Introduction:
As the adoption of blockchain increases the scams also increase in the web3 world. Rug Pull is one of the Famous scams that currently getting attention. You might be wondering "What this Rug Pull is?", "What do we lose in Rug Pull?" and "How do we get to know that we are Rug Pulled?". That's Why I decided to write an article about it from which you can understand Rug Pull in simple wording. So, let's start opening the box of Rug Pull.
What Is Rug Pull?
A rug pull refers to a deceptive practice within the cryptocurrency and blockchain space where the creators or developers of a project, typically a token or a coin, abandon the project after attracting investments, causing a sudden and significant drop in its value. In a rug pull scenario, investors are left with worthless or near-worthless assets, leading to substantial financial losses.
Here's how a typical rug pull unfolds:
Initial Hype: The creators launch a new token or coin, often accompanied by extensive marketing and promotion to create hype and attract investors.
Price Surge: The value of the token experiences a rapid increase, luring in more investors who hope to capitalize on potential profits.
Abandonment: Once the token's price reaches a peak or a specific target, the developers, without warning, sell off their holdings or withdraw funds from the project.
Value Collapse: With the sudden exit of the developers, investor confidence erodes, causing a panic sell-off. The token's value crashes dramatically, often returning to near-zero levels.
Several factors contribute to the success of a rug pull:
Anonymity: The anonymity provided by blockchain technology allows developers to conceal their identities, making it difficult for investors to conduct due diligence on the team behind the project.
Decentralization: Projects in the decentralized finance (DeFi) space, which often operate on blockchain, can be more susceptible to rug pulls due to the decentralized and often pseudonymous nature of their development teams.
Investors can protect themselves by conducting thorough research, scrutinizing project details, checking for transparency in the development team, and being cautious about projects that promise high returns with little risk. Additionally, monitoring community engagement, audits of smart contracts, and the overall legitimacy of the project are crucial steps to avoid falling victim to a rug pull.
Rug Pull-Through Liquidity Pool:
Rug Pull using a liquidity pool is so easy in comparison to others.
Scammers start it by creating a token. To create a token they need to just copy and paste the existing token code and make some changes through which the token is ready for scam.
In the next step, they just buy some amount of other token/coin that have higher value like ETH or BNB.
In step three scammers create liquidity and pair their token with the valuable token/coin in a ratio.
Now the creating liquidity part is completed after this scammers start doing activities through which people like us come and pay valuable tokens/coins and get scam tokens from the liquidity pool.
If you know the AMM( Automated market maker ) working that is because lots of traders put valuable tokens and take out worthless tokens then the supply of valuable tokens is too much because of this the value is affected and decreases from its actual value inside this pool. If you don't know the workings of AMM and liquidity I suggest you read my article on this topic here is the link.
When the scammer's target value is reached then they start putting the worthless tokens and take out all the valuable tokens/coins because they are so cheap and for this founder of worthless tokens holds already so many scam tokens to do this activity.
This is how the Rug Pulled through the liquidity pool.
How to get to know that this coin or token has a rug pull scam:
Safety checks are the best way to get move from such scams. Let's see some indicators for identifying Rug Pull.
Identifying a rug pull, which is a type of scam where developers or project creators abandon a blockchain project after attracting investments, can be challenging. However, there are certain indicators and red flags that may suggest a potential rug pull. Here are three key indicators to be aware of:
Anonymity of Developers:
Lack of transparency about the project's team members is a significant red flag. If the developers' identities are hidden or difficult to verify, it raises concerns about the project's legitimacy.
Check for public profiles, LinkedIn accounts, and other professional information of the team members. Genuine projects usually have a transparent team with a track record.
Unaudited Smart Contracts:
Smart contracts are the backbone of many blockchain projects. If a project's smart contracts have not been audited by reputable third-party audit firms, it increases the risk of vulnerabilities and potential exploits.
Look for evidence of smart contract audits and be cautious if the project lacks any form of security audit reports.
Lack of Community Engagement:
A legitimate blockchain project often has an active and engaged community. If the project's social media channels, forums, or community platforms show signs of inactivity or lack of genuine interaction, it may be a red flag.
Pay attention to how responsive the team is to community questions and concerns. A sudden decline in communication or the team avoiding tough questions can be indicative of a rug pull.
Remember, these indicators are not foolproof, and due diligence is crucial when evaluating any blockchain project. Additionally, be wary of projects promising high returns with little risk, as such promises are often associated with fraudulent schemes. It's essential to stay informed, conduct thorough research, and only invest in projects that have a proven track record and a transparent and engaged development team.
Real-World Example Of Rug Pull:
One prominent example of a real-world rug pull is the case of the "Save the Kids" token. "Save the Kids" was a cryptocurrency project launched in June 2021, which claimed to be a charity-focused token aiming to support children's charities. It gained attention due to endorsements from social media influencers, including popular YouTubers and influencers in the cryptocurrency space.
Here are key points about the "Save the Kids" rug pull:
Influencer Endorsements:
Several influencers with large followings promoted the "Save the Kids" token, lending credibility to the project.
The influencers involved included well-known names in the cryptocurrency community, which helped attract a significant amount of investment.
False Charitable Claims:
The project claimed to be focused on charitable activities, with a portion of the funds raised intended for donations to children's charities.
However, investigations later revealed that the promised donations were not made, and the project's charitable intentions were called into question.
Sudden Dump by Developers:
Shortly after the token's launch and a significant inflow of funds, the developers quickly sold their tokens, causing a substantial drop in the token's value.
The sudden sell-off by the developers, who had promoted the project as a charity initiative, led to losses for investors and raised suspicions about the true intentions of the project.
Lack of Transparency:
- The project lacked transparency about the identities of the developers, making it difficult for investors to conduct due diligence on the team behind the token.
The "Save the Kids" case highlighted the risks associated with investing in projects based on influencer endorsements and the importance of conducting thorough research before investing in any cryptocurrency or blockchain project. It also led to increased scrutiny of influencer marketing in the crypto space and a call for more responsible promotion of projects.
Thank you for reading! Keep exploring, keep growing, keep learning.