Slow Rug Pulls: The Wild Nature of Cryptocurrency Projects
However, crypto enthusiasts can avoid the occurrence of rug pulls, but it could be harder than many think. Crypto veterans often encourage people to DYOR(do your research), but what exactly does that mean, and what should one do to avoid getting scammed?
How a Rug Pull Happens
Generally, rug pull projects are those crypto projects whose developers have put little effort into them. They are operated by people whose primary goal is to defraud investors of their money. They could accomplish their plans within days or months, depending on how well planned the scam architecture is manufactured. Additionally, the assets within these projects may look slightly similar to other cryptocurrencies within the market.
Different types of Rug Pull
Liquidity Stealing
As the scam crypto's value increases, investors start buying in the asset, exchanging it with their ETH, which remains locked up in the liquidity pool for a defined period. Investors then continue buying the token, which could help it increase in value. Subsequently, more ETH is poured into the liquidity pool.
At the time of the choosing, the malicious developer will pull the ETH from the liquidity pool, leaving just the worthless token instead. Investors cannot trade back their now-worthless tokens while the developer takes his money in legit ETH and makes a run for it.
Disabling the ability to sell tokens
Investors can buy the scam coin, but only the developer can sell his coins because of the fraudulent piece of code. As the price rises to the point where people start trying to cash in to sell their coins, they realize they can't sell the asset. At some point, the scammer will deem the price high enough, and he will sell all his scam tokens, running away with the value of the investments that had been poured into it.
Developers cashing out
But in reality, the developer mints or creates a worthless token, giving himself a large part of these tokens from the beginning or buying them in the market at a low cost. As the promise of the revolutionary product makes investors buy the worthless tokens and the price goes up, the developer cashes out all his shares. He can do this all at once or over time, so the rug pull isn't as obvious. Either way, investors will be left with the worthless token while seeing their investment funds erased.
Rug pulls in Crypto History
OneCoin
BitClub Network
Squid Game Token
How to Avoid Rug Pulls
Online tools can help detect a rug pull, and Token Sniffer is one of them. Token Sniffer notes down all hacks and scam coins, so every project it lists is a rug pull.
Rug Doctor, a tool used to analyze crypto projects, goes through the code of conduct for newly launched projects, highlighting rug-pull strategies. Once Rug Doctor finds a high-risk token or DeFi project, it lists it on its website, adding a risk score and breaking down the red flags found in the project.
Blockchain explorers like Etherscan or Binance Smart Chain explorer can detect high-level scam operations. One can search for the token address of a cryptocurrency, prompting a token tracker page to appear. The tracker will display the total supply, number of real holders, and transfers, and interested parties can see the wallets holding large amounts of the token.
Moreover, interested parties can also look at the project’s journey before it launches any sales and ensure that they have undergone security auditing from reliable platforms such as Solidproof.
However, for new cryptocurrencies, if the top 10 wallets hold more than 20% of the token, or worse, a large percentage of the pass is stored in a single wallet, then this is a dangerous sign of a potential rug pull. If one or more of the ‘whale’ wallets cash out on all of their investments in the form of an exit scam, the crypto’s value steeply declines.