Signs Of A Crypto Rug Pull Scam and How to Protect Yourself

Crypto rug pull scams are a growing threat to the web3 ecosystem.

With the Web3 ecosystem growing, there are innumerable opportunities for people to make quick gains. However, these opportunities come with growing risks concerned with Web3 security.

A relatively new type of crypto scam specific to DeFi has already taken down $2.8 billion worth of cryptocurrencies from innocent users in 2021, which is 37 per cent of the total lost money to scams, says Chainalysis.

Conventionally, they are referred to as rug pulls scams. Crypto rug pulls take different personas, such as Pump and Dump schemes, exit scams and many others.

Irrespective of the names it goes by, crypto rug pulls adopt a deceptively facile working strategy. The project owners/developers release a new token and make it most attractive for investors to pull out the rug underneath and dump their investments. 

Sketching The Details Of Crypto Rug Pull Scams

Oftentimes, scammers publish their own brand cryptocurrency in decentralized exchanges. As we know, exchanges like Uniswap or Sushiswap don’t verify the coins for listing on their platform. This is utilized to the best by scammers. 

But how do they manage to get the users to invest in their coins? The developers pair the malicious coin with prominent coins like Ethereum or Bitcoin to gain users’ trust in the coins. 

This would eventually get investors into swapping for the new tokens, thereby pumping up the token price. Once the token is hyped, the scammers would drain the liquidity pool wiping out all the investments. 

Types of Rug Pull Scams

Rug pulls are of two types: Hard and soft.

Hard Rug Pull

A hard rug pull is a type of exit scam where a developer or group of developers insert a backdoor into the protocol codebase that allows them to easily drain user funds locked up in smart contracts and cash out. 

Sometimes the backdoors are obvious when they are executed on-chain. Other times, the backdoors are well concealed, draining the user’s funds slowly.

Soft Rug Pull

A soft rug pull is developers abandon a project by dumping all of their tokens which then crushes the token price and leaves the project dead. Here technically, no theft of user funds is taking place. 

This is why it is important to examine developer token distributions and protocol governance to figure out what developers are allowed and not allowed to do with their respective tokens.

5 Signs Of A Crypto Rug Pull Scam

The crypto industry has been booming lately, and we are seeing new projects popping up every day. But the pressing question here is how to differentiate between trustworthy and deceitful projects. 

Here are the signals that indicate whether the project might be a rug-pull scam or not. 

1. Very Few Token Holders And Token Transactions

If a token in question is only listed on DEX and no other trustworthy exchanges, it is better to check with the block explorer tool and find how many token holders it has.

If there are only less number of holders in a pool that is supposed to keep millions of dollars, then it should be given a thought. 

2. Watch Out for The Liquidity Pool

When looking for a legitimate crypto token, there are a few things to check to ensure it is legitimate. 

Firstly, to see how much money is in the liquidity pool – even if it is not one of the most popular tokens, it should still have at least tens of millions of dollars. 

Secondly, finding the number of tokens locked up for certain durations. This usually indicates that the team is committed to the project. 

3. Lot Of Hype Around The Project

When it comes to cryptocurrencies, there are two types: those that are legitimate and those that are nothing more than scams. 

Legitimate cryptocurrencies rely on factors like liquidity, while rug pulls will often come out with a lot of energy and entice users to attract investments. Some will spam social media feeds, while others will rely on influencers to spread the message. 

Too much enthusiasm is a clear sign of a rug-pull scam.

4. Less Engagement Of Team To User’s Queries

Dedicated developers will always engage with communities to questions and fix any bugs as soon as possible. 

If a website is broken or if social media channels are inactive, that is a huge red flag. Most rug pulls don’t bother setting up a convincing public profile for investors to find self-assurance. 

If you can’t trace legal information about the company, like the company’s name, details about the project team, cryptocurrency records, etc., it is an even bigger red flag.

5. Unaudited Projects

If the team is misleading users about getting an audit to persuade investments into their protocol, it justifies the fact they may be doing other unethical things like stealing users’ funds.

How To Check For Legitimacy Of A Project That You Suspect Could Be A Crypto Rug Pull?

The problem is complicated, but the answer is always simple. Challenges and solutions to Web3 security also work similarly.

If you catch a cryptocurrency project with any of the rug pull signs mentioned above or find it lacks any new innovation or creativity, you can use a rug pull detector tool that is available handy.  

The rug pull detector assesses the project’s risk level by doing a background check on different metrics and then rates their trustability. With the obtained results and digging into the details of the project more in-depth, you can spot whether it is a technically sound project or a malicious team operating it.