How to Prevent Getting Caught in a Rug Pull
The Villainous Rug Pull
By Scott Smith
Cryptocurrency is a new market that not many people are familiar with. At the time of this article, only about 3.9% of the world’s population is invested in it. (“Global Cryptocurrency Ownership Data 2021”) It is a young untapped gem that many do not get involved in because they do not understand it. Some have entered not knowing or understanding it, other than a friend telling them they need to buy a specific token. Others stay away because they hear horror stories of people losing all their money. This article is about the latter. I will hopefully open your eyes to cryptocurrency and teach you how to invest — at the same time, avoiding crypto that is not legitimate.
We may have been lucky enough never to have experienced a rug pull. If that’s the case, you are fortunate. Rug pools have come in many different disguises and have trapped a good portion of investors. If you have been involved, it is never pleasant. You are staring at your crypto wallet, wondering what the hell just happened. Rug pools have increasingly been more complex and harder to pick out of a line-up.
Some are easy. They have no information, no name recognition, and no real excitement. These are small-time crooks testing the water and learning how the hustle works. Then you have the savvy piggyback criminal. This guy or girl does their research to find out the name of a coin getting launched soon and creates a copycat coin. Of course, these are the ones I have been burnt by most. As an investor and researching the market looking for the next Shiba Inu token, I want to get in early and ride the waves to riches! That’s all of our dreams, right!
I would find a project where I did all of my due diligence, checked the criteria, use case, social media, etc. I would then come to the conclusion that I wanted in this project. These piggyback criminals are doing the same thing as I am doing, but they are not buying. They are creating. They create a duplicate token with the same name and release it as soon as the actual coin is expected to launch. As eager as we all are to get in early, many of us investors see the coin pop up on dextools and jump to buy. Marveling in our quickness to get in early to find all our money is gone a few moments later. These criminals do their homework.
Lastly, you have your long pull. This hustle is what we had seen with recent crypto. The team on this token was pretty impressive (amazing at deceiving us all). They hyped the coin and the launch. They even were responsive in the chats leading their holders on, getting them to keep buying, and getting the FOMO out across the crypto market. This token was breaking barriers. When you didn’t think it could go higher, it did. And there were no signs of foul play. Or were there? Some negative news came out, and the coin went stagnant. They were not going up or going down. Then they pulled the liquidity, and everyone’s investments were gone. The long pull seems like a valid project. It launches, and people can buy and sell just like any upstanding crypto. Promotion goes on, and people who have tremendous gains start telling their friends about it. Now their friends are buying in, and the beast grows into a monster. People are raving about their profits, and all is right in the world then. Your holdings are worth $5.00, and the project leaders are gone. These people are the most prominent con artists of them all!
What is a rug pull
When developers establish a token linked with a valued cryptocurrency, offer the token on decentralized exchanges (DEXs), and remove all the funds after the investor buys in, this is known as a crypto rug pull. In lamens terms, the developers zero out a token’s liquidity, therefore devaluing the currency and not allowing you to sell your holdings.
Rug pulls are carried out by con artists who build up a buzz about a coin and then abandon it, taking the money with them. Typically, these coins are coupled with dependable utility blockchains, such as Ethereum or Binance Chain. Investors who exchanged their ETH for the listed token allow the token’s founders to withdraw their ETH from the market rapidly. (“Definition of Rug Pull”)Meme coins, for example, are one of the craters that induce investors to succumb to FOMO and be rug-pulled.
How does a rug pull work?
Rug pulls are most common in the decentralized finance (Defi) industry. Decentralized Finance (Defi) brings the blockchain’s decentralized notion to the world of finance by obtaining cash from a liquidity pool. To fully comprehend this, we must first understand how liquidity pools work. (“Why Crypto Rug Pulls Happen in Defi and How to Avoid It”)
A liquidity pool acts as a market maker for DEXs, allowing users to buy and sell specific tokens. Crypto exchanges require a mechanism to keep order flow moving because there is no centralized infrastructure for arranging deals. Because there is no one to audit the token, it is also simple to offer it on decentralized exchanges.
At its most basic level, a liquidity pool is a collection of investor funds locked in crypto pairings that allow users to trade between cryptocurrencies. Because it’s a well-established platform token with high availability, most crypto pairings contain a prominent cryptocurrency like Ethereum’s (ETH).
A trading fee is paid on orders and granted depending on the total value provided to the pool to encourage investors to combine their resources and operate as a liquidity provider (LP) (similar to a dividend). Each user is entitled to a share of the aggregate fee in return for the crypto in their pool wallet. An investor stands to gain more money if the loan amount is larger. (“Why Crypto Rug Pulls Happen in Defi and How to Avoid It”)
When the designers of a rug pull have gathered liquidity sources with significant money, they withdraw all of the available assets. The coins are then swapped in a different marketplace, making the Developer’ identities untraceable. Because Ether is a medium of commerce, it’s simple to move funds between wallets and “disappear” to other users. This eliminates all cryptocurrency holdings, leaving the pool empty and the token holders disappointed.
