If you are in the crypto universe for a few months then you know about Squeed Game cryptocurrency and what they did there. If you are not so “old” in this world then also you know about the squeed game series and how some guys made a cryptocurrency based on the series and after two weeks from the big release of the tokens they left away with all the money from the investors. This is called rug pull and this is almost exactly what Ukraine did a few days ago after they announced that they will have an airdrop for those who donate crypto to sustain them in the war. Ok, Ukraine didn’t run away with anything, they just announced that the airdrop was canceled and actually they want to launch an NFT collection which also will help them to fight against the Russian army. Anyway, I wouldn’t talk in this article about what Ukraine did and if it was the right way or not. After all, we talk about an entire state which, I am pretty sure that they have their reasons to do what they need to do. In this article, I want to talk with you about rug pull. What it is and how to not be scammed by one.
First of all, we have to know what a rug pull is. So based on the definition that I found on Binance, rug pull is when a development team suddenly abandons a project and sells or removes all its liquidity. Usually, rug pulls are happening on DEXs (decentralized exchanges) because there is no need for KYC (Know Your Customer, which is a security check which is used by centralized exchanges to verify a person’s identity) or AML (Anti Money Laundering which is a term for laws and regulations which should prevent criminals for making money illegally or moving illicit funds). The process is like this: a DeFi project will create a token, after that, the developers can provide an amount as liquidity for a DEX. The DEX can sell those tokens in an IDO (Initial DEX Offering)where the investors can purchase that token and the funds that result from this sale will be locked for a period of time to guarantee a level of liquidity or the tokens can be put straight in a liquidity pool. After the hype level rises enough and the project has access to their liquidity the rug pullers do two things. The first thing is to sell everything that they have (all the tokens that they own) at a high price and also to remove all their liquidity. Without liquidity, the price can’t be sustained and it drops and the investors are struggling to sell their tokens because they are forced to sell them at a very low price, or the worst scenario, the investors will remain with a worthless token.
The second thing is to use some back doors in the contract that allows them to steal all the investors’ funds.
Usually, the developers of such projects are anonymous because they don’t want to be found so this is the first signal that should pay attention to. If you want to invest in some project search for the team, see who they are, and in what other projects they were. Another signal is that the project appears from nowhere, has a big hype, the price of the token rises hundreds or thousands of percent in a short time (weeks, maximum few months). Also, you should pay attention to the trading volume within 24 hours and to the liquidity. A big trading volume tells us that there is big liquidity. Also, low liquidity makes it easier for the developers to manipulate the price. Another sign that a project is fake is that it has a short whitepaper where it presents briefly what problem the project solves, even if the developers present that project as revolutionary for the crypto world. Also, they don’t pay too much attention to the social media presence and usually, there is a lack of engagement with the community.
All of these signs are just the tip of the iceberg, but I think are enough for protecting you from fishy projects. But if you want to know more about what criteria to apply to find a good project, I have already written an article about this and you can find it HERE.
In the end, I want to tell you just one thing: don’t believe those who promise you big earnings in a short period of time. I know that you think that this is a paradox but the crypto world is like other financial markets, the difference is that crypto is on steroids.