What is a Rug Pull? The Mechanics of DeFi Scams

These token holders then dump these tokens in the marketplace immediately or after the lapse of a vesting period, thereby depressing the asset’s price. A market is considered more liquid if there are large deposits of that asset held in a pool waiting for buyers or sellers. Alternatively, a platform could allow for direct trades between two market participants from their cryptocurrency wallets instead of trading from a pool. In this case, the more participants are trading a particular pair of assets, the higher the liquidity of this pair.

rug pull

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Tips to Avoid Rug Pulls

Scammers can prey on the FOMO that’s generated by rare-but-true stories of mind-blowing returns, according to Rex Hygate, founder of DeFiSafety, a company that reviews projects in the field. Rug pulls cost investors more than $2.8 billion in 2021, according to the research firm Chainalysis. Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. We believe everyone should be able to make financial decisions with confidence.

  • Once the scammers have large amounts of their chosen crypto, they can start hyping this cryptocurrency all over social media.
  • We may receive payment from our affiliates for featured placement of their products or services.
  • Hard rug pulls, which occur when a project’s founder uses coding to maliciously use the project as a way to defraud investors, are completely illegal.
  • Importantly, it would be best if you took time to step back during a time of excitement to establish the reality without FOMOing .

Together, these tokens contribute to the hidden theft of hundreds of millions from crypto investors. As the crypto market has gone up, it has attracted more scammers who want a quick buck. Although some crypto scams use traditional fraud techniques like Ponzi schemes, https://cryptolisting.org/s have become widespread in Web3.

If you’re lucky, getting involved early could result in huge returns – just ask the Winkelvoss twins, who invested in bitcoin nearly a decade ago and have since become billionaires. By using the name of a well-known TV program and gaining a lot of media exposure, the creators were able to boost public awareness and lend the fraudulent coin a sense of legitimacy. While crypto rug pulls should be illegal, unfortunately, due to the youth of the crypto industry the laws surrounding rug pulls are not the legal system. Unfortunately, many criminals have and continue to get away with rug pulls and related crimes. A rug pull is a malicious cryptocurrency industry technique where developers abandon a crypto project and flee with investors’ funds. When it comes to investing in NFTs, it is crucial that you do your own research and avoid simply relying on influencers on the internet.

Crypto Storage 101: Crypto Wallet vs. Exchange

While not terribly common, rug pulls happen from time to time and it’s in investors’ best interests to know about them. Consider these tips mentioned above when navigating the crypto space, and be sure to fully vet a project’s quality or investment potential before parting ways with any money. Choosing established cryptocurrency projects is always advisable, particularly over a new project that has garnered a lot of hype. Unfortunately, crypto rug pulls are here to stay, but that doesn’t mean that you need to be involved. Their smart contracts include scripts that disable secondary sales, allow developers to mint new tokens, or that charge buyers sell fees of 100%.

rug pull

To protect yourself from rug pulls, make sure to do diligent research on projects. This will include looking at the state of the product, its tokenomics, token distribution method, liquidity, and team. You can minimize your risk by making sure the above are all as transparent as possible and verifiable. For instance, token dumping may cause negative effects on the market, but it is not illegal. On the other hand, liquidity theft is against the law in most jurisdictions.

The project’s creators often disappear, leaving investors with worthless tokens and no way to recoup their losses. Nonetheless, there are ways to detect potential rug pulls and protect yourself from financial loss. The most common types of Rug Pulls happen within the decentralized finance system where anyone can start their own enterprise. In fact, the freedom of operation makes it the most attractive platform to pull these scams. Since all transactions are anonymous and there are no intermediaries, the losses are often permanent. It’s important to step back and do some research before buying a hot new coin, because if you act too hastily, you may end up the victim of a crypto rug pull.

Major Crypto Scams Explained: ‘Pump and Dump’ vs. ‘Rug Pull’

The investors incurred a total loss of almost $10 million, making Luna Yield the biggest rug pull on the Solana blockchain. Once a significant amount of unsuspecting investors swap their ETH for the listed token, the creators then withdraw everything from the liquidity pool, driving the coin’s price to zero. A “rug pull” is a common cryptocurrency scam in which a developer or creator promotes a project, such as a new coin or NFT release and then disappears with investor funds. Rug pullers are difficult to find after the fact because the decentralized and pseudonymous nature of blockchain allows those involved to conceal their identities.

