Navigating the perils of rug pulls in Crypto: a comprehensive guide to staying safe

Lack of necessary education and will to execute due diligence before investing in various DeFi projects has lead to increased amounts of those who became victims of so called rug pulls.

As the DeFi industry gains incredible momentum, a colossal number of new projects arises on the market, most of which impose a bright future and promise incredible returns.

Under such appealing conditions fraudulent developers hide a malicious intent to lure investors funds to subsequently go awol leaving them with as much as a hand full of worthless assets.

The reality of scams in the Crypto ecosystem

Sadly the track record of stolen investor funds within Crypto scams over the past years has been growing exponentially.

Only in 2021 a total of nearly $2.8 billion in Crypto rug pulls deprived the industry of investor confidence. But how was a substantial amount like this feasible for fraudsters?

Cybercriminals find opportunity in exploiting the blockchain ecosystem, apart from fooling investors, who put blindfolded trust into Crypto projects they know little or nothing about.

Irreversible and quick transactions in combination with no legal oversight allow perpetrators to rug pull users after withdrawing from the their ponzi schemes with next to none consequences.

Prevalence of rug pulls in the Crypto world highlight the importance of awareness. Moreover, why it is crucial for one to be properly educated about them when considering an investment in any DeFi project.

Demystifying rug pulls in Crypto

Users ability to identify a potential rug pull occurring in a project they wish to invest in depends on several factors.

Among many fundamental knowledge of this phenomenon is key to avoid becoming a victim of wire fraud.

What exactly is a rug pull?

Rug pulls are a common type of scam when a team of Crypto developers create a new token within a project and attract investors to pump its value on the market.

• A “rug pull” is a borrowed expression that literally means “pulling the rug out” from underneath something making it unstable and insecure.

Once the price of the asset has been substantially increased and trust of investors has been secured, token creators dump it, i.e. draw as much value out of it as possible, and then deliberately abandon the project.

Crypto rug pulls are decentralised finance exploits and are considered a common exit scam. These exploits are based on the ability to list tokens on decentralized exchanges (DEX) without a code audit, which later allows the exploitation of vulnerabilities in the token’s smart contracts.

The anatomy of a rug pull

Many Crypto rug pulls happen in a characteristically similar manner. As soon as the Crypto tokens are created and listed on the unlucky exchange, social media platforms are used to hype the project.

Over a certain period of time a series of heavy marketing events roll through the internet convincing early investors about the perspectives of the token, its incredibly high profit potential and guaranteed returns.

Basically conveying a message that it is too good to be true and urging to grab the opportunity as soon as possible.

• Unlike trustworthy start-ups, a scam project’s white paper is either absent or plans accomplishment of unrealistic goals in extreme timeframes. In reality having nothing to do with actual innovation and a proper follow-up.

The decisive moment of the Crypto scam begins once the value of the asset gains target/desired value, i.e. is pumped to its possible maximum.

At this moment the project developers quit and disappear with all investor money while their trust still lies within the promises that the team is working tirelessly to succeed.

• Interesting fact that not all rug pulls are planned out prior to launch. In some cases, only at later stages the team comes to a conclusion that the project will fail and decides to dump it.

Variants of rug pulls

Unfortunately the deceptive nature of these scams is not that obvious in the Crypto space and has another dark and destructive side to it.

Fundamentally they are categorised by two types of rug pulls. Hard rug pulls and soft rug pulls.

• A hard rug pull implies that the development team intentionally exploits the project’s code by “placing” backdoors into its token’s smart contract. This indicates that the scam scheme was planned from the start.Another form of these rug pulls is liquidity stealing. Project’s liquidity pool is intentionally drained when creators withdraw all tokens. This leaves remaining investors with a worthless asset.Hard rug pulls in all of their forms are highly unethical and are considered to be illegal.
• A soft rug pull on the contrary involves a quick dump of all digital assets from the project owned by the creators. This leaves investors with an extremely devaluated asset.Soft pulls are not necessarily a criminal act, yet they are also considered highly unethical because of the moral damage they inflict on the investors.

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How to detect a potential rug pull

The Crypto industry nowadays offers thousands of new projects annually if not more. And when it comes to selecting one, it is quite easy to get fooled by empty promises and fake claims.

