• Wed. Feb 21st, 2024

Rug pulls: uncovering crypto fraud

  • How does a crypto rug pull fraud look like?
  • The three main types of rug pulls in the cryptocurrency ecosystem.
  • Expert tips on how to avoid falling victim to rug pull fraud.

Do you know that a minor rug pull can lead you to bankruptcy? Now, you must be thinking what exactly is rug pull? A rug pull in cryptocurrency refers to the abrupt and deliberate abandonment of a startup by project developers after gaining the trust (read: tokenized funds) of the investors in them. 

These criminals steal the money and then flee, leaving behind a useless asset they created. In order to entice a community of investors, they make use of the marketing capabilities of social media by launching a buzz-worthy and hype-filled promotional campaign.

Here, malicious code can be used by developers to take advantage of self-executing programs that verify transactions and literally insert traps into a project’s code. Rug pulls are quite prevalent among crypto crimes

According to Chainalysis, a blockchain analysis company, con artists stole $2.8 billion, or $7 million per day, in 2021. 

How does a rug pull crypto fraud look like?

A barren, low-quality website, a guarantee of high returns, and unknown or anonymous project leaders lead this list of red flags. 

A startup’s homepage may be adorned with lofty objectives that must be accomplished in an unreasonably short amount of time. It also includes suspicious social media activity, buzzwords, and a desperate sense of urgency. 

Even though a failed project and a rug pull both ends up in the same place, their paths are very different. Many projects fail despite the best efforts of a team. 

According to the most recent data from the United States Bureau of Labor Statistics, only 80% of new businesses survive their first year. Startups have a survival rate of half within five years. It is designed to deceive investors for financial gain.

Types of rug pulls 

There are two primary types of rug pulls: soft and hard. A hard rug pull happens suddenly and without warning, as the name suggests. Investors are informed that they have been duped and that the project’s creators have abandoned it. 

When the numbers fall to zero and all tokens immediately lose value. Rug pulls fall into three categories, regardless of the pace of a hustle: stealing liquidity, restricting sell orders, and dumping 

Liquidity stealing

The most common type of exit strategy, liquidity stealing, involves token creators stealing all of the coins that were invested in a project or pooled together.. However, if the security system’s developers designed it with malicious intent, they can easily breach this safeguard and gain privileged access to the locked funds upon exit. 

Restricting sell order

The native token is completely compromised, and its value drops to zero. Backend fraudsters may alter a project’s code to only allow traders to buy into a platform once an exchange has received a significant amount of traffic. In the meantime, all but malicious accounts are prevented from selling the native token, which effectively funds the wallets of dishonest developers. 

Dumping

Virtual honeypots are rug pull strategies that use smart contract technology to direct money in one direction. Their goal is to entice a large number of crypto investors who are eager to increase the value of a shiny new token that is connected to an emerging trending project. 

Developers sell their shares and leave at the right time by lowering the value of the token for the remaining investors who were caught off guard. If you do not wish to become a victim of rug pull then sign up here today. It also leaves us with the next question which is: 

How to avoid rug pulls 

Haupt, who is now the CEO of his own Web3 startup, Bad Astro Society, is paving the way for its 10,000 members to launch into space. He humbly considers the mistakes he made in his early crypto career to be essential learning curves. He was also a victim of rug pulls—more than he could count. Here are some tips to avoid rug pulls:

Expert tips

The term “crowdfunding,” has developed a negative reputation that is sealed in skepticism. This is due to the numerous rug pulls, honeypots, and other schemes that took advantage of the bull market that lasted from 2017 to 2018. 

Claudiu Minea, a software engineer and project coordinator, hopes to change that with SeedOn, a crowdfunding platform he co-founded that uses a rigorous validation process as an alternative to conventional methods. Minea’s best advice is as follows: 

  • Invest in projects whose code has been examined by certified businesses. 

  • Before spending any money, it’s critical to check out the project team to see if they’re up to the task of achieving the company’s goals.

  • Only projects with a fixed amount of liquidity should be taken into consideration. 

  • It is important to boost investor confidence because it means they won’t be able to get away with their money.

  • Verify that the project’s team is actively involved in the community of its platform. 

  • Always include regular updates that transparently discuss the project’s progress. 

  • The white paper’s definition of a trajectory should be reflected in the results.

Conclusion

It is highly recommended to stay alert and save yourself from these rug pulls. These scams frequently assign membership in Ponzi schemes or make empty promises that are too good to be true. The reach of a platform and the value of its token both increase with sufficient traction. The core development team sells its tokens at the peak of the price, leaving behind the treasury of investor funds. It is important to take precautionary steps to avoid rug pulls. For secure and scam-free crypto trading, click here.

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