Rug Pull eyewash: Identification and Prevention

In recent years, the cryptocurrency market has been booming, attracting a large number of investors. However, this has been accompanied by the rise of various eyewash, the most common of which is Rug Pull. Data shows that in 2021, losses from Rug Pull eyewash reached as high as $2.8 billion, accounting for 37% of the total revenue from cryptocurrency scams that year.

In April 2023, the DeFi industry experienced multiple Rug Pull incidents again, causing investors a loss of over 6.2 million USD, involving 32 projects. Among them, BNBChain suffered the most severe loss of approximately 4.5 million USD, accounting for more than 73% of the total losses. Ethereum and Arbitrum suffered losses of 1.05 million USD and 182,000 USD respectively, ranking second and third.

What is a Rug Pull

Rug Pull is a type of cryptocurrency eyewash, usually manifested as project developers suddenly withdrawing funds from the DEX liquidity pool, leading to a sharp drop in coin prices, or using centralized permissions and logical loopholes to abscond with investors' funds. This is a typical scam technique in the DeFi field.

Recently, a suspected Rug Pull incident occurred on April 26, 2023, involving the zkSync ecosystem DEX project Merlin. Shortly after launching a three-day presale, approximately $1.82 million worth of USDC, ETH, and other cryptocurrencies were stolen due to malicious developers exploiting a vulnerability to carry out the Rug Pull. The incident is still under investigation.

The Main Types of Rug Pulls

Rug Pull mainly consists of three types:

1. Liquidity theft: Project creators withdraw all funds from the liquidity pool, causing investors' tokens to instantly become worthless.

2. Restrictive sell orders: Developers set restrictions in the code so that only they can sell the tokens. Once investors buy enough, the developers sell off to profit.

3. Dumping: Developers sell off large amounts of their held tokens, causing the price of the tokens to plummet, rendering the tokens held by other investors worthless.

How to Identify and Avoid Rug Pulls

The following 6 signs are worth paying attention to, as there may be a risk of Rug Pull:

1. Unknown or anonymous development team
2. No liquidity lock
3. Sell Order Limit
4. The number of token holders is limited, but the price skyrockets.
5. Suspicious high returns
6. No external audit

In addition, investors should also pay attention to:

• Check if the contract code is open source and has been rigorously audited.
• Does the project have security guarantees and emergency measures?
• Does the project have permission to transfer user funds?
• Is the project authority highly centralized?
• Is the token issuance consistent with the white paper?

Conduct Due Diligence

Before investing, investors should:

• Carefully study the project team's background and track record.
• Verify whether the smart contract has undergone a reliable third-party audit
• Fully understand the project whitepaper, website, and other materials.
• Be wary of excessive hype and FOMO mentality
• Spend enough time conducting thorough investigations.

Conclusion

Rug Pull has become a serious problem in the cryptocurrency field, causing huge losses. Investors should be vigilant, learn to identify risk signs, and conduct thorough research. At the same time, all parties in the industry must work together to prevent and punish such eyewash behaviors, and maintain the healthy development of the market.