A rug pull is a scam in the cryptocurrency industry where crypto developers abandon a project and run away with investors’ funds. Rug pull scams usually happen in the Defi ecosystem, especially on the DEXs.
Malicious individuals create a token and list it on a DEX without any audit. Then they create a liquidity pool for it. The pool contains a pair of scammers tokens and a leading cryptocurrency like Ethereum. Thereafter, once investors have swapped their ETH for the new token or coin. Scammers drain the pool by withdrawing everything from the liquidity pool. This drives the coin’s price to zero and no way for investors to swap the virtually worthless token left with them.
Rug pulls thrive on DEXs as they allow users to list token-free and without any audit. Anyone can create a token using open-source blockchains like Ethereum very easily and free. These two factors combined create an excellent condition for malicious individuals to perform a rug pull scam.
How to Spot Rug Pull Scams?
Here are some tell-tale signs of rug pull scams:
Low or No Team Credibility:
Verify the team’s credibility through searching for their track records, social media, employment history, industry connections, etc. You must also check if there is a lock on the token’s pool. Most reputable projects lock pooled liquidity for a certain period.
Ambiguous Cryptocurrency White Paper:
If a whitepaper of a protocol is ambiguous and unclear, it is often a red flag for a rug pull scam. An external audit is an indicator of the smart contract soundness, but it is not necessarily of the project’s soundness.
Unrealistic Return Projections:
As with other scams, if something seems too good to be true, it probably is.
Few Wallet Holders and Listing only on DEX Platforms:
Verify the number of token holders via a block explorer tool like Etherscan. Check whether it is listed and traded on other popular exchanges. A quick search on Coingecko can reveal more information about the coin.
Coin Skyrocketing in Price
A coin skyrocketing in price quickly is a sign of a rug pull. For example, a rug pull coin can move from 0 to 50X within 24 hours. This trick is meant to drive FOMO that leads more people to invest in the token.
Examples of the Rug Pull Scam
Compounder Finance:
Compounder Finance developers stole investors funds worth $10.8 million in a rug pull scam. The protocol had its contracts drained of $750,000 worth of WBTC, $4.8 million ETH, $5 million DAI and a small assortment of other tokens. While they have been audited previously, the team swapped the safe and audited contracts. They replaced them with malicious contracts that enabled them to steal investor funds.
Thodex
Thodex, a Turkish cryptocurrency exchange was accused of pulling fraud. The exchange has about 400,000 users. Thodex’s website stated that the platform is “temporarily closed” to address an “abnormal fluctuation in the company accounts”. The CEO of the exchange allegedly took $2 billion of customer funds with him while fleeing Turkey.
Tracing the activities of a Rug Pull Scam using Etherscan
To understand how a rug pull operation is executed on a Defi platform. Let us take a closer look at the TRUAMPL (TMPL) token. It is a coin that mimics Ampleforth (AMPL). The token was shilled on Twitter and mentioned on CoinMarketCap in the article titled Dark Side of Defi.
TMPL Tokens have created multiple fraudulent scams. Take a look at this specified smart contract: https://etherscan.io/token/0xfcb755b046ea9b9bc4586db4018b49c5a02e3d1c.
Transfer log shows that there are only 20 transactions and 10 holders. Most of the activity happened within a span of 4 days.
DISCLAIMER: The information provided in this article is for educational purposes. It does not constitute any type of investment, financial, or trading advice. Scamming someone of money is punishable under law. You are responsible for your own decisions and actions. We are not responsible for any kind of actions performed by you.
