The boom in the development of projects within the world of cryptocurrencies has led us to have a huge variety of projects in which to participate and set our expectations for the future, but at the same time it has made rug pulls appear more and more. more common, leading its participants to lose everything due to malicious actors seeking to take advantage of this boom in projects and those interested in them.
EThis is a reality that is repeated a lot, especially in the world of decentralized finance (DeFi). In this ecosystem there are a large number of protocols that promise totally unreal rewards. All this to attract users, to finally, from one moment to another, leave everything in just promises so that developers can run away with all the money collected. As a result, the community is economically affected and at the same time the sector is given a bad image, since, while honest projects seek to transform finances by giving new financial opportunities to users, other people not committed to that vision only seek opportunities to cheat.
But what exactly is a Rug Pull? How can we detect them and avoid falling into them? That and more you will know below.
What is a Rug Pull and how does it work?
A Rug Pull or "Carpet Pull" is a malicious practice that seeks to manipulate users to make them participate financially in a project, usually attracted by promises of high rewards, but then only remain in one thing: the closing of the project and the escape of its "developers" with all the money raised.
Thus, a Rug Pull is a form of scam designed to affect investors in projects that are being born. In the blockchain world it is quite common to see this type of scam within projects such as ICOs, DeFi, NFTs and even metaverses, since they are projects that generate great interest for investors, who, delighted by the "good project" run the risk of participate in such scams, looking for good profits to end up losing everything.
During the ICO boom in 2017, there was a significant uptick in this type of practice, since many of these projects were nothing more than simple smoke. Hence, Chainalysis, a renowned blockchain analysis company, reports that Rug Pull losses from 2017 to 2022 exceed 3 billion dollars.
In all these cases, Rug Pulls follow a fairly common scheme of operation: a new project is started that presents its own native token, and the developers pair that token with other well-known tokens such as ETH, USDT, or DAI. The idea is to attract users with the promise that the project will earn them a lot of money in a very short time. Thus, many investors come to the project, encouraged by quick profits, but at a certain point the developers close the doors without prior notice, stop maintaining contact and run away with everything. Behind are only scammed users, empty wallets and no one to complain to.
How to identify a Rug Pull?
Now, how can we detect that we are facing a project with potential danger of Rug Pull? Well, the first line of defense in this case is to do a good investigation of the project and its developers. The well-known DYOR (Do Your Own Research) is the best tool we have to avoid falling into these traps.
In any case, when you do a DYOR keep in mind the following points:
- Review the project and community history of the project's developers and founders. If the developer and founder of a project is known, has extensive experience in the sector and has had other successful projects, it is most likely that you are facing a project with a future. However, if the developer and founder is unknown or has had projects with suspicious features or outright scams, it is best not to risk it and not participate in said project.
- If the project has an unclear vision and objectives and its white paper is non-existent or directly a pamphlet that only talks about profits and nothing else, then you have another element of alert not to participate in said project.
- Verify the liquidity fund of the project. This is an easy and quick way to know if we should trust the project and check the liquidity of the group we are investigating. The more liquidity, the stronger the project. If the project has little liquidity or the liquidity is very recent (due to the avalanche of investors who arrive and inject it), you must be very careful if you are going to participate.
- They make use of social techniques for skyrocketing. Therefore, if we notice a sudden increase on the same day such as x50 or x100, it can be a trap to attract investors. If you add activity on social networks to influence the price, then you are facing a clear project with which you have to be very careful.
- An unclear tokenomics accompanied by high rewards. We must be careful with high rewards or pointless tokenomcis. A project that promises earnings of 500% or more APY, without clear and sustainable tokenomics, is not a viable project.
Examples of a Rug Pull
Now, what recent examples do we have of a Rug Pull? Do you remember the SQUID token, related to the famous Netflix series, “The Squid Game”? Well, this is a clear case of Rug Pull. It is enough to see the market graph of this token to be able to detect it:
A token that went from $0 to $90 and in less than 24 hours reached $0 again and stayed there because its developers left with all the money from the “new blockchain project”.
This practice is widely used by shitcoins and memecoins. For example, Floki Inu, is a book pull rug everywhere, something we can see in his market chart. Its current value of $0,000009386, which makes it clear to us that it is a project with no future, especially knowing that there is no development behind it.
In any case, users and those interested in the crypto world should stay away and avoid Rug Pulls, especially if they really want to enjoy everything that this ecosystem and its different utilities can offer us.
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