The “rug pull” crypto scam is now a well-documented phenomenon, aided by the unregulated innovations of cryptocurrency and decentralized finance (DeFi). These scams come in a few variants, but they all end up the same way: the project’s team disappears with everyone’s crypto.
Crypto scams are not new and come in many forms such as: B. Phishing attacks targeting crypto users, “pump-and-dump” scams, crypto-powered Ponzi schemes, tokens with “backdoor” code that disables victims’ ability to sell. CryptoRom” catfishing cryptocurrency scams and many more sophisticated scams preying on naïve crypto investors. What’s worse, even celebrities are getting paid to endorse cryptocurrencies they know little or nothing about, which they later (almost) always regret, and every popular movie or series is guaranteed to spawn a scam coin to take their hype to the moon, such as the MANDO cryptocurrency scam that took advantage of The Mandalorian’s popularity. While anyone with experience in crypto is painfully aware of the red flags of a scam, crypto newbies have no idea how easy it is to set up and pull through or what the red flags are.
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Rug pulls are among the most well-known crypto scams. As CoinTelegraph explains, rug pulls are often facilitated through the use of blockchain smart contracts and DeFi-specific innovations, particularly Decentralized Exchange (DEX) liquidity pools. Since a scammer cannot list their token on reputable exchanges like Coinbase, they must instead rely on unregulated DEXs like Uniswap to list their coins, and to do so they must deposit their token’s stash into a “liquidity pool” for people to trade legitimate cryptocurrencies for it. From there, they convince people to buy their token on the DEX, and when they’re ready to “draw the rug,” they pull all the liquidity out of the pool, which until then is filled with more legitimate cryptocurrencies than scam coins. This sends the price of the rogue coin to zero and creates the “Rug Pull” chart pattern: a long, red candle going close to zero.
The Rug Pull Warning Sign
There are several key warning signs of a crypto scam, the highest of which is founder anonymity. If the team behind the project never reveals their true identity, then that’s a massive red flag that shouldn’t be ignored. Anonymous founders “destroying” their community have now become such a problem that a project run by an anonymous team is automatically written off as illegitimate until proven otherwise. Two red flags that require more know-how are the lack of smart contract security checks and the team not uploading and verifying their smart contract’s code on a block explorer like Etherscan as both could be attempts at the Functionality of the code to hide other developers.
Two other red flags that almost guarantee a carpet move include the team using social media and private chat servers to boost the price of their cryptocurrency and/or creating an app that requires users to trade their crypto/NFTs deposit to earn an incredibly high return. An example of the first condition was crypto scam Squid Game, which is a typical “pump-and-dump” variant of the rug-pull scam. For the second condition, Crypto Daily reported on the recent SudoRare scam using a maliciously crafted NFT marketplace app copied from the SudoSwap and SoRare Github repositories to their community 6 hours after the app was running to overdraw and disappear with $820,000 worth of crypto after immediately deleting all of their accounts on the internet.
While it’s impossible to know for sure which projects are scams and which are legitimate until the rug has been pulled, it’s not hard to spot the red flags. Projects with anonymous teams should be viewed with great suspicion, especially those that pump their cryptocurrency and/or build a platform that promises high returns on crypto deposits. That DeFi The industry has extensive experience of rug-pull fraud. So understanding how they work can help keep you from becoming pushy.
Source: CoinTelegraph, Crypto Daily
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