DeFi projects have solved many problems of the cryptocurrency market, as well as providing many investment opportunities with huge profits. But with that comes many potential risks, and Rug pull is one of the most notable risks.
What is Rug Pull?
Rug pull comes from the phrase “pull the rug out from under (someone)”, which means to withdraw support suddenly. This term refers to the action of the development team suddenly abandoning the project after raising capital from investors.
The withdrawal of capital from the Liquidity Pool by development teams or large investors will cause the token to lose value. Then other investors will nervously sell off the tokens. In many cases, the token will return to 0 value.
Rug pull scenario
Rug pull occurs most in projects in the DeFi decentralized finance market, especially on decentralized exchanges (DEX), because these exchanges allow token listing without any fees. any testing requirements. In addition, creating tokens on open source blockchains like Ethereum is now very easy and free.
The above two factors have created favorable conditions for some scammers to take advantage of to create Rug pulls that cause panic in the community such as: SquidGame, SnowdogDAO, WhaleFarm...
Rug Pull from the SqiudGame project
The scenario of Rug pulls often occurs as follows:
The DeFi project development team will create new tokens and list them on the DEX. For this token to have value, they will provide liquidity for it by creating liquidity pools, paired with popular cryptocurrencies such as ETH, USDT...
To attract investors to put money into liquidity provision (LP), the creators of this token will offer a higher yield than usual. They will even spread the news on social networks like Telegram, Twitter... that they will put a large amount of liquidity into that project to gain the community's trust.
After many investors exchange their ETH, USDT... for these DeFi tokens, the project will withdraw all the liquidity in these Pools. The coins are then exchanged on another market so that victims cannot be traced. And of course, that project's token is no longer liquid, causing the value of this coin to gradually decrease to zero.
Characteristics of Rug pull projects
Rug pull projects often have the following things in common:
Yields are too high: To attract many investors to participate in a short time, high yields are one of the most effective tricks. Many DeFi groups offer unbelievable returns to stimulate investor greed. WhaleFarm, for example, offers returns in excess of 100% APY, while some other pools stop at just a few percent. If you see a pool that offers very good returns, this could be a suspicious sign.
Anonymous Team: There may be reasons for creators to remain anonymous, from security and privacy to personal reasons. However, anonymity also makes it harder for bad actors to be tracked after committing a scam. If a project is started anonymously, with new social media accounts created within days or hours of launch, that's a big red flag.
Coin/token prices skyrocket: With any asset, if you can't see why the value is increasing rapidly, be careful. Scammers may inflate a project by raising funds or creating fake hype to get people FOMO and involved. If you don't see legitimate reasons for these skyrocketing prices, be very careful.
No liquidity lock: Most legitimate liquidity pools lock investor funds for a certain period of time. This is to ensure 2 purposes. First, the pool's liquidity required for token swaps, lending, and other activities is secured, so that the pool can continue to operate. Second, it helps founders not abandon the project and run away with all the investors' money. An account pool without a lock is another question.
Prevention
To prevent Rug Pull, we need to check many project factors to avoid losing assets.
Here are some points to note:
Anonymous development team: When learning about a certain project, you need to check the team behind it through the project website. Be careful with projects that do not display Founder and Dev team information.
No audit: Most notable cryptocurrency projects will be subject to independent security audits of their code. A project without third-party audits is not necessarily a scam. But you should study the project more carefully before investing in it.
Asymmetric token distribution: Checking a project's distribution on sites like Etherscan will tell you who holds the largest amount and how they are distributed. If 1 or 2 single wallets hold a large amount of supply then it is easy to sell it all at once. That makes the risk of price manipulation higher.
Low liquidity: When listing on DEXs, the project needs to create liquidity on AMMs, creating low liquidity (less than 100 thousand USD) can be a fraudulent project.
Unlocking liquidity: On large AMMs, there is a liquidity lock when created, so that the project cannot withdraw the pool for a certain period of time to bring confidence to investors. Be careful with projects that have unlocked liquidity pools.
Epilogue
As the blockchain industry is growing bigger, Rug pull is becoming more popular in the world of cryptocurrency and DeFi as well as NFT, GameFi projects. Before investing money, you need to do thorough research and look for clear signs so you can avoid them.
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