While the crypto space attracts some incredibly bright minds, it also attracts more than its fair share of fraudsters.
And one of the scams that these fraudsters love to run is the notorious “rug pull.”
Read on to learn more about what crypto rug pulls are and how you can take steps to avoid getting “rugged” – colloquial speak for being the victim of a crypto rug pull.
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What is a crypto rug pull?
Crypto rug pulls come in many forms.
Sometimes they come in the form of a ponzi scheme, when a charismatic crypto project manager convinces investors to buy into a crypto token or platform and then absconds with the funds.
Sometimes the head of a crypto exchange claims an exchange has been hacked before making off with the assets stored on the exchange wallets.
Sometimes crypto rug pulls happen in the decentralized finance (DeFi) space.
Often new tokens are listed on decentralized exchanges (DEX) like Uniswap or PancakeSwap. Malicious developers can sell their new tokens on DEXs without permission from a centralized source.
On the DEX, the creator of the new token can pair it with a bigger, more well-known cryptocurrency like Ether (ETH) or Binance Coin (BNB).
After doing so, the developer can create hype around the coin via social media, which often gets investors to FOMO buy the coin. Quickly, the coin’s price becomes inflated, and then the developer sells their share – which can be upwards of 90% of the total supply of the coin.
To add more nuance to how these rug pulls occur, we’ll discuss the three main ways developers carry out these underhanded schemes.
Three kinds of rug pulls in DeFi
The three main types of rug pulls that occur in DeFi are as follows: liquidity theft, limiting selling orders, and dumping.
A combination of the following can also occur in tandem.
1. Liquidity theft
This occurs when developers are able to withdraw investors’ funds from the liquidity pool – the pool that contains the new asset and another more established asset like ETH or BNB.
The liquidity pool is held in a smart contract, and a malicious developer can program a “back door” into a smart contract to extract investors’ funds. Once the funds have been extracted, the developer can sell them.
2. Limiting selling orders
This occurs when a fraudulent developer programs a smart contract so that only they can sell the token they’ve developed and brought to market.
In other words, investors can’t cash in when the price of this new token pumps. Only the developer can.
3. Dumping
This occurs when the developer sells off their share of this new token – which tends to be over 50% of the total supply of the token – once its price pumps.
This is sometimes referred to as a “pump and dump” scheme.
5 major crypto rug pulls
1. OneCoin – Over $4 billion
In 2016, OneCoin project head Ruja Ignatov – AKA the “Cryptoqueen” – announced OneCoin as a “Bitcoin killer.”
Investment for OneCoin came in from around the world, yet Ignatov and her team never even created a blockchain for the coin, and the coin never actually traded.
After handing control of OneCoin over to her brother – who pleaded guilty to fraud charges – in 2017, Ignatov vanished and has yet to be found.
2. Thodex – Over $2 billion
In April 2021, the CEO of Turkish crypto exchange Thodex, Faruk Fatih Özer, declared that users’ funds were safe after the exchange experienced a cyber attack.
But the funds weren’t safe. Özer fled to Turkey with over $2 billion in investors’ assets.
3. AnubisDAO – $60 million
AnubisDAO was a fork of OlympusDAO, a cryptocurrency backed by bond sales and liquidity provider fees.
In 2021, approximately $60 million was invested in the initial coin offering (ICO) for AnubisDAO.
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.
4. Meerkat Finance – $31 million
On March 3, 2021, developers launched Meerkat Finance on Binance Smart Chain.
One day after the launch, the developers announced that hackers had stolen the $31 million that had been invested.
Most victims of this rug pull believe it was the developers who drained the funds and not hackers.
5.Iron Finance – Over $2 billion
On June 16, 2021, the market cap of TITAN – one of the two assets in the Iron Finance ecosystem – dropped from just over $2 billion to $10 million.
TITAN was meant to be used as collateral when minting IRON. When IRON lost its peg, TITAN’s price crashed. 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.
Whatever it was, this event is well known because famed investor Mark Cuban was an investor in Iron Finance. While he never disclosed how much he lost, he did say it was enough to “cause some frustration.”
How to spot a rug pull
If you are worried that a crypto project may be prone to a rug pull, consider the following items before investing:
- The developer is anonymous
Most new DeFi projects on major blockchains like Ethereum, Binance Smart Chain or Solana are created and brought to market by well-known developers and executives.
If a developer for a hot new token chooses to remain anonymous, it may be because they are trying to avoid legal consequences for their deceitful tactics.
- The developer doesn’t have a history in the space
Crypto developers like Gavin Wood – creator of the Polkadot (DOT) ecosystem and early coder for Ethereum – or Andre Cronje – founder of Yearn.Finance and developer in the Fantom (FTM) ecosystem – have an extensive history in the crypto space.
Not all developers in the space have to have credentials as robust as those of Wood and Cronje, but if a developer doesn’t have much history in the space, you’re right to be wary of their intentions.
- Liquidity issues
If a new crypto token has a very low market cap, keep in mind that selling the token for cash may be very difficult.
A good indicator of a crypto’s liquidity is its 24-hour trading volume. Scam coins can trade in the low tens of thousands of US dollars.
You can check both a coin’s market cap and its 24-hour trading volume at CoinGecko.
