What Specifically Are RugPulls? Avoid Being Scammed !

DeFi consumers have been duped out of billions of dollars by rugpulls. They are among the most popular kinds of frauds. Here’s all you need to know about them, as well as how to prevent them.

Only in 2021, about $10 billion was lost in DeFi scams and thefts, indicating an 81% increase over 2020, while rugpulls contributed for more than 35% of total crypto fraud earnings.

This is according to a recent Elliptic report. Rugpulls are possibly the most infamous of the several forms of scams that occur on a daily basis within the bitcoin ecosystem.

So, what exactly are rugpulls in cryptocurrency?

Rugpulls, derived from the expression “pull the rug out from under someone,” is a sort of fraud in which the development team behind a decentralized finance (DeFi) project steals investors’ cash by selling or depleting its liquidity.

Liquidity in DeFi refers to the amount of crypto assets poured into a liquidity pool and locked into a smart contract, which is required for running an automated market maker (AMM) and decentralized exchanges like Uniswap.

In summary, liquidity is vital in DeFi-based protocols, just as it is in centralized exchanges, since it allows users to perform transactions across many assets without generating huge price fluctuations in the assets’ prices. We’ll go about liquidity in further detail later in this book.

Rugpulls are frequently associated with the DeFi space due to the ease with which a new cryptocurrency can be created and listed on a decentralized exchange (DEX) without having to go through a Know Your Customer (KYC) process and run a third-party smart contract code audit to ensure the code has no known vulnerabilities. However, keep in mind that an audit does not guarantee the validity of a project.

In light of the above, it is also true that the community is receiving an increasing amount of Ether (ETH) — either directly or through an IDO (Initial DEX Offering), in which a project’s token makes its initial public debut on the

DEX in order to acquire funds from retail investors.

Most legal initiatives lock up the earnings for a specific length of time after the event, which is how you can recognize the first red flag – whomever planned a rugpull generally does not lock up the liquidity in order to subsequently take it from the pool.

In any case, the producers would generally push a crypto scam with adequate marketing to entice investors into purchasing the token by offering unrealistic APY (Annual Yield Percentage). The APY is a percentage of the annual return on an investment. Be cautious — a high APY does not necessarily imply that a crypto project is a scam, but it does imply a higher risk.

The crew would then proceed to build numerous social media channels, such as Discord, Twitter, and Instagram, with fictitious names or remain completely unknown. Another caveat is that not all anonymous teams are fraudsters; in fact, anonymity is a publicly stated feature of the sector that many players cherish.

The basic objective is to generate as much phony enthusiasm as possible while appearing as real as possible on social media. Some fraudsters may even impersonate assaults on their protocols in order to alert investors to prospective scammers and hackers, giving them the appearance of authenticity.

Once enough victims have been recruited and sufficient liquidity has been provided to the project, the fraudsters can sell their share of tokens all at once at a high price, emptying the liquidity pool.

Investors are obliged to sell at a considerably lower price when there is insufficient liquidity, resulting in huge losses. Developers can smuggle backdoors disguised in the protocol’s smart contract code if the project is not inspected by a well-known auditing outfit. Once all of the liquidity has been depleted and the cash of the investors have been transferred to the development team, the team frequently proceeds to remove any traces of the protocol by deleting its official website and social media channels.

How to Recognize and Avoid a Rugpulls

There are various red flags in a DeFi project that we can identify. As a side note, always perform your own due diligence and study before participating in a cryptocurrency project to prevent losing a significant amount of money – and always invest what you can afford to lose.

Anonymous Group

This is an important element to consider. An anonymous team or pseudonymous profiles leading a cryptocurrency project is a red flag. But allow us to elaborate.

However, how you define anonymity is open for argument. There are lots of well-known developers inside the bitcoin profession that haven’t been doxxed, but they have a verifiably documented track record.

As a result, their real on this one, too: the whitepaper may be written in a way that appears to be a marketing move rather than giving something beneficial or novel to the DeFi ecosystem.

Token Allocation Is Disproportionate

Stay away from the project if the token distribution benefits developers. Check out the token allocation as well as the supply release timeline.

Block explorers such as Etherscan may be used to see how the tokens are distributed, the number of token holders, and how much each of them possesses. A token supply distribution that is balanced is typically a safer investment.

There are no lock-up or vesting periods.

Following an IDO, developers renounce ownership of the tokens by locking up the liquidity pool, ensuring that the liquidity remains undisturbed for an extended period of time. Because there are no lock-up periods, developers can deplete the liquidity at any time, forcing investors to sell at a loss.

A lack of a complete vesting term, on the other hand, may indicate that the project’s aims are mismatched with those of the early investors and the team itself. This might refer to the so-called “slow rug.”

This is a circumstance in which seed investors who have no interest in supporting the project’s long-term goal but have participated only for the opportunity to be early sell their tokens gradually over time, thus crashing the market price.

A project that has gone through something similar will usually have a chart that looks like this:

Locked Total Value and Low Liquidity (TVL)

Always look at the DeFi project’s 24-hour trading volumes to determine its liquidity. If it is low, the development team will find it easy to manage the token’s price.

If the project under consideration includes a staking mechanism or allows you to offer liquidity, you should additionally evaluate the total value locked (TVL). This indicator is self-explanatory: it displays how much money is staked/locked in the project at the time. The greater this number, the more people believe it.

Defi RugPulls: An Eventful History

AnubisDAO

AnubisDAO was a memecoin cryptocurrency that was touted as a fork of OlympusDAO, a DeFi reserve currency created through bond sales and liquidity provider fees. AnubisDAO made its début with an Initial Coin Offering (ICO) that garnered $60 million from investors, only to be moved to a single wallet and lost.

Meerkat Financial Services

Meerkat Finance was a DeFi yield vault startup that debuted on the Binance Smart Chain (BSC). The protocol’s vaults “suffered” a security breach a day after its launch, draining almost $31 million. The Meerkat deployer contract was changed to allow the vaults to be emptied shortly before the deployment.

Luna Yielding

Luna Yield was a Solana-based cross-chain yield aggregator that debuted on SolPAD, Solana’s financial launchpad SolPAD. After stealing approximately $10 million in tokens, the protocol’s creators disabled the liquidity; all social media platforms and the official website were quickly deleted.

TurtleDEX

TurtleDEX was a BSC network-based decentralized exchange. The protocol began with a presale round that raised around 9,000 BNB, which equaled to $2.5 million at the time. The team, on the other hand, drained liquidity from the BSC trading pools, converted the TTDX tokens for ETH, and then sold the proceeds on the Binance market.

Final Thoughts on Rugpulls

Aside from having a bright future, Decentralized Finance is regarded as the wild west of the cryptocurrency business. There are several chances for developers and crypto enthusiasts to research and create new technologies in the ecosystem.