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Rug Pull – what is it and how to catch a Rug pull?

Rug Pull – what is it and how to catch a Rug pull?

February 25,2022 in Glossary | 0 Comments

Rug Pull

A rug pull is the kind of situation where the developers not only leave a project behind but take the money of the investors as well.

What does rug pull actually mean?

A rug pull usually takes place in the cryptocurrency where the developers leave a project in between and take all the funds and money of the investors. These kinds of pulls usually occur in the ecosystem of decentralized finance (DeFi), especially focusing on decentralized exchanges (DEXs). DEXs are used by all those malevolent individuals who create a specific token and pair it with a booming cryptocurrency like that of Ethereum and then list it on DEXs.

The price of the coin seems to drop down to zero once the naïve investors switch their Ethereum for a token that has been listed on the DEX list. In this way, the creators can take out all the stuff from the liquidity pool. It is found that the creators of such coins also create huge propaganda on Twitter, Telegram along with some other social media websites. This is primarily done to acquire the confidence of the investors by creating an immense liquidity pool.

Rug pulls generally occur on DEXs because these kinds of swaps permit the users to list the tokens without worrying about audits and reporting. Moreover, it is quite easy to create tokens on Ethereum.

There is a certain decentralized exchange known as uniswap that automatically brings out the prices of the tokens, considering your available account balance. There are a number of ways through which you can tackle a rug pull and we are going to discuss them shortly. However, the first and the most prime step to avoid getting a rug pull is checking the pool liquidity.

When it comes to a rug pull, another thing that you need to look out for is the sudden increase in the price of a coin. For instance, the price of a rug pull coin can increase from 0 to 50X within a few hours. This approach is usually taken to trigger FOMO (fear of missing out) among the people, making them invest more.

To understand the concept better, let’s consider this example. Suppose you buy some RUG tokens via Uniswap. Now, you don’t just want to be the owner of RUG, you want to take benefits from the 1000% APY by diving into the liquidity pool of RUG-ETH. Then, you purchase the same amount of ETH as that of RUG and then pair them before depositing them into the pool to gain more yield. Once the rug is out, you will not only lose the worth of ETH but also the coins that you utilized to purchase RUG. All of your money and coins will become worthless.

How can a project be made “unruggable”?

Now, two approaches are generally used to make a certain project unruggable which are mentioned below.

  • One way to think about an unruggable project is if the team rejects any kind of ownership associated with the tokens. For example, no one would be able to claim the tokens acquired during a presale.
  • Another way we can term a project unruggable is if there is an insufficient number of tokens developed by the development team. A small number of team-held tokens don’t hold the capacity to do an exit scam or rug pull.

How to catch a rug pull

Rug pulls can be quite devastating especially when you invest a large number of funds and money. Thus, if you want to avoid such scams, you need to understand how you can catch them before they destroy you. Let’s take a look at some ways that can help you catch these malicious exit scams.

Liquidity has no time lock

The most definite way to build trust among the teams is by developing a time lock on the liquidity of the token pool. This ensures that no one would be able to get away with the funds of the investors. You should know that about 95-100% of the liquidity must be kept in the time lock. However, for an average crypto investor, making a time lock may get a little too technical.

The best thing you can do is contact your developer team and ask them about your locked liquidity. You can even ask for proof. If they are able to provide proof then everything is in your luck but don’t believe everything you see. If there is anyone who can help you verify that your liability is locked, that would be better.

Anonymous or fake founders

Anonymity is the problem that gives the malevolent developers a chance to execute as many rug pulls as they want because no accountability exists in anonymity. We all know that nobody knows the founder of Bitcoin. However, Satoshi never forced or asked people to purchase Bitcoin. He only wanted people to mine it. When it comes to DeFi, it was compulsory for all the people involved in the project to attach real identities with the rest of the information.

You can also verify the identities with their given social media accounts. You can also check the authenticity of their records from the same accounts. However, there are some people who are clever enough to create fake profiles for Twitter and LinkedIn. But, you can pinpoint that kind of profile as well. Check the number of followers that the account has. If it is quite less than what you had in mind, that’s a red flag right there. You can also check the reliability of the given information by doing a follow-up on the team’s interaction with their followers. If there is none, things can take a wrong turn.

Unrealistic projected returns on investment

Whenever you see something giving an immense amount of returns, just run far away because it will be too good to be true. When someone tries to pull off a rug, the scammers generally offer the highest rewards that fall somewhere between 500% and 5,000% APY. This is where your common sense needs to act before everything goes down.

Unaudited projects

If you’re working with a genuine crypto project, you need to audit the small contracts using a third party security firm that is independent of all your project dealings. It must be done prior to allowing the investors to acquire more exposure or listing the tokens. Auditing can take a lot of time and introducing an independent security firm can not only help in saving a lot of time but gains the investors’ confidence as well.

However, investors also need to pay close attention to every intricate detail present in the audit report. There are a lot of crypto projects that delude the investors, illustrating that they’ve just been audited. If investors vigilantly go through the audit report, they might find some loopholes or unveil the scammer’s new rug pull.

Undoubtedly, auditing can be quite expensive, especially when you’re introducing a third-party. But, now, things have been made a lot easier for the investors who can now audit their project online via RugDoc and Token Sniffer. These websites can audit your project quite effectively and they are free of cost.

Lack of effort or innovation

Last but not least, one of the most effective ways of catching a rug pull is by checking the quality of the websites. Scam projects don’t last. That is why a minimum amount of effort is put into them to make them effective for the time being. Thus, the most obvious sign of the rug pull is a low-quality website or the ones that show the “launching soon” page, the minute you browse it. Other hints to look at are the presence of copy-paste descriptions taken from other websites or projects along with the occurrence of a few buzzwords such as blockchain, DeFi, etc. If a website’s landing page doesn’t make any sense to you, it’s better to keep moving.

Another signal that can indicate the presence of a potential scam is zero innovation. If a project doesn’t bring anything innovative to the table or is simply a clone of some other project, you need to move on. Otherwise, you may lose all of that hard-earned money to those malicious scammers.

Conclusion

A rug pull is a serious disease that has been contaminating the cryptocurrency world for so long. But it’s about time we should start acting on them. The aforementioned tips can help you in catching the rug pulls before they cause any serious damage.

However, it is important to note here that these tips will not guarantee to save you from the pulls because technology keeps on evolving and brings new surprises every day. Similarly, the knowledge of those malicious hackers is also evolving day by day.

But it is better to stay precautionary rather than just giving all of your funds and money away. Thus, before you start investing your funds into cryptocurrency, make sure you have sufficient knowledge regarding rug pulls and how they can be caught. It will save you tons of trouble.

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