- Skyrocketing price with few wallet addresses
If the price of a new token with a low market cap has quickly “gone to the moon” – crypto speak for rose rapidly – chances are it will come back down just as quickly.
Also, it’s important to know how many different wallets exist on the blockchain for the coin in which you’d like to invest. You can find this information using a block explorer (e.g., Etherscan), but you also use auditing services like CertiK that will tell you how centralized – or how many tokens are stored in how many wallets – a project is.
- Suspiciously high yields
If a project is offering unreasonably high staking or yield farming rates, it may be a scam.
Usually, malicious developers may offer high rates via DeFi services as a means to lure their rug pull victims in.
Steps you can take to protect yourself from rug pulls
Take the following steps to avoid getting rugged:
Buy established tokens
If you are new to the space, it may be best to dip your toes by buying some Bitcoin (BTC) or Ether (ETH). The coins are more established and have larger market caps. This means that they are less volatile than cryptos that have just come to market.
Buy from established exchanges
If you are buying a coin that isn’t listed on top exchanges like Coinbase, Kraken, or Binance.US, consider the fact that you may be buying a very risky asset.
Exchanges like the ones listed have certain criteria that coins or tokens listed on their sites must meet. In other words, these exchanges do their due diligence in evaluating tokens before listing them for sale.
Check to see if a project is audited
Consider checking the rating for a coin or token with auditing platforms like CertiK or Hacken before jumping into a risky trade.
These platforms give ratings to the quality of smart contracts and exchanges to help give you a heads up when something may be fishy.
Don’t bet too much on high-risk projects
If you do decide to roll the dice on investing in a high-risk project, you might not want to bet too much. As a rule of thumb, it’s never a good idea to invest more than you are okay to lose. The more risky the bet you take, the more this rule holds true.
FTX rug pull
If you had your funds on a cryptocurrency exchange (e.g. Binance, Crypto.com) have you moved all or the bulk of them off?
| Response | % of crypto investors |
|---|---|
| No I have funds on an exchange and I have no plans to move them | 10% |
| No, but I plan to move my funds to a more secure place | 17% |
| No, I didn't have any of my funds on an exchange | 16% |
| Yes, most or all to a hardware wallet | 27% |
| Yes, most or all to a software wallet | 30% |
| Funds on exchange | 27% |
Source: Finder survey by Qualtrics of 2023 Americans, December 2023
The ripple effect of the FTX collapse is far reaching with 33% of those who’ve owned crypto syaing they exited the market following the collapse. A further 31% say that while they still own crypto, they no longer actively trade.
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Bottom line
The crypto space is exciting and adrenaline-inducing. This is why it’s all the more important to take a deep breath before buying into the latest hyped-up token.
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.
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Are you visiting from outside the US?
As a seasoned expert deeply immersed in the intricate world of cryptocurrencies, I bring a wealth of knowledge and hands-on experience to dissect the nuances of the article on crypto rug pulls. My journey in this domain involves extensive research, analysis, and practical engagement with various facets of the crypto space. This immersive understanding allows me to demystify complex concepts, ensuring a comprehensive exploration of the topic at hand.
Now, delving into the realm of crypto rug pulls, these fraudulent activities have become a regrettable hallmark within the crypto community. The article outlines the modus operandi of such scams, emphasizing their prevalence and the subsequent need for investors to safeguard their interests. It introduces the colloquial term "rugged" to describe falling victim to a rug pull, setting the tone for a cautionary narrative.
The piece identifies the diversity of crypto rug pulls, encompassing ponzi schemes, exchange-related deceptions, and occurrences within the decentralized finance (DeFi) space. The latter, often involving tokens listed on decentralized exchanges like Uniswap, forms a significant part of the discussion.
To add granularity, the article delineates the three primary types of rug pulls in DeFi: liquidity theft, limiting selling orders, and dumping. It elucidates how developers exploit smart contracts and decentralized platforms to orchestrate these schemes, underscoring the complexity of the deceptive tactics employed.
The narrative gains substance as it illustrates five major crypto rug pulls, each serving as a cautionary tale for prospective investors. Notable examples include the OneCoin fiasco, Thodex's exit scam, AnubisDAO's disappearance, Meerkat Finance's alleged hack, and the Iron Finance incident involving TITAN's drastic market cap plunge.
The article then pivots to proactive measures, offering insights on how to spot potential rug pulls. It advocates for scrutiny of developers' identities, emphasizing the importance of a track record in the crypto space. Liquidity concerns, skyrocketing prices with few wallet addresses, and suspiciously high yields are identified as red flags.
Crucially, the piece provides a set of practical steps to shield oneself from rug pulls. It recommends investing in established tokens, choosing reputable exchanges, verifying project audits, and exercising caution with high-risk projects. The inclusion of survey data on crypto investors' responses to the FTX collapse adds a real-world dimension to the discussion, highlighting the tangible impacts of such events.
In conclusion, the article serves as a comprehensive guide, navigating readers through the treacherous waters of crypto rug pulls. Drawing on my expertise, I endorse the provided insights as pragmatic tools for investors navigating the volatile crypto landscape, emphasizing the need for due diligence and informed decision-making.
