There is nothing as scary as any investor as a financial scam, mainly the one that wipes the complete investment of an investor in a project. Such situations are not just an enclave of cryptos either. In the stock market crash of 2008 that was caused by the too big to collapse Lehman Brothers caused a devastating wipe out of the savings of the people across the globe. With that in this article, we are going to have a look at what crypto rug pull and also some crypto rug pull news.
The crypto rug pull scam is among the most scary scams even though it is not quite within the range of the massive mainstream financial scams that sends complete economies reeling back several years. So what is a rug pull scam?
The Concept Of Crypto Rug Pull
A crypto rug pull is a type of scam primarily with the DeFi (decentralized finance) ecosystem. It is a malicious operation wherein digital currency developers discard a project and run away with the funds of the investors.
How It Occurs?
The developers do that by initially advertising for the project aggressively and bringing huge investments in it initially to increase its attractiveness. Investors who now think the project to be attractive and viable end up investing hugely to make it again. Usually, they rope in a pumper-dumper whale investor whose activities of moving large liquidity into the project serve to pull even more investors.
The forces of demand and supply naturally push the value over time. And that is all the whales and the developers and whales are waiting for all this time. Once the preferred target is hit by the price they prepare for an exit but bring in all the liquidity that is possible. The action creates big market shocks that crash the prices well under what has been invested by the investors.
Susceptible Cases Of Crypto Rull Pull
While Rug Pulls can theoretically occur to any project, whether in digital currencies or even in traditional finance, some very likely crypto rug pull lists are stated below. These scenarios have various inherent vulnerabilities that make them the most exposed. The crypto rug pull examples include;
Small New Decentralized Exchange projects
A very latest and small DEX (decentralized exchange) project has all the hints for rug-pull susceptibility. Even though that is not to say all are culprits of such. The most likely ones look not to have any inherent benefit to bring to the sector but look to be offering a huge hype to investors.
First, decentralized exchanges do not have listing audits similar to their centralized exchange counterparts where anyone can list tokens anytime. Second, it is pretty quick and easy for anyone to form a token on blockchains like Ethereum because of their open-source nature.
These exchanges generally have some of the best returns and they also tend to have some unclear protocol. So they will pair these tokens with pretty common digital coins like ETH or BTC to attract investors before doing the scam.
How to Decrease Susceptibility to Rug Pull DEXs
Avoiding them requires vigilance from one’s side. To start with, one should look for the liquidity in a pool about the valuation of tokens in the pool. Most legit Decentralized Exchanges usually have algorithms that evaluate the levels of price based on the availability of the token balance. But that is not completely enough since pricing may get affected by other factors as well.
It is also advisable to ignore projects whose value suddenly increases in hours without a real causative activity like upgrades. One can also look for locks on pools. Most scenarios, a legitimate DEX will lock pool liquidity for a specific period.
Small Latest Crypto Projects
Decentralized exchanges are not the only suspects; complete blockchains can also be strong suspects. There are nearly 5000 varied altcoins, the bulk of which are very small and latest.
Normally, altcoins are launched backed with concept or innovation in a bid to take a slice off the crypto-space pie. If not, they are released with a nice strong use case, either within a specific geographic area of function or to attract a certain clientele. The focus is still attempting to receive a market share.
However, if the latest blockchain and crypto are released without any inherent innovative characteristic or target market, it is pretty questionable. Many times, the blockchain will lack an open-sourced structure, also having some obscure protocol. Where one can avail data related to the blockchain, various wallets (usually owned by the developers) control a substantial portion of liquidity.
How to Reduce Susceptibility Rug Pull Blockchains
There are various features one can look out for to make clear of such potential blockchains. First off, one should ignore small, latest coins whose values rocket in just a few hours or a day without a prominent alteration in the parent blockchain.
It would also be wise to try and ignore a blockchain that does not seem to have an evident market penetration trajectory other than depending on a whale investor. It should ignore it if the similar blockchain also has no innovative characteristic to the table but is still enjoying strong price hikes.
Even worse is when the developers of the project and a whale or two hold maximum liquidity in the coin. Thus, tiny meme coins are a likely crypto Rug pull scam source since they contain all the above red flags.
Vigilance is always recommended when one makes any investments in any project as there is always a chance of the investments of one draining in the gutter. Investment opportunities that are based online which associate one entrusting their hard-earned currency are even riskier. Now you may wonder are crypto rug pulls illegal. Crypto rug pulls are not always illegal, but they are certainly unethical and hard rug pulls are illegal.
Digital currencies are quite an attractive investment avenue, with several billionaires and institutions having noticed them. Vigilance is, however, recommended to ignore a crypto rug pull scam. This article provides clear guides on ignoring the pitfalls that may finally result in one falling for a rug pull maneuver. Of course, participating safely to safeguard investments is always a wise option.