Several criteria points can be considered when analysing a project potentially capable of a rug pull. Here are just a few of them:

Evaluating the project team

The Crypto space is anonymous and many project founders choose to keep themselves unexposed to the public. But this approach can serve as a shield to protect themselves from being accountable for fraud.

Typically founders and project owners have pseudonyms which you can use to track them across social media accounts, past projects and Crypto companies, review their track record, background and if they are well know in the community.

You should always run your own research and question the credibility of people behind the project you are overviewing.

Importance of security audits

Another vital criteria to check is code audit. A reliable project will always undergo an audit of their smart contracts code. Projects that successfully passed audit by an independent trustworthy 3rd party organisation will often share the results themselves.

• In addition to that, you must always question the company’s intentions and evaluate project’s innovation. Review all available documentation, such as the white paper to estimate the feasibility of the project and its goals.

Assessing returns and marketing claims

Upon launch many Crypto projects run marketing campaigns to publicly present the token and attract investors. Staying cautious and exercising prudence is key.

Falling towards promises of incredibly high returns or profit yields could be a serious mistake. Such claims are usually those exact red flags you should pay attention to. They serve as a leverage tool to draw as much liquidity as possible to the scam project.

• On top of that checking liquidity locked for the Cryptocurrency is a must to determine if its a legitimate token or not. If liquidity for the own supply of the asset is not locked at all, project owners hands are untied to perform a rug pull and run off with investor funds.
• Engagement with the community is also important. A reliable project and its owners will support a healthy relationship, run public channels and provide community managers to establish a strong and trustworthy communication.

Proactive measures for rug pull prevention

Best practises in preventing a rug pull and protecting your investment always include a blend of theoretical and practical measures.

While some are more radical than others, there is a number of well-known tactics investors prefer to stick to:

Favouring established projects

Either it is a perspective NFT project or a DeFi token you feel comfortable about, choosing those presented on centralised marketplaces will provide you with a batter sense of security.

Such exchanges have implemented legal standards towards reviewal of assets prior to them being listed. This allows them to limit potential scam projects slipping through by approving only established and audited ones.

Although listings on centralised exchanges and marketplaces are not an indicator of safety and guaranteed protection from rug pulls, they exclude some non-obvious potential risks you might simply not notice, such as fact of executed audit and others.

Utilising rug screen tools

Another essential method for identifying and preventing rug pulls is the use of screen tools and rug pull Crypto checkers.

• As corny it may seem, basic analysis of the tokens address on the blockchain explorer like Etherscan can provide a lot of useful information.

Some choose to resort to complex automated systems like Token Sniffer, that list and maintain information about all latests scam tokens and hacks. By investigating their databases you can detect a match with an asset you might have chosen.

If you are a devotee to much deeper investigations you can utilise tools like Rug Doctor and similar ones. These will scan projects or assets code for discrepancies and parallels with the most common exit scam strategies and assign risk-scores based on the executed check.

Case studies of notorious rug pulls

Even if you have performed all due diligence steps and analysed the market practically, make sure you know your enemy face to face.

The Crypto world has seen many companies and individuals from around the world commit wire fraud. Some cases have made a lot of noise when publicly exposed to the media, and here are just a couple of them:

• Thodex. A Turkish centralised Cryptocurrency exchange founded back in 2017 counted a total of 400k users and millions of invested funds.Unfortunately it was not long before its founder Faruk Fatih Ozer shut down withdrawals on the platform and vanished with the acquired funds in 2021. A incredibly colossal amount – $2 billion worth of Crypto was stolen.
• OneCoin. Another prime example of a rug pull happened when a self-proclaimed individual Ruja Ignatova created a Cryptocurrency company in Bulgaria.Ruja and her associates managed to defraud users of over $4 billion when in 2017 she disappeared with the following shut down of the platform.
• AnubisDAO. A typical project with loud claims launched in 2017 and convinced users and investors across the internet by raising a total of $60 million in ETH.Once the liquidity pool of the native token ANKH was full, just under 24 hours into the sale liquidity was drained to a none-related address dropping the tokens value to ground level.

Conclusion

Rug pulls are common in the Crypto industry and no one can be fully protected from falling victim to malicious actions of cyber criminals.

Nonetheless, in-depth and thorough investigation, analysis of the market and what it has to offer must always be accompanied by caution, common sense and basic understanding of risks associated with investing into dubious projects.

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