One of the most prolific scams in the crypto world is the “rug pull”, where the developers of a project suddenly disappear into the aether with investor’s money after convincing them to back it.
With rug pulls, the projects in question will seem absolutely legitimate and above board. They’ll create a flashy website and a seemingly innovative token or NFT, talk about the utility it provides and hype themselves on social media as much as they can. They do this to get people to invest, enticing them with the prospect of high returns once the project takes off. But instead, it’s the developers themselves who suddenly take off, leaving the investors holding bags of worthless tokens that no one wants to buy.
The prevalence of rug pulls in crypto is alarming, due to the decentralized nature of the industry, which means there’s little in terms of regulatory oversight. A smart developer can set up a new “project” all too quickly. They usually model it on some other project that has already achieved a reasonable amount of success, and the rapidly evolving nature of crypto means they can quickly attract investors, then disappear before anyone realizes that there’s no actual development going on.
If you’re thinking of investing in crypto, be sure to pay attention to how rug pulls work, so you can avoid becoming the next victim.
How Do Rug Pulls Go Down?
The scammers who create rug pulls generally use the same kind of tactics to try and entice investors to back them, with the main one being the promise of high returns that play on people’s greed, as well as access to exclusive products or services – such as NFTs – that are being pitched as high value with substantial utility for holders.
In some cases, rug pull operators may pay social media personalities to promote or shill their projects to try and get lots of attention, because they know that very few of them are likely to do much in terms of due diligence. After all, they want the scammer’s money just as much as the scammer wants yours.
When rug pullers launch their scam tokens or NFTs, they may also engage in “coordinated buying” to drive up the trade volume and pump the value of their assets, generating excitement among investors.
All of these tactics aim to create “FOMO”, or “fear of missing out”, which is an extremely powerful way of enticing people to invest money, for fear of missing the next Bitcoin.
Rug pullers need to time their exit perfectly, and will keep up the pretense that they’re a legitimate project until they have obtained a decent amount of capital. At that point, they’ll suddenly pull the rug out from investor’s feet, withdraw the funds and abandon the project and its social media channels. As soon as the cryptosphere realizes this, the value of the underlying assets tanks, leaving investors with next to nothing.
Why So Many Rug Pulls?
The reason is that it’s a very quick and relatively simple way for dodgy developers to make a decent amount of money, without putting in much effort. The crypto world is rife with scams and that attracts other scammers who want to get in on the act.
Because blockchain is open-source and decentralized, anyone can create a new digital asset, and they can even get them listed on multiple decentralized exchange platforms to boost their legitimacy. At the same time, it’s relatively simple to create a website for the project and create a Discord server or Telegram channel through which they can broadcast their “progress” and their plans.
Scammers can make an awful lot of cash from rug pulls, so long as they don’t have any morals. For instance, the most notorious rug pull of all was probably OneCoin, which pretended to be the next Bitcoin but didn’t even have a blockchain. It raked in more than $4 billion of investor’s money before its creators suddenly pulled the plug, and to this day they have never been caught.
Rug pullers take advantage of FOMO. Back in the early days of crypto, there were numerous stories of “Bitcoin millionaires” who invested in the token early, transforming just a few hundred or thousand dollars into millions of dollars, setting themselves up for life. Who doesn’t want to take a chance of investing in the “next” Bitcoin and doing the same?
How Can You Spot A Rug Pull?
Rug pulls are not easy to detect, but there are a few tell tale signs that may suggest that a project isn’t all it’s cracked up to be.
One way of avoiding becoming a victim of rug pulls is to only invest in tokens that launch on centralized exchange platforms and hire the services of professional market makers to ensure the relative stability of their crypto assets.
When new tokens launch on CEX platforms, one of the main listing requirements is to enter into a contract with a reputable market maker such as Kairon Labs, which immediately enhances the credibility of any project.
Kairon Labs is a widely respected player in crypto market making, specializing in ensuring that crypto assets have sufficient liquidity to meet trading demand. Since its inception in 2019, it has helped to facilitate the launch of more than 400 new cryptocurrencies, helping them to maintain price stability and ensure their long-term health. To put it simply, an experienced team like Kairon Labs won’t touch any project that looks even remotely like it might be a rug pull. It will perform its own due diligence on each asset it agrees to support, as this is essential to protect its own reputation as one of crypto’s most respectable institutions.
When a crypto project has this kind of backing, it’s a sure sign that its team is deadly serious about its mission and determined to ensure that its token provides long-lasting value to holders.
Besides looking for strong backers, there are many tell tale signs that may suggest that a project isn’t all it’s cracked up to be. For instance, if the project has a lot of unlocked liquidity that can be withdrawn by the developers at any moment, that’s a strong sign that something isn’t right. Because legitimate projects do precisely the opposite to reassure investors that they are the real deal, using mechanisms such as vesting periods to prevent early token dumps.
Other signs include irregular token distribution, or basically, where a small number of wallets holds the majority of the project’s tokens. Also, legitimate projects will ensure their smart contracts have been audited by a respected firm, such as Hacken or CertiK. In the case of a rug pull, obviously the developers aren’t going to do this, because they would be quickly found out – their smart contracts may not even exist. While they may promise to get an audit done on their roadmap, they have no intention of doing so. If it hasn’t been audited, invest at your peril!
If the developer team is anonymous, with no track record of working on previous crypto projects and no personal social media presence, that’s yet another sign that something isn’t right.
The crypto industry is choc-a-bloc with tales of investors falling victim to scams, but this kind of misfortune can easily be avoided with a bit of due diligence. If the project is backed by a professional firm like Kairon Labs, audited by a reliable company such as Hacken and listed on respectable CEX platforms such as Binance and Kraken, it’s almost certainly the real deal.
