Rug Pull Eyewash: Crypto Assets Investors' Concerns

In recent years, as the investment enthusiasm for Crypto Assets continues to rise, related fraudulent activities have also emerged one after another. Among them, Rug Pull has become one of the most common and harmful eyewash in the crypto world. Data shows that in 2021, Rug Pull scams caused victims approximately 2.8 billion dollars in losses, accounting for 37% of the total revenue from Crypto Assets fraud that year.

What is even more concerning is that this trend does not seem to have been curbed. In April 2023, the DeFi sector once again experienced multiple Rug Pull incidents, resulting in over $6.2 million in losses for investors, involving as many as 32 projects. Among them, the BNB chain was the hardest hit, with losses amounting to approximately $4.5 million, accounting for over 73%. Ethereum and Arbitrum ranked second and third, with losses of $1.05 million and $182,000 respectively.

Definition and Types of Rug Pull

Rug Pull is a common eyeglass in the DeFi space involving Crypto Assets. It usually manifests as the project team suddenly withdrawing the liquidity pool from a centralized exchange (DEX), causing the coin price to plummet; or by exploiting centralized permissions and system vulnerabilities to abscond with investors' funds without any warning.

On April 26, 2023, the zkSync ecosystem DEX project Merlin was suspected of experiencing a Rug Pull incident. On-chain data shows that shortly after the project launched its three-day presale, approximately $1.82 million worth of USDC, ETH, and other Crypto Assets were transferred out, due to the developers exploiting a vulnerability to carry out the Rug Pull.

Rug Pull mainly includes the following three types:

1. Liquidity theft: The project party withdraws all tokens from the liquidity pool, causing investors' funds to instantly become worthless. This is the most common form of Rug Pull in the DeFi space.

2. Restricted Sell Orders: Developers set through code to make themselves the only party able to sell the tokens. After retail investors buy in large quantities, developers sell off to profit, leaving behind worthless tokens.

3. Dumping: After developers heavily promote on social media, they quickly sell off a large amount of tokens, leading to a sharp price drop. Although this practice is in a moral gray area, it can still cause significant losses for investors.

How to Identify and Avoid Rug Pulls

To reduce the risk of encountering a Rug Pull, investors should be vigilant about the following aspects:

1. Unknown or anonymous development team
2. Lack of liquidity locking mechanism
3. There are selling order restrictions
4. The number of token holders is limited, but the price skyrockets.
5. Suspicious high-yield promises
6. Lack of third-party auditing

In addition, investors should also:

• Check if the project is open source and has undergone rigorous auditing
• Understand whether the project has security guarantees and emergency measures.
• Confirm whether the project permissions are highly centralized.
• Verify whether the token issuance situation is consistent with the white paper.

The Importance of Due Diligence

Before investing in any Crypto Assets project, it is crucial to conduct thorough due diligence. Investors should:

• Beware of excessive hype and FOMO( fear of missing out) mentality.
• Verify the background and past performance of the project team
• Carefully read the project white paper, website, and other materials.
• Confirm whether the smart contract has been audited by a reliable third party.

Conclusion

Rug Pull has become a major ailment in the Crypto Assets industry, causing massive losses for many investors. This article introduces the definition, types, and methods for identifying and preventing Rug Pulls. Investors should remain vigilant, learn to recognize potential risk signals, and conduct thorough due diligence to protect their asset security.

With the continuous development of the Crypto Assets industry, individual investors, regulatory agencies, and law enforcement need to work together to prevent and combat such eyewash, maintain market order, and promote the healthy development of the industry.