Cryptocurrencies have been in the news lately, and for a good reason. They’re a relatively new way to invest money, and their value can fluctuate wildly. Unfortunately, there are also people out there who are looking to take advantage of gullible investors. The latest cryptocurrency scam is called a “Rug Pull.” Here’s what you need to know about this scam and how to protect yourself.
What is a Rug Pull in Cryptocurrency?
Rug pulling occurs in the cryptocurrency industry as crypto developers abandon their established projects to steal investor funds for their investments. It promises high returns with minimal effort but is designed to steal users’ funds. The scammer sets up a project with fake promises, and at some point, he will pull the rug from underneath the investors by disappearing or dumping all of the coins on the market.
Cryptocurrencies often employ smart contracts which govern a transaction through software rather than the legal system. Those systems can help reduce the transactional cost but make the process difficult for anyone looking for or returning a lost or stolen asset. As such, in the case of a rug pull, there is no legal recourse for investors who have lost funds.
DeFi projects and NFTs have been involved in several Rug Pulls, costing investors billions of dollars. These projects and token creators aim to disrupt traditional financial services but have often been met with resistance from investors. According to the research of Chainalysis, in 2021, rug pulls cost investors more than $2.8 billion. Additionally, many new projects with massive coin supply and low liquidity have also been subject to rug pulls.
What Are the Various Types of Rug Pulls?
There are three types of Rug Pulls:
1: Liquidity Pull
A liquidity pull is when a token creator or issuer withdraws all the coins from the liquidity pool, a decentralized exchange. This project’s liquidity pool removes all the value injected into the currency by investors, which drives the price to zero.
These liquidity pulls usually happen in DeFi environments, which stands for decentralized finance. A DeFi rug pull is the most common exit scam, where the scammer creates a token and then pulls the liquidity out of the market, crashing the price to nothing.
2: Limiting Sell Orders:
In this situation, the developer codes the tokens so that they’re the only party that can sell them. This is often done through smart contracts, a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. As an investor, it’s important to be aware of these types of traps and to steer clear of any token that has this limitation coded into its smart contract.
Once paired currencies have been chosen, developers wait for retail investors to purchase their new cryptocurrency. Paired currencies refer to currencies that have been paired for trading, one against the other. When there is enough positive price action, they dump their positions and leave behind a worthless token.
The Squid Token scam exemplifies this type of scam. In this scam, developers pulled an elaborate scheme where they created a new cryptocurrency and then paired it with Bitcoin (BTC). They waited for the price of Squid Token (SQT) to go up and then dumped their holdings, leaving investors with a worthless token.
3: Dumping
So, what is dumping? Dumping is a term used in the cryptocurrency world to describe the act of selling a large number of coins very quickly. This causes the price of the coin to drop and leaves investors who bought in at the higher price with worthless tokens.
This type of scheme is often referred to as a pump and dump. The pump phase is when the developers heavily promote their coin on social media platforms. This causes the price of the coin to spike. Once the coin reaches a certain price, the developers sell their coins and leave investors holding worthless tokens.
Two Main Forms of Rug Pulls -Hard Pulls VS Soft Pulls
Hard pull and soft pull are two forms of rug pulls. So, what is the difference between hard and soft rug pulls? Hard rug pulls refer to situations where project developers code malicious backdoors into their token smart contracts. This can be done to commit fraud or steal market liquidity.
On the other hand, soft rug pulls are situations where token developers dump their assets quickly and indiscriminately. This leaves the remaining investors with severely devalued tokens and often causes financial damage.
Why Do Rug Pulls Happen?
Rug pulls are becoming an increasingly common problem in the cryptocurrency industry. There are a few different reasons why rug pulls might happen. The first is simple greed. The people behind the project may have never intended to deliver on their promises; they may have only been in it for the money.
Once they’ve raised enough money through initial coin offerings (ICOs) or private investments, they disappear, leaving investors high and dry. Unfortunately, there’s not much that can be done to prevent this type of rug pull from happening; greedy people will always find a way to separate others from their hard-earned money.
The second reason rug pulls happen is poor management. Even projects with the best intentions can fail if they run poorly. If the team behind the project runs out of money or makes poor decisions, the project can quickly collapse, leading to a rug pull. This is why it’s important to do your due diligence before investing in any crypto project; you must ensure that the team is competent and has a solid business plan.
Finally, rug pulls can also happen as a result of hacking. If hackers can gain access to a project’s funds, they can steal them and then disappear. This type of rug pull is especially dangerous because it can happen even to well-run projects with good intentions. That’s why it’s so important to invest only in projects that have strong security protocols in place; otherwise, you’re just risking losing your money to thieves.
Was Terra Luna a Rug Pull?
On Wednesday, May 11, 2022, a devastating earthquake caused nearly 40 billion pounds of cryptocurrency value erasure. The UST debug event triggered the “death spiral” with LUNA and ultimately ended the two coins going to almost zero. It resulted in a massive loss of wealth for many investors. This was due to a rug pull orchestrated by the Terra Luna project developers.
The event has since been widely criticized by industry experts and crypto investors alike, who believe that it should have never happened in the first place. As such, many are now asking themselves: “Was Terra Luna a rug pull?” The answer appears to be yes; the project developers had planned the rug pull from the start to make a quick profit and leave investors with worthless tokens.