Why Did Defi Become a Rug Pulling Mecca?
As the name implies, Defi protocols have no centralized control and rely only on smart contracts, making them an ideal target for Defi rug pulls. Defi has a record number of offenses in the first seven months of 2021. However, investors are becoming more knowledgeable, and the amount of cryptocurrency stolen on Defi sites has decreased by 64%. (“Cryptocurrency Crime and Anti-Money Laundering Report, February 2021”)
Bad actors can use Defi initiatives to produce coins, enhance their profile, and attract investors. Decentralized Exchange (DEX) is a crypto exchange platform based on blockchain technology that eliminates the need for… sites like SushiSwap or Uniswap. Tokens are produced and sold without audit. Scammers only need to develop a token that appears to have some value, offer use cases, and establish a market appeal for investors to acquire it.
As soon as money begins to pour into the project, its value rises, and the developers sell these tokens, reducing their worth to zero. They pocket the money given to the initiative through token sales, pack their belongings, and go, thereby pulling the rug out from under their consumers. Because the Defi is unregulated, criminals will attack it.
How to spot a rug pull?
After the fact, rug pulls in crypto markets are simple to spot. Even though exit scams and rug pulls have risen in the previous year, the overall amount of money taken decreases as investors learn to recognize the warning signs. So it’s easy to avoid these schemes if you know what you’re looking for. So here are some frequent warning signs to help you avoid being a victim of such a ruse.
Devs are anonymous.
There are various reasons why creators would choose to remain anonymous, ranging from security and privacy for personal reasons. However, anonymity makes it more difficult for scammers to be identified once they’ve pulled off a con. It’s a significant red flag if a project is established anonymously and new social media profiles are formed within days or hours after its introduction. (“Why Crypto Rug Pulls Happen in Defi and How to Avoid It”)
It’s also a red indicator if a project has no links to other successful initiatives or the crypto community as a whole. Look for helpful information about the crew on the project’s website. If it’s simply a load of fluff, proceed cautiously (if at all).
Extensive marketing Strategies
The majority of cryptocurrency scams are created with the intention of luring you into a rug pull. As a result, the token’s or pool’s use case is hazy and impractical. Instead, the producers seek support through social media postings, crypto influencers, and sponsored marketing. Before investing in a new coin or pool, make sure you understand the project’s valid use case. (“Why Crypto Rug Pulls Happen in Defi and How to Avoid It”)
Liquidity Lock
The majority of genuine liquidity pools bind investor funds for a set period. This accomplishes two goals. 1. The pool’s liquidity requirements for token swapping, lending, and other operations allow the pool to continue operating. 2. It prevents the pool’s designers from swiftly emptying it once it reaches a particular size — and taking the money with them. A liquidity lock protects the interests of investors. If liquidity is not locked, stay away or use extreme caution. (“Why Crypto Rug Pulls Happen in Defi and How to Avoid It”)
The value of coins is skyrocketing.
If you can’t see why the value of an asset is fast-growing, be cautious. Scammers might inflate a project by investing money into it or creating fake excitement to get others to participate by abusing “FOMO” — the fear of missing out. Look for reasonable causes for the increase, such as new exchange listings, partnership announcements, or other good news. It might be a rug pull or a pump-and-dump scheme if these aren’t present. (“Why Crypto Rug Pulls Happen in Defi and How to Avoid It”)
How to Stay Away from a Crypto Rug Pull
Investors can reduce their chance of getting snared by a rug pull by exercising care and searching for the above indicators. When entering new markets or investing in new pools, prudent investors do their research. Knowing the symptoms of criminal behavior will reduce one’s chances of falling prey. Greed may make lousy business decisions appear much safer than they are. (“Why Crypto Rug Pulls Happen in Defi and How to Avoid It”)
Avoiding frauds and possible rug pulls in crypto projects comes down to being aware of the risks and conducting research before investing. Here are a few more techniques to verify a project’s validity.
Liquidity should be checked.
Checking a token’s liquidity is one technique to determine its authenticity. Legitimate enterprises often have millions of dollars in cash on hand. These projects hold a large number of tokens for an extended period of time, and they cannot be taken from the liquidity pool during that time. Check the project liquidity lock term and the quantity of liquidity owned by the project’s owners. Liquidity information is typically easily available on legitimate services like PancakeSwap and Uniswap.
