What is a Rug Pull? Why should you care about it?

What is a Rug Pull?

Rug Pull is a scam that has plagued the cryptocurrency world lately; the fraud occurs when the developers of an outgoing bolt run for the hills with the investors' money from the project. Thus, they essentially pull the rug out from under the feet of the investors, leaving them counting huge losses.

How does it happen?

Developers can do this by aggressively advertising the project first and investing heavily initially to increase its attractiveness. Investors who now consider the project viable and profitable end up investing heavily to do it again. They are usually intertwined with investor whale dumper, whose high liquidity transfer actions in the project attract even more investors.

The forces of supply and demand naturally drive prices up over time. And that's all the developers and the whale have been waiting for all this time. Once fees have reached their preferred targets, they stage an exit by pulling out all the liquidity they can get. The action causes massive market shocks that send prices plummeting, far below what investors took, sometimes dropping to zero.

Cases most likely to be avoided

While Rug Pulls can theoretically occur in any project, be it cryptocurrencies or traditional finance, some very likely cases are. These cases have several inherent vulnerabilities that make them the most exposed. They include;

Small new projects of decentralized exchange

A new, small decentralized exchange (DEX) has all the characteristics of susceptibility to traction. Although, this doesn't mean they are all guilty of this. Most likely, they don't seem to have any inherent benefit to the industry, but they seem to feel a lot of investor outcry. First, decentralized exchanges don't have listing audits like their centralized exchange counterparts; anyone can list tokens at any time. Second, it's quick and easy enough for anyone to create a token on blockchain like Ethereum due to its open-source nature.

Such exchanges generally have some of the best returns and also tend to have an obscure protocol. Therefore, they will pair these tokens with fairly common cryptocurrencies like BTC or ETH to attract investors before removing the scam.

There are also slow rug pulls...

These are much more difficult to detect. What fraudsters usually do is create a legitimate-looking coin with no other warning signs, but they distribute a large number of coins in hundreds of wallets to which only they have access. For example, 20% of the coins are distributed to 500 wallets of 0.04% each. As people start buying the coin and the price increases, they will slowly start to dump (sell) their coins to generate money. People will keep buying and keep dumping until all their wallets are empty. These are very hard to detect, but the most reliable way to detect them is to use Etherscan or BscScan to check many wallets with the same % of tokens.

With the development of the cryptocurrency industry worldwide, and the constant and growing flow of information on the subject, more and more available to the public, defense mechanisms against this type of scams have also been made public. The most prominent example of this is the creation of the Token Sniffer website, dedicated to the public dismantling of rug pull scams, in order to alert token investors who have been affected by this type of malicious behavior. The creator of Token Sniffer was a victim of a Rug Pull, which motivated him to create this website, which today has become the main reference in terms of transparency in cryptocurrency transactions.

Relevant cases:

Squid Token: Squid Game became Netflix's most-watched series so far in 2021 worldwide. Among many other things, the popularity of the series prompted the launch of a token called Squid Token; About a week ago, a token called Squid was released about the South Korean Netflix series, The Squid Game. It is a game that was to be released in November and consisted of a replica of the series under the play-to-earn model, which implies that to play, you have to pay to get Squid, the only good crypto asset to play. On October 26, Squid began trading on the PancakeSwap platform with a value of 1 cent per token, but its value that Friday reached $4.39, and by Monday, it was at $2,800, claims Coinmarketcap. The popularity of the series attracted a large mass of people interested in acquiring the token. However, the problem began when many users reported having trouble selling the tokens. Shortly after that, on Monday, its value plummeted, the official "Squid Game token" Twitter account disappeared, as did its Medium account, and its official website also stopped working. This means that users holding the tokens cannot sell them on the decentralized platform PancakeSwap.

Mooncharge V2: Then there's Mooncharge; in this case, the creator of the project bought $50 worth of Mooncharge in April after reading about the coin on Reddit. Soon after, he lost his money. Here's what happened: In April, the administrator of the Telegram group, presumably the creator of Mooncharge, announced to members that he was working on a new version of the coin. "We're going to keep you all updated on Mooncharge v2. Get ready. This is going to be insane," he wrote.

