The crypto industry has been booming recently. More cryptocurrencies have emerged to solve the centralization problem the financing sector faces. However, some people are out to take advantage of the crypto popularity and naivety of some investors. Thus, the start-ups lure angel investors with enticing promises and schemes only to steal from them. Despite the decreasing rate of crypto fraud, 2021 has seen rug pull scams rise in the DeFi ecosystem. Precisely $113 million have been lost in DeFi rug pull from January to July 2021 alone. So what is a crypto rug pull?
What is a rug pull?
A rug pull in crypto refers to the event where the network founders and developers abandon ship with the investors’ money. Rug pulls are common in the DeFi ecosystem. For instance, the perpetrators create a coin and list it on a decentralized exchange (DEX). The actors then stake a valuable or established cryptocurrency to drive the price of the token.
To attract more investors, the creators create hype around it. Once the investors buy in a significant amount, the malicious creators withdraw everything, “pull the rag.” This drives the coin’s price to zero. Rug pull scams thrive on decentralized exchanges because the platforms allow anyone, without audit, to list the tokens free. The creation of these tokens is also simple and accessible on open-source blockchain networks.
How SQUID coin collapsed
Immediately after Netflix’s Squid Game TV show, Squid Game token (SQUID) was launched. The token came into existence as a play-to-earn coin on the Binance Smart Chain (BSC) network. The token received mass acceptance from many people, quickly pumping its price. Investors even suggested that it was the next big thing, further attracting more people.
The creators launched the token in later October 2021. It became available for trading and investing in DEX like PancakeSwap (V2), ZT, Gate.io, and DODO. The coin launched at $0.01. Three days later, the price skyrocketed to a $4.42 mark. The price kept on increasing at an alarming rate. However, the Squid Game tokens were hard to sell on the Pancake exchange. On November 1, the price rose to an all-time high of $2861.80, rising by about 33,600%. The spike was caused by the forced anti-dumping mechanism and the hype on Twitter and Telegram. Minutes after the rise, the malicious actors pulled the rag, leaving investors pondering over a fool-and-his-money proverb. The SQUID token price virtually lost its value to $0.0007926. The developers behind it vanished, without a trace, with $3.42 million.
How to spot a rug pull
- Investigate the team behind the coin
Malicious actors usually have a non-existent past. They can appear and disappear without a trace. Before making investments in a new token, check the project’s team’s background and social media presence. Hence, the anonymity of the team should raise eyebrows. Are the community members in social media platforms authentic? Do they allow you to question the token’s legitimacy? In addition, you should also confirm the solidity of their backgrounds and reputation. For instance, the SQUID developers all had fake profiles and faked affiliations with Netflix.
- Check whether the project was audited
Third-party services often audit legitimate projects. If the project was not audited, the high chances are that it is a scam. Lack of auditing could also mean that the code behind it may contain bugs. The bugs may provide hackers with a loophole to steal users’ funds.
However, most users never go through the audit report. They assume that since it is edited, everything will work fine. In some cases, the audit report may be warning users of the dangers of using the token.
- Test the capability to sell the coin
Squid Game token blocked everyone from withdrawing their funds from the liquidity pools. The woes of a few users went unheeded, and as the coin rapidly rose, the creators vanished. Users should test the ability to sell or withdraw their assets before investing in a coin. Moreover, only invest an amount that you can afford to lose.
- Vet the coin’s distribution
Where are the coins primarily distributed? If most of the coins are concentrated around a few people, it is a scam. If the whale investors dump their bags, the token’s price crashes. Use third-party browsers that can scan the concentration of a token like BscScan.
- Check whether the liquidity is time-locked
Investors should always check whether the liquidity pool has a time lock. The time lock prevents creators from withdrawing their funds from the pull. A rug pull can never occur in a time-locked pull. Thus, investors should utilize online tools to check if the liquidity is locked. Reputable tokens often lock their liquidity pools.
- Check independent auditing sites
Platforms like RugDoc audit DeFi tokens by breaking down metrics that determine the legitimacy of the token. Then they rate the tokens based on the risk levels. It is like asking an expert about their opinion about the token before investing.
- Vet how quickly the coin gained popularity
The SQUID coin preyed on the hype of the Netflix hit and gained popularity faster than most established coins. It even surpassed Dogecoin, which has been around for a while now, within a couple of days. Moreover, many social media accounts came up to promote the meme coin. The quick attraction and hype pumping the coin should have been a red flag. Instead, the accounts either turned out to be fake accounts or bots. The hype convinced users that the coin had an impressive network of supporters and inventors than it did. The trick is to drive users into fear-of-missing-out (FOMO).
It is up to the prospective investors to research before putting their bags on it. However, even with the knowledge of safe investing, users still tread the risky path. We get it; the higher the risk, the higher the reward, right? If you want to be on the safe side, always use already established platforms to trade. Before listing the coin on their platform, reputable exchanges investigate the legitimacy, community, project team, use cases, and other essential details. Moreover, the rule of the trade is to invest the money that you can afford to lose.