Rugpulls and How to Avoid them
Imagine standing on a rug and feeling all comfy and warm, then that rug getspulled from under you. Well, that’s how rugpull feels like (in a way).
Rugpull occurs when project teams pump a project, then abandon the project, pulling as much value from it as possible, leaving the price to fall to almost zero. This scam is quite popular in the DeFi and NFT projects. According to Chainanalysis, over $2.8 billion was lost to rugpulls in 2021 alone.
Some of the most popular rugpulls in the crypto space include OnceCoin (Over $4 B), Thodex Over ($2 B), Luna Yield ($10 M), Snowdog ($10 M), and Squid game ($3.36 M).
Rugpulls commonly happen in 3 ways
- Liquidity theft
For a token to be tradeable, there has to be a liquidity pull containing that token and an established cryptocurrency (e.g BNB or ETH). When investors buy into a fake token using an established cryptocurrency, say BNB, more BNB is added to the liquidity pool and the value of that token keeps increasing. The developer can withdraw all the BNB in the liquidity pool, driving the prize of the fake token to zero leaving investors with nothing. - Limiting sell orders
In this scam, the developer adds a code to the smart contract, disabling investors from selling. Usually, the developer holds a large amount of the token and is the only one allowed to sell. When investors buy into the project, driving the price up, the developers sell off their share of the token while the investors are unable to sell, driving the price down. - Pump-and-Dump
This is considered a soft rugpull, and though it is unethical, it is not considered illegal. Here, the project team owns a large percentage of the token supply and sells it off after a huge market pump. It is always preceded by huge social media promotion and hype, inviting investors to buy in and driving the market price up. Once the price pumps, the team sells off their share, driving the price down to almost nothing in a short time.
Signs of a rugpull
- Unknown team
The credibility of a project is usually dependent on the credibility of the team involved — who they are, their backgrounds, and their track record in the crypto community. It’s always best to know the team behind a project and their ability to deliver on their promises. - No locked liquidity
When no liquidity is locked, nothing prevents developed from withdrawing the assets from the liquidity pool and disappearing. Reputable projects usually lock about 80% to 100% of the liquidity for more than a year, mostly 3–5 years.
The locked liquidity is always shown as a smart contract holding a large supply of the token under token holders. - Centralized token distribution
Most scam projects have 5–10 wallets holding a large share of the token supply, allowing them to dump the project easily. If a wallet holds 5% or more of the token supply, the project is most likely a scam. - Sketchy website and social media presence
If the website looks like it was rushed or looks sketchy, the project is most likely not reputable. Also, the social media presence factors in. Scam projects have lots of fake followers and fake community members. Most of the time, they just appear offering giveaways without a proper introduction to the project. And there is always a lot of hype and bot tagging. - Price skyrocketing and unrealistic APY
If it looks too good to be true, most times it is. Most rugpulls had the price skyrocketing from 0 to 50x or 100x in less than 24 hours. Also, when a project experiences a huge pump while having a low amount of holders, it is susceptible to dumping.
Scam projects sometimes offer huge APY like 500% and above. This is to drive investors to the project. - Sell restrictions
When investors are not allowed to sell their tokens, it becomes easy for the developers to sell off their share of the token, scamming the investors. Always buy a small amount of a token and sell it to test if there are sell restrictions on the project.
When investing in crypto, it is always wise to DYOR diligently. Take the time to research the team, check out the whitepaper, the website, and social media accounts, check out the smart contract, and if the liquidity is locked. It’s always wise to not jump into a project just because the social media hype is high. Websites like TokenSniffer and Coinmarketcap can help you in conducting your research.
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