Rug Pull Explained: Identifying and Avoiding Crypto Assets Eyewash

In recent years, the Crypto Assets market has flourished, attracting a large number of investors. However, this has been accompanied by an endless array of eyewash tactics, among which the most common is the Rug Pull. According to statistics, in 2021 alone, Rug Pull scams caused losses of approximately $2.8 billion, accounting for 37% of the total revenue from Crypto Assets scams that year.

In April 2023, the DeFi industry once again encountered a Rug Pull incident, resulting in losses exceeding $6.2 million, involving 32 projects. Among them, the BNB chain suffered the most severe losses, approximately $4.5 million, accounting for over 73% of the total losses. Ethereum and Arbitrum ranked second and third, with losses of $1.05 million and $182,000 respectively.

Rug Pull Concept Analysis

Rug Pull is a type of Crypto Assets eyepash, usually manifested as project developers suddenly withdrawing liquidity pools from the decentralized exchange (DEX), causing a sharp drop in coin prices; or utilizing centralized permissions and contract vulnerabilities to suddenly abscond with investor funds. This is the most typical form of Rug Pull in the DeFi space.

On April 26, 2023, the DEX project Merlin in the zkSync ecosystem was suspected of a Rug Pull incident, resulting in a loss of approximately $1.82 million. Data shows that shortly after Merlin launched a three-day pre-sale event, Crypto Assets worth about $1.82 million, including USDC and ETH, were transferred out of the protocol, allegedly due to the developers exploiting a vulnerability to execute the Rug Pull. As of the time of this report, the incident is still under investigation.

Three Main Types of Rug Pull

1. Liquidity theft: Project creators withdraw all funds from the liquidity pool, causing the token value to drop to zero. This is the most common type of Rug Pull in the DeFi space.

2. Restricted sell orders: The developer restricts through code, making themselves the only party able to sell the tokens. After retail investors buy in, the developer dumps their holdings, leaving behind worthless tokens.

3. Dumping: After developers heavily promote on social media, they quickly sell off a large amount of tokens, causing the coin price to plummet, rendering the tokens held by other investors worthless.

Six Warning Signs of Identifying Rug Pull

1. Unknown or anonymous development team: A project team lacking credibility and transparency is a dangerous signal.

2. No liquidity lock: If the token supply is not locked, the project creator may run away with all the liquidity at any time.

3. Sell Order Restrictions: The inability for certain investors to sell their held tokens may indicate eyewash.

4. Price surges caused by a small number of coin holders: A small number of token holders makes it easy to manipulate prices.

5. Suspiciously high returns: If the returns are too good to be true, it is likely an eyewash.

6. Lack of external audits: Formal code audits by reputable third parties have become an industry standard.

Additional Measures to Avoid Rug Pulls

1. Check if the project is open-source and has undergone rigorous auditing.
2. Check for safety guarantees and emergency measures
3. Confirm whether the project has the authority to transfer user funds
4. Check if the project permissions are decentralized, such as using multi-signature and time locks.
5. Verify whether the token issuance is consistent with the white paper.

The Importance of Due Diligence

Investors should:

• Verify the legitimacy and past records of the project team
• Carefully read the project white paper, website, and other materials.
• Understand the smart contract code and ensure it has been audited by a trusted third party.
• Be wary of excessive hype and FOMO( fear of missing out) mentality
• Spend enough time conducting thorough research.

Conclusion

Rug Pull has become a serious issue in the Crypto Assets world, causing significant losses. This article details the concept of Rug Pull, its types, and methods for identification and avoidance. Investors should remain vigilant, learn to identify risk signals, and conduct thorough research before investing. Meanwhile, as the industry develops, individuals, regulatory agencies, and law enforcement must work together to prevent and punish fraudulent activities, protecting the interests of investors.