Rug Pulls

One of the greatest fears within the crypto community is a rug pull. Rug pulls are exactly what the name implies; they happen when developers suddenly withdraw all investors’ funds in a project and disappear with it, leaving the investors with nothing.

According to Chainalysis' 2022 Crime Crypto Report, over 2.8 billion dollars of investors’ money was lost through rug pulls last year. This does not include losses from the Defi tokens' eventual loss of value due to a rug pull. Rug pulls are very lucrative for any malicious developer and for this reason, rug pulls have jumped from 1% of all crypto crimes in 2020 to 36% of all crypto crimes in 2021.

Rug pulls thrive on decentralised exchange (DEX) platforms because these platforms do not require the third-party validation that centralised platforms require. Centralised platforms like Quidax require a code audit before listing a coin on their platform and the relatively new DEX platforms do not, making it far easier for developers to create backdoors in the smart contracts that power the fraudulent project.

However, the largest rug pull happened on a centralised platform called Thodex, whose CEO disappeared after users could no longer withdraw their money. The CEO, Faruk Fatih Özer allegedly took 2 billion dollars worth of investors’ funds with him to Albania.

Because of their trustworthiness and utility, blockchain protocols like Ethereum, Solana, and Binance have been frequently used by fraudulent developers to build tokens. This is because the developers can easily withdraw the ETH or SOL that the investors used to purchase the token.

Rug pulls have been a threat to investors and present a negative picture of the crypto community, thus it is in everyone's best interests if they are avoided and eradicated. Rug pulls can be avoided if an investor is careful enough to do research (DYOR) in the project they are investing in. Some of the things to look out for in a potential rug pull are the liquidity, anonymous developers, and the lack of community behind the project.

The liquidity of a token can be a determinant to look out for when researching about a token. Liquidity refers to the ease with which the token can be traded for fiat money. A token with low liquidity is often synonymous with rug pulls. There should also be a lock on the total amount of money that is pooled into the token, a safe token should have 80% to 100% of its total value locked. You should also be wary of a token where the majority of the token is owned by the developers.

The crypto space accepts anonymity and mischievous developers have used this to their benefit. Before you invest in any token, you should verify the team behind it; a safe token should have identifiable developers with a track record behind them. The white paper, website, and community of a project should offer an insight into its credibility.

Another thing to look out for is the volatility of the price of the coin. A coin with unusual volatility is a red flag, as this is usually a sign of the pump and dump scheme. A pump and dump scheme is an example of a rug pull and it happens when traders conspire to manipulate the price of a coin by raising it and then selling it for profit.

Finding it difficult to sell a coin can also indicate that it is a potential rug pull. One approach to avoid buying a fraudulent coin is to buy a little amount initially, and if it proves tough to sell, cut your losses and move on.

Fraudulent developers have however proven willing to get creative. A vivid example is War on Rugs, a supposed group of developers who gained over a hundred thousand followers on Twitter for exposing rug pulls and their creators. The collective also created their coin RETH, to battle the current rug pulling problem and within a week they had gathered over 9,000 holders and 2 million dollars, then they pulled the rug.

Harvey Dent: You either die a hero or live long enough to become a villain.

Another example is the Squid Game Token, which was inspired by the popular Netflix show and marketed as a play-to-earn game that would need a specific number of SQUID tokens to participate. The developers did not allow investors to sell their tokens and instead in true Squid Game fashion made away with $3.38m.

Rug pulls have the potential to persuade budding investors that the crypto industry is rampant with fraud. This, in turn, will have a long-term impact on the advancement of blockchain technology.

Valery Legasov: What is the cost of lies? It's not that we'll mistake them for the truth. The real danger is that if we hear enough lies, then we no longer recognize the truth at all.