Rug Pull eyewash: Risks that Crypto Assets investors need to be aware of

In recent years, the rise of Crypto Assets has been accompanied by various eyewash schemes. One of the most common is the Rug Pull. According to statistics, the losses caused by Rug Pull scams in 2021 were approximately $2.8 billion, accounting for 37% of the total revenue from Crypto Assets fraud that year. In April 2023, the DeFi industry faced a Rug Pull attack again, affecting 32 projects, with investors losing over $6.2 million.

BNBChain has become the main victim chain of Rug Pulls, with losses of approximately $4.5 million, accounting for 73% of the total. Ethereum and Arbitrum rank second and third, with losses of $1.05 million and $182,000 respectively.

Definition and Types of Rug Pull

A Rug Pull is a type of Crypto Assets eyewash that typically manifests when developers suddenly withdraw liquidity from a DEX pool, causing the coin price to plummet, or exploit centralized permissions and logical flaws to siphon off investors' funds. On April 26, 2023, the zkSync ecosystem DEX Merlin allegedly experienced a Rug Pull incident, resulting in a loss of approximately $1.82 million.

Rug Pull mainly includes three types:

1. Liquidity theft: Developers withdraw all tokens from the liquidity pool, causing investors' funds to instantly go to zero.

2. Restrictive sell orders: Developers use code restrictions to make themselves the only party able to sell the tokens.

3. Dumping: Developers quickly sell a large amount of tokens they hold after the token price rises, causing the price to plummet.

How to Identify and Avoid Rug Pulls

Investors should pay attention to the following signs that may indicate a Rug Pull risk:

1. Unknown or anonymous development team
2. Lack of liquidity lockup
3. There are restrictions on sell orders
4. The number of token holders is limited, but the price skyrockets.
5. Suspected High Yield Promises
6. Not audited by a third party

To reduce risk, investors should further check:

• Is the project open source and has it undergone rigorous auditing?
• Are there relevant security guarantees and emergency measures?
• Does the project have the authority to transfer users' funds?
• Is the project authority decentralized, using management methods such as multi-signature and time lock?
• Is the token issuance consistent with the white paper?

The Importance of Due Diligence

Before investing in any crypto asset, it is crucial to conduct thorough due diligence. Investors should:

• Verify the background and track record of the project team
• Carefully read the project white paper and other materials
• Check if the smart contract has been audited by a reliable third party.
• Be wary of excessive speculation and FOMO emotions.

Summary

Rug Pull has become a major threat in the Crypto Assets world, causing huge losses. Investors should learn to identify risk signals, conduct thorough research, and invest cautiously. At the same time, the entire industry needs to work together to strengthen regulation and law enforcement, prevent eyeglass behaviors, and protect investors' interests.