"V2?" community members on Telegram asked, confused.

"Can someone explain to me what's going on, were we scammed?" someone asked.

"I've been down $600 for 20 or 30 minutes. What happened?" asked another.

In early May, the group's administrator was still insisting that version 2 was coming. "Don't change the channel," he wrote. But nothing happened. As of July 1, there was still no news. The token lost all value after that.

Meerkat: The team behind Meerkat Finance, a yield farming pool running on the Binance smart chain that went live just a day ago, claimed on its official Telegram channel at around 9:00 UTC on Thursday, March 4, 2021, that its smart contract vault was compromised.  Subsequently, the project suffered a drain of about 13 million BUSD and about 73,000 BNB, which are worth $31 million. The funds were further transferred to multiple new blockchain addresses.

TurtleDex: In March this year, TurtleDex, a decentralized protocol on Binance's smart chain, suffered a slap on the wrist. The protocol drained BNB 9000, approximately $2.5 million. The owners immediately deleted TurtleDex's Telegram, official website, and Twitter page. Jet Fuel Finance, a yield farming protocol that partnered with TurtleDex, confirmed the subsequently on Twitter. In addition, a user reported the diversion of liquidity funds in PancakeSwap and ApeSwap. Both protocols lacked liquidity as users desperately sold TTDX tokens at near-zero levels.

FUCKMETAVERSE: The most recent known case of a rug pull at the time of writing is the FUCK METAVERSE token, which, according to the Token Sniffer website, occurred today 20:03:57 GMT. The website above states the following regarding the scam "This token has been flagged due to evidence of a bug, hack or scam," then the website's analysis continues, "The audit score for this token is 0 because it was flagged as a scam by the automatic contract scanner or administrator. "

How to Reduce Susceptibility to Carpet Tractive DEX

Avoiding them requires vigilance on your part. For starters, you should check the liquidity in a pool on the price of the tokens in the pool. Most legitimate DEXs usually have algorithms that determine price levels based on the available token balance. But this is not entirely sufficient, as other factors can also influence the price.

It is also advisable to avoid projects whose prices suddenly go up within a few hours without real causal action, such as upgrades. You can also check the blocks in the pools. Most of the time, a legitimate DEX will freeze the liquidity of the pool for specific periods.

Small new cryptocurrency projects

Decentralized exchanges are not the only suspects; entire blockchains can also be potential suspects. There are around 5000 various altcoins, most of which are very small and new. Typically, altcoins are launched backed by innovations or concepts to take a slice of the cryptocurrency market pie. Otherwise, they are launched with an excellent solid use case within a certain geographic area of operation or to attract a certain clientele. The goal is still to try to gain market share.

However, if a new blockchain and cryptocurrency is launched without any inherent innovative features or target market, it is quite moot. Many times, the blockchain will lack an open-source protocol, even with some obscure. protocol. Where blockchain data can be accessed, several wallets (usually owned by developers) control a significant amount of liquidity.

How to Reduce Susceptibility to Carpet Traction Block Chains

There are several features you can look for to avoid such potential blockchains. First, you should avoid small new coins whose prices rise within a few hours or a day without a significant change in the main blockchain. It is also wise to try to avoid a blockchain that does not appear to have a clear path to market penetration beyond relying on a whale investor. You should avoid this if the blockchain itself doesn't even have an innovative feature on the table, but still enjoys strong price increases.

Even worse is when the developers and a whale or two have the lion's share of the coin's liquidity. Therefore, small meme coins are a likely source of Pull Rug scam, as they meet all the above red flags.

Conclusion

Vigilance is always recommended when investing in any project; there is always a chance that your investments could end up in the sewer. Online investment opportunities that involve relying on your hard earned currency are even riskier.

Cryptocurrencies are quite a profitable investment avenue, and many billionaires and institutions notice them. However, vigilance is recommended to avoid a carpet-pulling scam. This article provides clear guidelines on how to avoid the dangers that a carpet-pulling stunt can entail. But, of course, playing it safe to safeguard investments is always a wise move.