Rugpull is one of those terms in the crypto world that is important to know. This term itself refers to the mode and practice of fraud that often occurs.
As is known, investment in the crypto world has the potential to provide significant returns, but every investor and trader must know what assets they are buying.
The reason is that there is always a mode of fraud lurking behind investors’ carelessness, such as rug pull.
So, consider the following review to find out what rug pull is and how to avoid it.
What Is Rug Pull?
Rug pull is a mode of fraud in the crypto world. In practice, the developer/developer will leave the project that has been made after successfully raising funds from investors.
In this case, they will sell crypto assets from the project simultaneously and in large quantities so that the value of the assets owned by investors becomes worthless.
How Do Rug Pulls Work?
Usually, this loss pull occurs for tokens in decentralized exchanges (DEX) that rely on a collection of assets stored in the DEX.
Besides that, in this mode, scammers who claim to be developers usually design a promising project and attract many users.
Then, the project was spread and attracted many investors, so the asset price increased.
However, when the price rises to a good point, the fraudster will simultaneously sell all their assets (in massive amounts).
Then, they destroy the asset price and harm all investors who have deposited their funds.
To design this rug pull practice, several methods were used by the developer, including recruiting artists or creating a sensation on social media.
The sensation is in the form of providing capital to their group, so investors will find it very easy to believe this.
How Does Rug Pull Happen?
Fraudulent practices such as rug pull can frequently occur because hundreds of new tokens/coins are generated almost every day in the world of the blockchain and crypto industry.
Well, most of the tokens or coins that have sprung up are scams. Systems of security and transparency are things that should be addressed.
Therefore, do not be surprised if many fraudulent practices such as rug pull will often occur.
Why Can Rug Pull Grow?
The rug pull action can develop on decentralized exchanges (DEX) because new tokens can be registered with a cheap fee and no longer need to be audited.
This is what differentiates it from centralized/centralized cryptocurrency exchanges. In addition, on the blockchain, exchanging valuable coins for new coins is also very easy.
The reason is it only requires a cheap fee or even free. With the existence of these two factors, unscrupulous developers/developers also take advantage of this opportunity.
Examples of Rug Pull That Happened
Here are some examples of rug pulls that have occurred.
1. Squid Game Tokens
SQUID has become one of the most popular crypto assets since early October 2021.
This coin meme is based on one of the popular series on Netflix, Squid Game, even if it’s not directly related to the series.
The price of this token has suddenly increased dramatically since the information was spread. This is because many investors see the promotion through various social media.
Then, between October 26 and November 1, this coin’s price rose by more than 23 million percent, from 1 cent to $ 2,861.80.
However, the increase was then followed by a decrease in price to $0.003. Everyone then saw that the Squid coin was just a rug pull.
Allegedly, the SQUID developer has left the project and sold his tokens, which brought him about $3.3 million.
In fact, upon examination, the Squid project’s white paper was filled with grammatical errors and was not designed professionally.
Coinmarketcap has also embedded a warning on the SQUID page of its website to make users aware of potential scams.
A crypto exchange from Turkey, Thodex, which has about 400,000 users, was accused of an exit scam in April 2021.
As for the rug pull case, it is suspected that the CEO of Thodex took away $2 billion in user funds when he fled Turkey.
Users claim that they need access to their funds. Most of the Thodex team has now been secured by the Turkish police, and Interpol wants the CEO of Thodex.
3. Compounder Finance (CP3R)
One of the DeFi projects, Compounder Finance, made a rug pull and took $10.8 million from its users in early November 2020.
After the scam, CP3R’s price dropped 98.8% in 24 hours and lost value completely.
The Compounder development team was able to steal $ 5.066 million in DAI; 4.8 million in ETH (8,080 ETH); $745,000 Wrapped BTC (39 WBTC); and the remaining COMP, UNI-V2, and CP3R DeFi tokens.
This rug pull was planned since the project was founded because all the money was taken through the code in the smart contract that was deliberately written by the development team.
Allegedly, the Compounder development team deliberately included code in the smart contract that allowed them to take all the funds raised.
How to Know and Avoid the Risk of Rug Pull
Here’s how to find out and avoid the risk of a rug pull.
1. Research the development team of a project
First, you should research the development team, both people and organizations, that builds and oversees the asset or project.
As well as avoiding potential rug pulls, it can help you determine their intrinsic value and find all the necessary information.
In addition, know and read the white paper of each crypto asset project to find out its long-term plans, the purpose of creation, and technology.
A legit and legal crypto project will provide detailed information about the above.
However, on the other hand, a project with a potential for loss pull will have little or no information about the project.
2. View network data and information
In the context of a blockchain network, you can see the on-chain activity of a crypto asset.
It includes data on trading volume in the last few days, total liquidity, and DEXs that registered it as a legitimate crypto asset.
Usually, projects with potential loss pull are only listed on a few DEXs and have little trading activity (little liquidity).
You can also use the block explorer to see who holds the crypto asset and whether there are many/few.
For information, a legitimate crypto asset will spread among many users even though it has yet to be widespread.
On the other hand, assets that have the potential to experience loss pull are usually owned by a small amount (only owned by fraudsters) and in large amounts.
3. Avoid FOMO and read the news
The next tip is that you also need to align the data you are looking for with current popular news.
You can find out how the crypto community reacts to the asset, check out popular forums, such as Reddit, and check news from trusted crypto sites.
The goal is that you don’t get caught up in FOMO and can see the big picture of the popularity of a crypto asset.
You can use your critical side to overcome your emotional FOMO when reading news from various sources.
Besides that, reading a lot of news also makes you distinguish which media are promotional and which are trusted facts that are neutral.
Meanwhile, excessive and massive promotional content can be a sign of a loss pull because most new crypto assets will start slowly and small.
To avoid the RUG plug risk, it’s a good idea if you want to invest in crypto using a safe and trusted application like Indodax.
Also, check out articles about crypto assets, blockchain, and more only at Indodax Academy.