What Is a Rug Pull and How Does It Work?

This way, potential investors who also understand the coding language can invest in auditing the code independently. Most projects opt to crowdsource and store their smart contract files on GitHub for easy access. It is not clear whether the team carried out a rug pull or the smart contract contained a vulnerability that was exploited, but the project did exhibit all the telltale signs of a classic crypto rug pull. Squid Game (SQUID) was a controversial cryptocurrency project with an aim to take advantage of the popularity of the unrelated South Korean Netflix TV series that aired back in 2021.

Famous examples of crypto rug pulls

Developers best ways to earn free bitcoin can disable features like wallet transfers and cap transfer amounts based on the project’s nature. In the volatile crypto market, caution is key – don’t let the promise of quick gains cloud your judgment. For example, if a couple of hands control 60% of the supply, they could easily sell them in one sitting and crash the token price. This is generally how a rug pull is executed in DeFi, albeit with a few variations and extra steps. DeFi can and is quite rewarding for many users, assuming they pick the right projects.

Pick established products

Scammers sometimes create tokens that you can buy but can’t sell, known as honeypots. Honeypot.is tests smart contracts by simulating buy-and-sell transactions to make sure there are no hidden restrictions. This tool is handy for spotting projects designed to trap your tokens. Also, the ANKH/ETH liquidity pool was drained, leaving token holders with worthless tokens they could not immediately sell. A more subtle token dumping scheme happens where a nefarious crypto project team allocates itself a disproportionately large amount of the available tokens as compensation for their role. These token holders (also called whales) then dump these tokens in the marketplace immediately or after the lapse of a vesting period, thereby depressing the asset’s price.

• Rug pulls are one of the most common scams that can quickly drain your hard-earned money.
• Rug pulls are decked out in bells and whistles — a trail of social media hype and fancy graphics designed to bamboozle inexperienced investors, without any real follow-through when it comes to innovation.
• A common practice for most upcoming crypto projects are to lock the tokens allocated to the team to prevent dumping or even theft from the team members or hackers.
• This scam typically takes place on decentralized exchanges to minimize the chances of authorities tracking it.
• Remember, this article is not financial advice – just a reminder to always be cautious and protect your hard-earned money.

Liquidity Stealing

Excessive marketing without a working product or clear utility can be a warning sign. Look for projects that focus on development and community engagement over flashy promotions. If developers hold a significant portion of the tokens, they could dump them, causing the price to plummet. More often than not, it is impossible to recover as it depends on the kind of rug pull. If a rug pull was executed by an anonymous team, it makes it harder to recover funds.

Once an exchange has attracted a substantial amount of traffic, backend fraudsters may amend a project’s code to only grant traders the ability to buy into a platform. Meanwhile, selling of the native token is disabled — either partially or entirely — across all but malicious accounts, use these 25 job sites to find your first developer job software development effectively pouring money into the wallets of corrupt developers. Rug pull tactics that specifically manipulate smart contract technology to funnel money one way are virtual traps known as honeypots. Rug pulls are common with decentralized finance, or DeFi, projects that aim to disrupt traditional financial services such as banking and insurance.

The perpetrators of rug pulls are difficult to track down after the fact, as the decentralized and pseudonymous nature of blockchain allows those involved to conceal their identities. Ethan Nguyen and Andre Llacuna made the news in 2022 when they were charged with conspiring to commit wire fraud and money laundering in one of the first rug pull crackdowns in the U.S. The duo had created an NFT project called Frosties, which they advertised as coming with rewards, giveaways and exclusive opportunities. Hours after selling around $1.1 million of Frosties, Nguyen and Llacuna shut down the project and absconded with investor funds. Low liquidity means difficulty in buying or selling tokens without affecting their price.

Whether scammers choose to cap sale amounts or rewrite code that wholly reconfigures a native token’s viability, the end goal will always be to run with the highest amount possible. Some of the biggest red flags in the cryptocurrency world come down to human factors. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research.

In total, the men allegedly earned $1.1 million and were charged with conspiracy to commit wire fraud and conspiracy to commit money laundering in March 2022. “We advise consumers to pursue emerging investment trends with diligence and skepticism,” the DOJ wrote in its release. Any project that promises sky-high returns should be carefully considered because DeFi scammers need liquidity to fund their scheme. Staking rewards and yield farming are two common features in DeFi ecosystems that scammers might seek to exploit or make false promises on. In the fall of 2021, an anonymous developer known as Evil Ape disappeared after taking $2.7 million of investor funds. Investors had fallen for a bogus NFT project called Evolved Apes, a collection of 10,000 cartoon apes that was supposed to include a fighting game.

CryptoCurrency

The developers disabled the token’s ability to be sold, and then disappeared with investors’ money. A crypto rug pull is a deceptive maneuver in the cryptocurrency space where developers abandon a project, taking investor funds. It results in significant financial losses for those who had invested in the project. A common practice for most upcoming crypto projects are to lock the tokens allocated to the team to prevent dumping or even theft from the team members or hackers. If a project’s smart contract launches without the provision of a locking mechanism for the tokens, that is a red flag. There is little stopping the developers from taking their tokens and dumping them in the market as how bitcoins and cryptocurrencies are taxed in uk uk bitcoin tax free consultation soon as they are able to.

And if the project has a white paper, you’ll want to give it a read. Crypto scams are big business, with an estimated $25 billion lost to cryptocurrency and NFT scams so far, and no signs of slowing. And with over $2.8 billion lost to rug pulls in 2021 and more than 280 rug pulls executed in 2022 alone, there’s no shortage of examples to pull from. For instance, the Squid Game token scam involved anonymous developers who vanished with traders’ money.

It’s important to be aware of the red flags when it comes to rug pulls. Not only will this spare you the stress of having to deal with losing your tokens, it can also make you a better trader. The promoters ended up with a horde of about $3.38 million and deleted their online presence, including all their social media pages and website. Following their exit, the token’s price plummeted by 99.99% before being delisted from the popular crypto analytics website CoinMarketCap.