The Biggest Crypto Rug Pulls in Cryptocurrency History
The Terra Luna rug pull was not the only one of its kind. Here are some other major rug pulls that have happened in recent years:
OneCoin:
Onecoin is an online crypto Ponzi scheme. The company that developed this scheme is OneCoin Ltd. and One Life Network Ltd., conceived by Bulgarian Ruja Ignatova, who disappeared in 2017. But it was never until the program raised $4bn a year. The firm focused its primary business sales and marketing activities on a multilevel marketing strategy, with buyers rewarded for recruiting new customers.
The coin has not been redeemed or used for transactions in any way. The founder vanished during the 2017 arrest warrant and was returned to her brother Konstantin. Later, the founder was arrested in 2019 and is being prosecuted in the fraud and money laundering case.
Iron Finance
It’s more of a dump. Whales with high holdings in iron finance’s liquidity pool started trading large amounts, quickly affecting its prices, affecting TITAN, and forcing other companies to start buying.
Within very short periods, TANTAN lost its value. Mark Cuban was among the investors affected by the decline. The system is operational, but TITAN is no longer a valuable resource.
Luna Yield:
The new yield aggregating platform Solpad has sold nearly $6.7M in digital currencies. To improve yield-agritourism for users, it promotes itself as a true project aiming at aggregating yield farms. During its initial DEX offering, Luna transferred money to Tornado Cash for no trace and closed the site.
Thodex
Central Turkey-based cryptocurrency trading company Thodex was established in 2017 and has more than 400k users. In 2021, the exchange stopped accepting withdrawals for users, and its founder Faruk Fatih Ozer was soon removed.
Some cryptocurrency exchanges, including Dogecoin, traded at lower prices than most markets the night before the closure. Chainalysis estimates that the loss of crypto was more than $2 billion.
Bloomberg has said Turkish prosecutors could face jail sentences for its founder and executive Ozer, who has been missing since February.
Anubis Dao
The proposed system was described as a decentralized reserve currency funded with bonds and liquidity providers’ fees. Although the team had no website, they had a Discord server and a Twitter account that reached huge numbers. The initial token purchase generated $60 million in investment for the ANKH token.
Nonetheless, 20 hours later, the money in the investment pool had been sent to another place and still needed to be recovered.
Baller Ape Club
Vietnam’s national leader Le Ahn Tuan funded in September 2021 the Baller Ape Club project, which promises its members benefits and special rewards. During a trial, the defendants claimed the transactions had failed when they tried to buy NFTs in Solani.
The two were accused of shutting down the SOL project earlier and stealing $26m from a company despite the promise of the NFTs from investors’ funds. The money stolen was then laundered through an algorithm called chain-hopping, where coins are merged across several blockchains.
Swipathefox Project:
It is regarded as the biggest carpet pull ever by Sacramento Kings star guard De’Aaron Fox. It is an NFT project with 6000 unique fox characters generated by Ethereum’s blockchain and provided via OpenSea secondary markets. The program had a special offering and giveaway that created lots of interest.
Unfortunately, the project was abandoned, websites closed, discord and Facebook pages disappeared, and $500,000 in revenues disappeared. After the incident, players formally offered him a half-hearted apology for abandoning the project.
How To Avoid Rug Pulled In The Crypto Market?
Here are some tips to help you avoid being a victim of rug pull scams:
1. Do Your Research
This one seems like a no-brainer, but you would be surprised how many people invest in projects without doing research first. When looking into a project, read everything you can about it—the website, the whitepaper, the blog posts, etc.
Pay attention to red flags like unclear roadmap goals or a difficult team to find information about. And if someone promises you guaranteed returns, that’s definitely a red flag. Doing your research ahead of time will help you avoid a lot of rug pulls.
2. Stay Away From Pump And Dump Groups:
Pump and dump groups are hype machines; they try to get everyone to invest in a project so that the price goes up, and then they sell all their coins at the new higher price, and everyone else is left holding the bag. These groups are usually pretty easy to spot—they’ll have outrageous claims and no real substance. Steer clear of these groups, and you’ll be much less likely to get caught up in a rug pull.
3. Diversify Your Investments:
Investing all your money in one project is never a good idea, no matter how great that project might seem. If that project does end up being a rug pull, you could lose everything. So it’s always best to diversify your investments rather than putting all your eggs in one basket. That way, even if one project does turn out to be a scam, you won’t lose everything.
4: Stick To Reputable Exchanges
Finally, always stick to reputable exchanges when investing. Many rug pull scams happen on lesser-known exchanges, so it’s best to avoid them altogether. Stick with well-known and trusted exchanges like Binance, Coinbase, or Kraken, and you should be much safer from any quality or investment potential rug pulls.
5: Know the Code:
Having at least a basic understanding of how the project’s computer code works in cryptocurrency is also important. Knowing how to read smart contracts and tokens is key, as it can help you spot any potential issues. If something seems off, don’t invest until you understand the problem.
Conclusion: Always Be Cautious With Crypto Rug Pulls
Hopefully, this article has given you insight into what a rug pull is and how to avoid them from many crypto projects. Crypto projects can be a great way to make money, but there are also plenty of scams, so always be careful with your investments. Do your research, stay away from pump-and-dump groups, and stick to reputable exchanges. Doing all this will help keep you safe from any potential crypto rug pull in the crypto industry.
