It’s hard to find a financial institution or industry that is completely free from fraudulent practices. From Wall Street, banking, brokerage firms, to the stock market, all have been touched by fraud or other dirty deeds.
In the last ten years, the crypto industry has emerged as a new force disrupting the traditional financial system. It has developed very quickly, but like any rapidly growing sector, the presence of bad actors is almost inevitable. Like it or not, they will always be there.
In the crypto world, this kind of fraudulent action is often known as a rug pull. For those of you who invest in crypto or explore the world of Web3, of course you do not want to be one of its victims. Fortunately, there are some signs that can help you recognize a potential rug pull early on.
That’s why in this article we will discuss what a rug pull is and various effective ways to avoid it.
What is a Rug Pull?
Rug pull is a term that comes from the phrase “pulling the carpet out from under someone’s feet.” In the crypto world, it refers to a fraud committed by a project developer by suddenly leaving the project and running away with investors’ funds.
How Does the Scheme Work?
Typically, scammers release a new coin with a catchy name and big promises. The token is launched through a crypto launchpad, a platform where new crypto projects are introduced to the public. Platforms like Kommunitas aim to provide stricter vetting processes to protect investors from such scams. Once investors start buying and the price goes up, the scammers withdraw all the funds and disappear. As a result, investors are left with tokens that are no longer worth anything.
Why Can Launchpads Be Easy Targets?
While many crypto launchpads have a strict selection process, some also provide loopholes for projects with unclear credibility. These launchpads often attract investors who want to get in early and hope to make big profits. This situation is what scammers take advantage of to carry out their actions quickly before anyone gets suspicious.
Rug Pulls Also Occur in NFT Projects
This type of fraud does not only occur with tokens, but also in the NFT world. For example, a project team can sell out an NFT collection, and then disappear without fulfilling promises such as a project roadmap or exclusive access for the NFT owner.
Big Losses in the Crypto World
According to data from Statista, crypto scams have caused losses of more than USD 20 billion in the past five years. In 2021 alone, about a third of the total losses of USD 7.7 billion came from new fraud schemes including rug pulls.
The Mode is Simple but Effective
The main key to rug pulls is creating hype and trust. Usually they actively build a professional image on social media and online communities. The bigger the hype, the easier it is for them to attract investors and raise funds before finally disappearing without a trace.
How to Recognize and Avoid the Risk of Robbery in the Crypto World
So, to understand this, you need to really know the answer of these questions and decide yourself the risks and how to avoid them.
Is the team open and trustworthy?
Having a team with a clear identity is not a guarantee that everything is safe, but it can make us calmer than an anonymous team. But what is much more important is whether they have experience and a proven track record. Try to find out through their social media or see if there are other projects that they have built before.
How is the token distribution?
If most of the tokens are only held by the core team or certain parties, it is suspicious. Try to check the token distribution method, whether it is fair or biased. You can use a blockchain explorer like Etherscan to see who has how many tokens. Healthy projects usually have a balanced distribution.
The whitepaper is clear or confusing?
The whitepaper should explain the purpose of the project, how it works, and what makes it different. If the content is confusing, too many promotional words, or feels too grandiose without real evidence, you should think twice, especially if there is no prototype or example of a product that is already running. Is liquidity secured?
Locked liquidity is important so that the team can’t suddenly withdraw all funds from the project and run away. Make sure there is proof that liquidity is locked in the contract, so that it is safer from the risk of fraud such as rug pulls.
What about the community on social media?
A healthy and active community usually has many members who are actually engaged in discussions, not just talking about the token price. Try joining their groups and asking critical questions. If you are immediately muted or removed for no reason, it could be a sign that they are hiding something.
Does the website look professional?
Less serious or shady projects often have makeshift websites, full of empty promises such as “coming soon” or “in development.” A good website should be informative, neat, and show that they are serious about the project.
Has it been audited by a third party?
Audits by independent companies can help identify security holes in the project’s smart contracts. Make sure the audit results are real and publicly available, not just unsubstantiated claims.
That is a review of what rug pull is, how it works, why launchpads are easy targets, and how big the threat and losses are. Then, you can see about what are the tips and ways to find and join the rug pull. Hopefully this review is useful!
FAQs
What is a rug pull in the crypto world?
A rug pull is a type of fraud where project developers suddenly abandon a project and steal investors' funds, leaving them with worthless tokens.
Why are crypto launchpads vulnerable to rug pulls?
Some launchpads have loopholes that allow fraudulent projects to bypass strict vetting processes, attracting investors looking for early profits.
How can I recognize a potential rug pull?
Look for signs like an anonymous team, unbalanced token distribution, confusing whitepapers, and a lack of liquidity. Also, check if the community is active and engaged.
What steps can I take to avoid falling for a rug pull?
Research the project’s team, audit results, website professionalism, and community interactions. Ensure the token’s liquidity is locked, and check for third-party audits.
Related reading: Benefits Crypto Launchpad.
Related reading: Token Distribution.
You may also want to read about launchpad exchange vs decentralized incubators.