Crypto rug pulls have been a growing problem in the cryptocurrency space for years, with no signs of slowing down. These scams, which involve the sudden and unexpected withdrawal of funds from an investment, have cost investors millions of dollars. They can also be considered as “DeFi Killers” as they have forced the fallout of some innovative projects like Ronin Network, RING Financial, etc. In this article, we will take a look at what crypto rug pulls are, how they work, why they are so prevalent, and how to spot and avoid them.
What are Crypto Rug Pulls?
Crypto rug pulls, also known as exit scams, are a type of fraud in which an individual or group of people set up a cryptocurrency project, raise money from investors, and then suddenly and unexpectedly withdraw all the funds. These scams can be perpetrated on investors in a variety of ways, including through Initial Coin Offerings (ICOs), Initial Exchange Offerings (IEOs), and DeFi projects.
Crypto rug pulls can be extremely damaging to investors, as they often involve the sudden and unexpected loss of funds. This can be especially devastating for investors who have put their life savings into a project, only to find out the next day that the funds have been withdrawn.
How Crypto Rug Pulls Work?
Crypto rug pulls typically involve the use of web3 technologies, such as decentralized exchanges or NFT platforms. These platforms are often used by scammers to solicit investment from unsuspecting investors. Once the funds have been raised, the scammers will then suddenly and unexpectedly withdraw all of the funds, leaving investors with nothing.
The scammers may also use sophisticated techniques to hide their activities, such as using multiple wallets and crypto mixers (like the infamous Tornado cash) to launder the funds. Additionally, they may use bots and other automated tools to quickly spread misinformation about the project and its progress, leading to a rapid decline in investor confidence.
In recent years, we have witnessed the failure of several cryptocurrencies and DeFi. Most of these failures are prepared moves by hackers who have already planned everything from the beginning.
The problem now is that people confuse a failed or collapsed project for some reason with a Rug. Let’s just remember that in the case of a failed or collapsed project, there is no bad intention coming from the founders of the project whereas the Rug is a form of scam that is well prepared in advance as we just saw above.
Due to misunderstanding, failed projects are subject to a smear campaign and are accused of Rug for the wrong reasons. This is what happened to RING Financial, for example.
What was RING Financial?
Before we take you through how RING Financial was falsely accused of Rug, let’s first look at the real intentions of this DeFi.
Every crypto enthusiast has dreamed of a platform where all the DeFi protocols are centralized and where they can make their token purchases easy without having to get lost on many platforms looking for information.
This was what RING Financial wanted to bring to the world of virtual currencies. An all-in-one platform that will allow everyone, even those who have no experience in the DeFi market, to buy tokens easily.
RING Financial offered even better by allowing its users to automate their token purchases and let their Ring Tokens work for them. RING Financial’s algorithms are quite good at recognizing the best opportunities in the DeFi market. Indeed, users’ tokens are used automatically and in return, each Noders receives regular profits.
Moreover, compared to other DeFi’s, RING Financial operated with very low transaction fees. This made allocation in DeFi easier and more convenient for all users of the platform.
RING Financial was very successful to the point where Noders were in possession of their profits until a hacker found a loophole to commit fraud.
Why RING Financial wasn’t a Rug Pull?
As we’ve seen before, Rug Pulls are premeditated scams that are organized by scammers from the beginning with the sole purpose of robbing all their holders.
But we can clearly see that this was not the case with RING Financial, as DeFi had a clear plan that was even validated by the entire DeFi community.
Also, RING Financial had still been working well before being scammed later on, which is not often the case with Rug Pulls where scammers only wait for a maximum of funds to disappear.
Indeed, RING Financial was neither a fraud nor a scam, but rather a victim of a hacker who exploited the vulnerability of the smart contract and took advantage of it to perform a scam.
Why Are Crypto Rug Pulls So Prevalent?
Crypto rug pulls are so prevalent because they are relatively effortless and low risk for the scammers. By setting up a project, raising funds, and then suddenly withdrawing the money, the scammers can make a large amount of money with very little effort. On the other hand, because most of these scams are conducted online, the scammers can remain anonymous, making it difficult for law enforcement to track them down.
Moreover, the cryptocurrency space is still relatively new and unregulated, making it easy for scammers to take advantage of unsuspecting investors. Due to the lack of regulation, there are very few safeguards in place to protect investors from these types of scams. Additionally, many investors may be unaware of the risks associated with investing in cryptocurrency projects.
How to Spot a Crypto Rug Pull?
Although crypto rug pulls can be difficult to spot, there are a few warning signs to look out for. One of the most common signs is the sudden and unexpected withdrawal of funds. If a project suddenly stops making progress or fails to deliver on its promises, this should be a red flag.
This is further proof that RING Financial was not a scam, as the platform continued to pay its Noders regularly before the failure of the project.
Token holders should be wary of projects that promise unrealistic returns or make exaggerated claims about their progress. If a project claims to be able to generate huge returns with very little effort, it is likely a scam. Additionally, investors should be wary of projects that require a large amount of money to be invested upfront, as this is often a sign of a scam.
Finally, investors should take the time to research the project and its team before investing. If the team members are anonymous or have a questionable background, this should be a red flag.
Crypto rug pulls are a growing problem in the cryptocurrency space, and it is important to be aware of them and to take the necessary steps to protect yourself and your investments. By researching the project and its team, diversifying your investments, and staying up to date with news and updates, you can minimize the risk of falling victim to a crypto rug pull. If you believe that you have been the victim of a crypto rug pull, it is important to take action to protect yourself and your investments by reporting the scam to the appropriate authorities and considering taking legal action against the scammers. Remember, the best way to avoid a crypto rug pull is to be aware of the risks and to do your due diligence before investing.
