That thriller of cryptocurrency, where even the most fastidious investor gets clouded by stratospheric returns, holds one significantly sinister fraud known as the "rug pull."
The word refers to a scenario in which developers suddenly withdraw their support from a project, taking with them the funding, and leaving behind nothing but a shell of broken dreams and worthless tokens.
In this article, we'll discuss the basics of rug pulls, how they work in the memecoin community, and how you might avoid becoming a victim.
The Basics: What is Rug Pull?
In the crypto world, a rug pull means the sudden "pulling of the rug under the investors' feet" by creators of crypto, who siphon away the liquidity pool, the reservoir of funds that facilitates trading on decentralized exchanges or selling off a big stash of tokens of the very project, crashing the token value to zero. This is rather than a breach of trust; it is a methodically orchestrated treachery that can bankrupt investors.
Image 1 - Rug Pull chart (for Reference)
Rather than the immediate loss of funds, rug pulls have disastrous consequences that run deeper. They erode trust in a booming crypto economy, scare off new investment, and attract increased scrutiny from regulators. Individual investors suffer terrible financial blows or lose their trust in decentralized finance. The macro implications may lead to fear of chaos and, by extension, fuel panic selling and ruin the good name of the bitcoin market.
Types of Rug Pulls
Rug pulls can take numerous forms, each with its method of execution:
Liquidity Theft: By far, the most common rug pull activity is liquidity theft. Developers create a token and add liquidity to DEX. They market their product with the promise of great return, and as soon as there is enough investment in the token, developers steal all the liquidity that they add, leaving investors unable to sell their tokens.
Token Minting or Infinite Supply: Smart contracts can create new tokens anytime, as a developer may have designed. They issue a huge number of tokens, flooding the market and making its value crash. The investors are left with worthless tokens once developers cash out.
Dump After Pump: Developers push the project to artificially inflate the price of tokens. The longer they could keep the price high, the more money they would make from selling their tokens at that inflated price. But eventually, once the price peaks, the developers dump all their tokens in the market, and the price of the tokens crashes. The persons who bought in at the high prices get completely liquidated.
Front-running Rug Pull: The developers use bots to watch and then execute buy orders that are before their investors, taking advantage of a bit of price swing before their investors can react. This means the creators can quit briskly, profitably, and without any drawbacks on account of price manipulation.
Roadmap/value Rug Pull: The developers promise long-term usability, development, or partnerships and then ghost the project after securing investment funding from investors. There is no liquidity draining, but the project fails, leaving worthless tokens in the hands of investors while the crew quietly disappears.
Pre-Sale Funds Exit Scam: The developers create a pre-sale in which they promise that future returns will be rewarded to the investors. Instead of issuing the coin to the buyers, they collect money from the pre-sale and make an exit.
Rise in Memecoins Rug Pull
Meme coins are driven by internet memes and online communities. Unfortunately, this rally also carried along a horror increase in rug pulls. Here are some of the key factors that lead to meme coin rug pulls:
Lack of Regulation: The cryptocurrency sector, particularly the meme coins, sometimes operates within a grey area that is largely unchecked by regulatory authorities. A system without regulation allows hackers to be able to scam investors with ease.
FOMO and the excitement: A sudden rush of meme coins usually comes with FOMO that forces investors to invest without thorough research.
Secretive and Low on Transparency: Most meme currency projects keep their developers anonymous, and a series of measures cannot allow the investor to check the credibility of the development team along with their intentions.
Cheap entrance Barriers: The low cost of entrance in the meme coin market is relatively low for so many wide categories of investors, hence attracting so many, including those who were even known to be more vulnerable to fraud.
All these sums up to provide an ideal breeding ground for rug pulls where entrepreneurs only market projects and hike the prices afterward, then take off with money meant for investors. Investors should, therefore, be fully aware of all risks associated with meme coins before investing.
Identifying a Rug Pull
Anticipating a rug pull is tough, but possible. You just need to be aware of the signs or indicators of a possible rug pull so that your money can be protected. These pointers will help you through the red signs and avoid rug pulls:-
Unknown or Unaccountable Team: If the folks working on the project are unknown, or at least, do not have a history that has been documented, this is a big red flag. Most legitimate initiatives, by having transparent teams and verified histories, will avoid issues related to unknown or unaccounted-for teams.
Unrealistic Promises: Be very cautious of initiatives that promise assured returns, large riches in a short period, or other exaggerated marketing statements. If it sounds too good to be true, chances are, it probably is.
Lack of Liquidity: Find out whether the token is liquid or not. In case the project in question has extremely low liquidity, it is a perfect sign of a rug pull. If liquidity all of a sudden becomes reduced, it might trap investors because they cannot sell.
No External Audit: Legitimate crypto projects should solicit audits from reputable third parties to confirm the legitimacy and accuracy of their smart contracts. Any project without auditing or relying on some unknown audit firm is a red flag.
Sudden Token Price Spike: A sudden spike in the token's price followed by a crash can indicate a pump-and-dump. Be wary of sudden spikes that aren't correlated with the project's progress.
There is no lockup term for team tokens. There should be a vesting schedule or lockup term on the tokens issued to the team; otherwise, developers can sell these fast and jump ship from the project.
There is no clear roadmap or whitepaper. The legitimate projects would have a pretty considerable road map, white paper, and all objectives set well. If these are incomplete or vague, then it has red flags written all over it.
Super High Degree of Suspicious Contract Code: Scanning the smart contract code used for the project yourself or having a trusted team of developers peer-review it is possible. If the code looks easily manipulated by developers, it might mean there will be a rug pull.
How to Protect Yourself from Rug Pulls
From what we learned about understanding rug pulls, let's focus on real-life means by which to safeguard assets. It's time to provide you with some working tips and information so you don't fall prey to these deceitful crypto projects.
1. Use research tools: You can input the contract address of a meme coin on RugCheck and Birdeye and check the risk indicators. There you may find signals like mint authority being active, liquidity being low, or just a few people holding large amounts of tokens.
2. Scan the Top Holders: Look through the top token holders. This is a scary red flag for a rug pull if only one or two addresses control a large amount of supply.
Image 2 - Top 10 holders of a popular crypto (for reference)
3. Ownership Renouncement Verification: Verify that the ownership of the token has been renounced so devs no longer have control over the contract.
4. Social Presence Research: Check whether the meme currency has an existing community on sites such as Telegram or Twitter. Check if real engagements exist rather than inflating engagements artificially.
5. Be Careful: No matter the research, rug pulls can occur. Set stop-loss limits and be prepared to throw in the towel if things begin to go south. Have a Telegram bot, such as Trojan on Solana, at your beck and call for you to quickly buy and sell your coins, thus reducing the chance of getting rugged.
Conclusion
Due to the hype surrounding meme coins as well as the promise of quick returns, most investors are often oblivious to the dangers associated with rug pulls. With your knowledge of the common practices fraudulent individuals engage in and by implementing the solutions outlined within this article, you may be able to dramatically reduce your chances of becoming one of their victims.
Remember, when it comes to cryptocurrency, due diligence is a must. Never invest in a meme currency project if you don't do a lot of research; try to avoid the hyped ones and promises not yet realized. Memecoins are interesting, but risky too. So, just invest wisely and choose fundamentals over hype.
