safemoon exploiter: Hey relax, we are accidently frontrun an attack against you, we would like to return the fund, setup secure communication channel , lets talkhttps://t.co/ylHpIiFmrl
— PeckShieldAlert (@PeckShieldAlert) March 29, 2023
And the exploiter has transferred 4k $BNB to 0x237d5https://t.co/45wnrxzixa pic.twitter.com/BMxHOBvbjF
Several red flags should have alerted investors to the possibility of a rug pull. For example, the team was anonymous, and the enterprise had no clear roadmap or plan for the future.
Additionally, the project’s tokenomics were designed to reward early investors, which could have been seen as a sign that the developing team was more interested in making money quickly than in building a sustainable project.
The Aftermath
The rugpull has had a significant impact on the crypto community. Many investors lost money, and the incident has led to increased scrutiny of new crypto projects. Additionally, the rugpull has damaged the reputation of DeFi, which is a relatively new and innovative field.
Despite the negative impact, there are still many legitimate DeFi projects out there. However, investors need to be more careful when investing in new projects. Perform thorough research and invest exclusively in projects you have confidence in.
How to avoid a rug pull
There are many things you can do to avoid being a victim of a rug pull:
- Do your research: Before you invest it is important to do your research. This includes reading the project’s whitepaper, checking out the team’s social media profiles, and looking for any red flags.
- Only invest what you can afford to lose: Crypto is a volatile market, and there is always the risk of losing money. Only invest what you can afford to lose.
- Invest in projects that have been audited: A security audit can help to identify potential security vulnerabilities in a project.
- Be patient: Don’t invest in projects that promise overnight riches. Be patient and invest in projects that have a long-term plan.
Conclusion
Rug pulls are a serious threat in the cryptocurrency world. By being aware of the signs of a rug pull, you can help to protect yourself from becoming a victim of such fraud. If you are considering investing in a new project, be sure to do your research and only invest in projects that you trust.