Picture this: You’ve invested in a new cryptocurrency token or NFT project. You feel amazing! But suddenly, the team behind the token disappears, taking all your funds with them. Unfortunately, you’ve just become a victim of a rug pull – one of the most despicable types of crypto and NFT scams out there.
So, what actually is a rug pull? Rug pulls occur when deceitful developers launch a new crypto token or NFT project, pump up its value through manipulative tactics, and then abscond with the funds. Ultimately, they leave investors with worthless assets. Sadly, these are a type of exit scam and decentralized finance exploit that is becoming more common by the day.
To protect yourself from rug pulls, you need to know how to identify them in the first place. Before that, however, it’s essential to understand the types of rug pulls that can leave unsuspecting investors high and dry. In this guide, we’ll dive into the different types of rug pulls, some of the most infamous schemes, and how we can try to avoid them.
The Dreaded Rug Pulls and How They Work
In the world of crypto, rug pulls are a dreaded occurrence that can leave investors with a worthless asset. But what exactly are rug pulls and how do they work? Essentially, there are three main types of rug pulls to look out for: liquidity stealing, limiting sell orders, and dumping.
Firstly, let’s take a look at liquidity stealing. It is a common tactic used in decentralized finance environments. In this scam, token creators withdraw all the coins from the liquidity pool. Thus removing all the value that investors have injected into the currency. As a result, the price of the token plummets to zero.
Secondly, limiting sell orders is a more subtle way for malicious developers to scam investors. They code the tokens so that they’re the only party able to sell them. Once retail investors buy into the crypto, the developers wait for positive price action before dumping their positions and leaving behind a worthless token.
Dumping is when developers quickly sell off their own large supply of tokens, driving down the price of the coin and leaving investors with a worthless asset. This often happens after heavy promotion on social media, in what’s known as a pump-and-dump scheme.
Understanding the Two Forms of Web3 Scams
Rug pulls can take on two different forms. These are hard and soft pulls. Hard pulls occur when malicious developers code backdoors into their token’s smart contract. Essentially, they set up a scam from the very beginning. Liquidity stealing is also a type of hard pull, where the project creators withdraw all the coins from the liquidity pool, leaving investors with a worthless asset. Hard rug pulls are actually illegal, as well as unethical.
On the other hand, soft rug pulls involve developers dumping their crypto assets quickly, leaving remaining investors with a devalued token. It can also mean the act of project or token founders taking investor money, then not meeting promises, such as donating funds. While not necessarily illegal, soft rug pulls are considered unethical. Significantly, they can be devastating for investors.
From Promises to Worthless Assets: High-Profile Rug Pulls in Web3
There have been several high-profile rug pulls in the web3 space over the years. Let’s take a look at a few examples.
First up is the Mutant Ape Planet NFT collection. In January 2022, the developer of the collection, Aurelien Michel, was arrested by the US Department of Justice for defrauding buyers of more than $2.9 million in cryptocurrency. Michel, along with others, marketed the collection with fake promises of benefits such as rewards, raffles, and exclusive cryptocurrency assets, as well as community wallet support. They even claimed they would purchase metaverse land for the project, but this never came to fruition. After selling out the NFTs, Michel and his associates transferred $3 million worth of funds to other wallets, with Michel controlling one of them.
Another notable rug pull was the CryptoZoo NFT project, created by YouTube star Logan Paul. Paul was hit with a class-action lawsuit that accused him of conducting a rug pull by raising funds for an animal-themed game that was never developed, leaving investors with a worthless asset. To his credit, Paul took responsibility for the situation and worked to reimburse those who suffered losses through his NFT project.
Finally, one of the most infamous cryptocurrency rug pulls was the case of BitConnect. Launched in 2016, BitConnect claimed to provide investors with high returns on their investments through a lending program. The project’s operators promised returns of up to 40% per month. However, in early 2018, it was revealed that BitConnect was a scam. Markedly, the value of the cryptocurrency plummeted from over $400 per coin to just a few cents within weeks. Investors lost over $2.5 billion in the scam, making it one of the biggest rug pulls in crypto history.
How to Avoid a Rug Pull
To avoid a rug pull, it’s important to conduct thorough research before investing in any project. It can take some serious digging, but there are things to look out for.
- Anonymous or unverified developers: Rug pulls are more likely to occur when developers are anonymous or cannot be verified. Always check the team’s background and credentials before investing in any project.
- Lack of transparency: If a project’s website social media does not provide enough information about its goals, technology, or team, this could be a red flag. Additionally, if the team is not responsive to community questions or concerns, it could indicate a lack of transparency and raise suspicion.
- Unrealistic promises: Rug pulls often involve unrealistic promises of high returns or rewards. If a project promises returns that seem too good to be true, it’s probably best to approach with caution.
- Lack of liquidity: If a project has low liquidity, it can be difficult to sell your assets when you need to. This can make it easier for developers to execute a rug pull and leave investors with worthless assets.
Finally, always remember to do your own research and if something seems too good to be true, it probably is. Trust your instincts and exercise caution when investing in web3 projects.