Been in the world of cryptocurrency for over a year now and been successful, looking forward to invest more in coming years. There are still many people who doesn’t believe in cryptocurrency because they feel it is a scam. There are reasons for investors to believe that due to rug pull.

What is a rug pull?

This is a kind of cryptocurrency manipulations or an easy words this is an investor scam. The phrase “Rug Pull” refers a sudden loss of liquidity leading to the massive sell off by liquidity providers or investors investing their money. In the end, investors loosing al their money which they have invested. A rug pull is a malicious act in which crypto developers abandon a project and either run away with project funds or sell off their pre-mined holdings. Rug pulls are most common within the DeFi ecosystem, as DEXs allow malicious developers to list their tokens without any prior verification or auditing.

Scam artists have used the ERC-20 platform since the financial and technical barriers are lowered and not audited when listing the tokens. Rug pulling is more frequent in the DeFi ecosystem and DEX (Decentralized Exchanges).

Recently, one of the biggest rug pulling was Squid Game Token which rose to 75000% and then crashed to a fraction of a cent.

Squid Game Token

The amount of money flowing into DeFi (up from $1.7 billion in early 2020 to $130 billion by May 2021), has attracted no short order of malicious actors. Security analysts have noted a similarity in the tactics used with the initial coin offering (ICO) mania of 2017.

How Rug Pull Works?

Rug Pull is very much like Pump and Dump method as they take an advantage of regulation in the crypto space, misinformation and FOMO (fear of missing out).

Another common tactic is large developer pre-mines, which in many cases are either hidden from investors or explained away as a project vault, developer fund, or eventual burn. The scam is only revealed when these funds are quickly sold off when the token’s price rises high enough. Rug pulls are often accomplished through backdoors intentionally written into the project’s smart contracts that allow developers to drain and manipulate staked or otherwise locked tokens. In any case, the rug pull quickly drives the price to zero, leaving any investors that didn’t get out early with a bunch of worthless tokens.

How to identify rug pull scams?

Whitepaper: Look for the information of the token and its projects, in addition the founders of the projects. A lot of the scam projects don’t mention the founders and project information and that is always a red flag.

Liquidity: Look for the liquidity of the project, higher the liquidity, stronger is the project but this might not be only criteria.

Price fluctuations: When price surges it is a good news for investors but a sudden surge of 75000% like Squid game token was a red flag, this is a way to trap many investors.

Extremely high rewards: Many of the DeFi protocols offers high rewards at the launch of the projects is a red flag, this is to lure many investors. So, this is an important aspect to look at.