Examine Whitepapers, and Social Media Platforms
Look at the project’s whitepaper. Is it in line with the token and what the developers are stating? A project’s social media platforms, such as Telegram and Twitter. Make sure that it ties into the whitepaper of the project. It might be a red flag if the project does not appear to be under active development and is a fork of another project.
Check the credibility of the team.
Any organization that has the potential to be a rug pull is defined by its owners and creators. Their past involvements, track records, social media, and industry history and connections, as well as their previous involvements, track records, social media, and industry history and relationships, must all add up if they wish to establish credibility. If there are more questions than answers about the founders and staff, the project is more likely to be a scam. (“Why Crypto Rug Pulls Happen in Defi and How to Avoid It”)
Investigate DEX Platforms for Holders and Listings.
A token with only a few token holders that aren’t often exchanged on many platforms is likely to be a rug pull waiting to happen. A few tools that may be useful in learning more about a token are Etherscan, Coin Market Cap, and CoinGecko.
Is it still a good idea to invest in Defi?
Defi is a young industry with a lot of potential. It enables you to borrow money regardless of your credit background. It has massive potential for growth, and because no centralized body is in charge of establishing regulations or collecting exorbitant transaction fees, Defi banking is private. The downside of such an unregulated market is that anybody may list an asset because there is no central authority over it. Rug pulls come in helpful when there is no one else to check to see whether a project is attempting to deceive people.
As with any new technology, unethical crypto players will do everything they can to deceive others with less knowledge and competence. In the short term, prices for many new companies may be overstated, and it can be challenging to discern hype from reality.
Ultimately, investing in Defi comes down to your financial means and risk tolerance. Before investing in a project, be sure you’ve done your research and understand what you’re getting into. Etherscan and other online platforms and tools may help you determine the viability of investments.
Rug pulls are usually methodically planned and carried out. The freshly created tokens promise significant advances and have sparked a great deal of interest in a short amount of time. Rather than selling tokens, the authors of the fraud are considering an escape strategy. Typically, investors are ignorant of this until the token has lost its value and the creators have gone.
The stakes are rising in lockstep with the growing interest in bitcoin. Scammers are constantly looking for new ways to make money off of unsuspecting victims. You can lower your chances of being the next victim of an exit scam by being aware of common indications and conducting research on possible projects.
How does Heros stack up to the criteria of a solid token?
- 1% of every transaction gets added to the liquidity pool. This will increase Heros liquidity over time, making it more stable.
- Liquidity is Locked until 2023
- The Devs are out front and center. Exposed to the entire world
- Anti-whale built into the token limits the max amount of tokens that anyone wallet can purchase is 3% of the total supply. In turn, it limits the maximum sell to 3% as well.
- Flipper tax is in place that also adds additional safety to Heros. This will double tax anyone who sells their Heros within 24hrs of buying them. This encourages long-term holders and reduces the possibility of a pump and dump.
- 1% Reflections 1% of every transaction is shared throughout our current holders; this increases the size of your holdings over time.
- 1% of every transaction is sent to a burn wallet which eliminates those tokens from existence, never to be used again. Every transaction reduces the overall supply of Heros, which in turn naturally increases demand.
- 2% of every transaction is collected to give to a community decided charity; just two weeks into the project, Heros has donated to 4 separate charities.
- Heros had a stealth launch, with no advantage to any one person, even the dev team had to buy in with everyone else.
Check Out $HEROS @
Website: https://www.hero-inu.com/
Twitter: https://twitter.com/HeroInuErc20
Reddit: https://www.reddit.com/r/Hero_Inu/
Telegram: https://www.t.me/heroinucoin
Instagram: https://www.instagram.com/hero_inu.heros/
Facebook: https://www.facebook.com/groups/413998576932790
This is not an original topic, and to be sure all information was as accurate as possible. I used multiple sites for reference. They are as follows.
Reference for this article:
“Cryptocurrency Crime and Anti-Money Laundering Report, February 2021.” CipherTrace, https://ciphertrace.com/2020-year-end-cryptocurrency-crime-and-anti-money-laundering-report/. Accessed 25 November 2021.
“Definition of Rug Pull.” CoinGecko, 12 August 2021, https://www.coingecko.com/en/glossary/rug-pulled. Accessed 24 November 2021.
“Global Cryptocurrency Ownership Data 2021.” TripleA, https://triple-a.io/crypto-ownership/. Accessed 25 November 2021.
guide, step. “What is a Rug Pull on PancakeSwap or Uniswap?” CryptoTips, https://cryptotips.eu/en/knowledge-base/what-is-a-rug-pull-in-crypto/. Accessed 24 November 2021.
“Why Crypto Rug Pulls Happen in DeFi and How to Avoid It.” Bybit Learn, 27 August 2021, https://learn.bybit.com/investing/why-crypto-rug-pulls-happen-in-defi/. Accessed 24 November 2021.
