Trend DeFi has developed very strongly in the past year as money continuously poured into the market. DeFi projects spring up like mushrooms after rain. Many of them are scam projects that paint the ideal picture. Makes it easy for new investors to believe and then lose money. This article will help you understand what is Rug Pull. How to recognize and avoid projects with signs of Rug Pull.
So, What is Rug Pull Exactly?
Rug Pull is the term used to refer to the action of the team leaving the project and hiding with the investors’ money causing the price of that token to “zero”.
Rug Pull inherently occurs often in Dex Exchanges because most exchanges are decentralized, they allow users to freely, without permission and easily create liquidity pools to transactions, so there will be no party to guarantee these transactions.
How Does the Project Implement Rug Pull?
The Dex Exchange always promotes decentralization allowing anyone to create a liquidity pool and bad guys have taken advantage of this feature to list scam tokens.
Liquidity withdrawal project
For projects doing AMM, Farming, usually they will provide high APY levels to attract users to put more liquidity into that Pool.
Since the pool has not been locked, the pool value keeps increasing until the project feels the amount in the pool is as expected, they will withdraw all the assets in the pool and run away.
The project collapsed
As for projects that do not operate in a way that calls for users to provide liquidity, there will often be strange codes with the purpose of preventing investors when buying tokens that will not be able to sell or can only be sold with negligible amount of drops.
This leaves investors with almost one-way buying. After doing the media, creating a fomo that pushed the price to the top, that’s when the project discharged all the tokens they held and disappeared.
Or the case of large investors withdrawing capital from the liquidity pool will reduce the value of the token, then other investors will fear that they will continue to withdraw their capital, causing the value of the token to decrease further. and loss of liquidity. The worst case is that the liquidity pool can’t liquidate the users and the token value is zero.
Signs to Identify the Rug Pull Project
So we can know the basics of how projects do Rug Pull. These actions are all quite subtle. Therefore, new investors who do not have much experience will be easily trapped.
Usually scam projects will have the following signs:
Anonymous Team
When researching a certain project you need to check the team behind through the project website. Be careful with projects that don’t show founder and dev team information. However, there are still some anonymous but well-developed team projects such as Pancakeswap, Sushiswap, etc.
Liquidity is not Locked
A decent project will have a liquidity lock when created, so that the project cannot withdraw the pool for a certain period of time to bring confidence to investors. Be careful with projects with an unlocked liquidity pool.
Check out Github
It can be said that GitHub is the heart of the code base for development on decentralized projects. You can find a lot of important information on GitHub such as how the project develops and works. If you see a project on GitHub that is not actively developing, this may be a bad sign not to invest in it.
Sketchy Website and Virtual Interactions on Social Media channels
Some projects that want to increase their credibility in the media have quietly bought virtual interactions. These virtual interactive services are actually advertised at a very cheap price.
So if you look at a project with an anonymous team and the project’s Telegram or Twitter has the majority of bot follow accounts, it’s clear that the project is just trying to create virtual value..
The project has a contract that has not been audited (audit) by a reputable unit
Some projects, when they want to increase their credibility with users, will have to pay a fee for a 3rd party to come out and certify their contract without any signs of scam. However, the fee for this audit is quite high for startup projects.
Therefore, this is a necessary condition but not necessarily a sufficient condition to immediately conclude whether the project has Scam or not.
Some famous audit units in the market can be mentioned as:
- Trailofbits
- Cryptomaniac
- Certik
- Quantstamp
Summary
Decentralized platforms have solved a lot of problems in the market. But Rug pull is also becoming more popular in crypto and DeFi markets as well as NFT, GameFi projects. You need to do thorough research to understand what is rug pull and check the clear information before deciding to invest in new projects. Good luck!
