Rug Pull Explained: Potential Risks in the Crypto Assets World and Prevention Strategies

In recent years, the investment boom in Crypto Assets has continued to rise, but it has been accompanied by increasingly rampant fraudulent activities. Among them, Rug Pull, as a common scam tactic, has caused significant losses for investors. Data shows that the losses caused by Rug Pull scams reached as high as $2.8 billion in 2021, accounting for 37% of the total income from Crypto Assets scams that year. Even more concerning is that in April 2023, the DeFi industry faced another Rug Pull, resulting in losses of over $6.2 million for investors, involving 32 projects.

In these events, BNBChain became the most severely affected chain, suffering losses of approximately $4.5 million, accounting for more than 73% of the total losses. Following closely were Ethereum and Arbitrum, 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 scam, typically manifested when project developers suddenly withdraw the liquidity pool from a centralized exchange (DEX), causing the coin price to plummet, or exploit centralized permissions and logical loopholes to abscond with investors' funds. This behavior is particularly common in the DeFi space.

A recent suspected Rug Pull incident occurred on April 26, 2023, involving the DEX project Merlin within the zkSync ecosystem. The incident resulted in the theft of approximately $1.82 million in Crypto Assets such as USDC and ETH, as malicious developers exploited a vulnerability to carry out the Rug Pull.

Rug Pull mainly includes three types:

1. Liquidity Theft: Developers extract all tokens from the liquidity pool, causing investors' assets to instantly drop to zero.

2. Restricted Sell Orders: Developers restrict through code, allowing only them to sell the tokens. Once the price rises, the developers dump their holdings, leaving worthless tokens.

3. Dumping: Developers sell a large amount of their tokens in a short period of time, causing the price to plummet and rendering the value of the tokens held by other investors to zero.

Methods to Identify and Avoid Rug Pulls

Investors should be wary of the following signs that may indicate a Rug Pull risk:

1. Unknown or anonymous development team
2. Lack of liquidity lock-up
3. There are limits on sell orders
4. The number of token holders is limited, but the price skyrockets.
5. Suspicious high-yield promises
6. Lack of external auditing

In addition, investors should also:

• Check if the project is open source and has undergone strict auditing.
• Pay attention to whether the project has security measures and emergency plans.
• Assess whether the project permissions are overly centralized.
• Verify whether the token issuance situation is consistent with the description in the white paper.

The Importance of Due Diligence

Before investing in any crypto assets project, conducting thorough due diligence is essential. Investors should:

• Verify the background and past performance of the project team
• Carefully read the project whitepaper, website, and other related materials.
• Confirm whether the smart contract code has been audited by a reliable third party.
• Stay calm and do not be influenced by excessive hype and FOMO.

Conclusion

Rug Pull has become a major hidden danger in the Crypto Assets field, causing billions of dollars in losses. This article introduces the definition, types, and methods to identify and avoid Rug Pulls. Investors should learn to recognize potential risk signals, such as promises of high returns, anonymous development teams, lack of audits, and transparency.

Before investing in any project, thorough research or seeking professional team audit opinions should be conducted. With the continuous development of the crypto assets industry, individual investors, regulatory agencies, and law enforcement need to work together to prevent and combat fraud to maintain the healthy development of the market.