It is, however, possible for a project to run effectively with little to no knowledge of the person or people promoting it. A case in point is Bitcoin, whose creator is still unknown more than a decade later. In March 2016, authorities in various countries started investigating the company, which saw Ignatova vanish into thin air, leaving her brother Konstantin Ignatov in charge. Users of the exchange will be lured into using a new trading platform through an active marketing campaign. Once the exchange becomes abuzz with trading activity, the scammers will partially or entirely disable functionality. The pool, which typically is comprised of two tokens, will allow traders to deposit one token in exchange for the other.

rug pull

Reputable crypto projects often allow independent security audits or financial transparency reports to advance their authenticity. For example, Cardano went through several audits and an independent source code audit to boost investor confidence. Nevertheless, a crypto project without an external audit report isn’t automatically fraudulent. It simply means you should do more research about the project before investing your hard-earned money in it. While founders of NFT or DeFi projects often keep themselves anonymous, that approach could also protect them from being held accountable in case the launch of the project goes wrong. In some cases, the founders may maintain a pseudonymous crypto identity that they will use for years across projects and accounts.

If you can’t find any legal information, such as the company’s name, real names of persons involved, track records on cryptocurrency, etc., it’s a red flag. Solidus Threat Intelligence leverages Token Sniffer’s smart contract scanning technology to spot rug pulls early, accurately, and at scale. This gives crypto businesses a window into their compliance posture and opportunities to prevent DeFi scammers from cashing out.

What are the most common types of rug pulls?

Another way to think about an unruggable project is if the team renounces ownership of any tokens, like tokens they would have acquired during a presale. An unruggable project is one in which the team gives up any ownership of tokens, such as those they would have received during a presale. Since launching in 2012, Bankless Times is dedicated to bringing you the latest news and informational content within the alternative finance industry. Our news coverage spans the whole crypto-sphere so you’ll always stay up to date — be it on cryptocurrencies, NFTs, ICOs, Fintech, or Blockchain.

For example, the founder of Rugdoc.io, a service that reviews new projects, says she wound up getting scammed herself on an NFT that was supposed to be a ticket for an event. Developers could also disable features such as token transfers between wallets and limiting or capping transfer amounts, among other features depending on the nature of the project. To gauge whether an allocation is alarmingly large, check peers within the same niche and see what other founders are allocating to themselves. Despite experience in regulating marketplaces in the past, Web3 has posed a new set of unique challenges to the SEC.

The prices of the NFTs have fallen significantly lower than their minting price on secondary markets and at the time of writing, the trading activity has largely ground to a halt. In total, he paid around $336,000 for the NFT but started to wonder whether the listing had been fraudulent after he realized all traces of the NFT auction had suddenly disappeared from the Banksy website. Due to the anonymous nature of cryptocurrencies, it is unknown whether the perpetrators will ever be caught and held accountable for their actions. In the world of investment, people always want to buy low and sell high. While exploring potential methods to expand your cryptocurrency asset portfolio, you must have come across the concept…

Since this rug pull strategy restricts sell access to token buyers, it’s often referred to as a “limiting sell order” scam. Crypto rug pulls are more common within decentralized entities such as decentralized finance protocols and decentralized exchanges as opposed to the more centralized properties. This is because decentralized entities have little to no adherence to regulatory provisions, thereby encouraging anonymity and pseudonymity amongst project developers and users alike. Since its invention, the cryptocurrency space has experienced tremendous growth. Indeed, investing in crypto has proven to generate more returns than most investments in the long run. However, as an investor, you must keep an eye on the multiple frauds and scams common in the space.

In most cases, liquidity pool pulls and limiting sell orders are illegal. With both of these strategies, it’s clear that developers created their tokens or dApps to trap retail investors. Both of these scams are often called “hard rug pulls” because the fraud is “hardwired” into a crypto project’s code. Rug pulls are common with decentralized finance since anyone can create their application.

Many NFT collections also require users to get on the “whitelist” to be able to mint — further driving the exclusivity of the NFT collection. In this article, we have created a list of the top NFT rug pulls as they are called, where project founders have run away with investors’ funds and failed to deliver on their promises. Most rug pulls don’t bother setting up a convincing public profile in case investors decide to seek self-assurance.

These are usually listed on “decentralized exchanges,” which don’t rely on any centralized authority that would prevent unproven projects from joining. The project attracted a lot of interest at its height leading to a meteoric rise of 40,000% rise at its peak. However, Squid Game token was a classic rug pull scam with multiple red flags, including the inability to sell these assets. A more subtle token dumping scheme happens where a nefarious crypto project team allocates itself a disproportionately large amount of the available tokens as compensation for their role.

We didn’t put this crypto blow up closer to the top of our list because some call what transpired here more of a bank run than a rug pull. 20 hours into the sales of the AnubisDAO tokens – ANKH – all of the liquidity for the tokens was moved to a new wallet, and investors never saw their money again. Layer 2 network Polygon was third with just 1.2% scam tokens and smart contracts. Recent research by crypto risk monitoring firm Solidus Labs has taken a deep dive into the shady world of crypto scams.

With enough traction, a platform’s reach increases alongside its token’s value. Once the price peaks, the core development team dumps its share of the tokens, making its way out with the treasury of investor funds. As mentioned, crypto rug pulls are carried out in DEXs, where project founders pull funds from a liquidity pool. To better understand this, let’s briefly check how liquidity pools work.