What Are Crypto Rug Pulls?
A crypto rug pull is a form of scam that can take place when the developers (and sometimes some outsiders) suddenly withdraw all liquidity to prevent retail traders from selling their tokens, leaving them with worthless coins or an empty bag. The name "rug pull" is in reference to how someone could have the rug pulled out from under them and they would fall, but instead of a physical person falling over, it's the associated cryptocurrency plummeting as well after support has been "pulled," i.e., abandoned by developers.
Examples of rug pulls
Liquidity rug pulls: Developers provide initial liquidity to a decentralized exchange (DEX) and attract capital from investors but subsequently remove all the provided liquidity, making it impossible for those same investors to sell their tokens.
Minting Rug Pulls: The developers have included a "backdoor" in the smart contract that allows them to mint an unlimited number of new tokens and then take advantage by selling and crashing price.
Sell-Off Rug Pull: Developers sell many of their own tokens at once, dumping on the market and reducing price to zero.
Avoiding Meme Coin Rug Pulls
Meme coins such as Dogecoin, Shiba Inu, etc. gained popularity but were many times created without any real use case; hence, investing in them is the highest risk involved in this space. Well, here to make sure you don't get caught in the trap of a meme coin rug pull.
1. DYOR (Do Your Own Research)
Due diligence on the team: verify whether or not they are publicly named members of a reputable group. Anonymous or unknown teams are often red flags.
Check Whitepaper: A genuine project needs to provide a white paper that clearly explains the purpose and use case of it. If it is too vague or poorly written, proceed with caution.
Check for Audits: See if the smart contracts of the project have auditing done by reputable third party firms like CertiK or Hacken. Of course, an audit isn't foolproof, but it helps against malicious code sneaking in.
2. Check the liquidity pool
Due diligence: Check if the liquidity is locked for a period. This prevents the developers from suddenly pulling their money out. Make verification on platform, i.e., Unicrypt, Team Finance.
Liquidity Depth : Assess the size of the liquidity pool. A small pool can be easily manipulated by developers executing a rug pull.
3. Take a look at the tokenomics and contract code
Token Distribution: Check the distribution to determine if a small group owns most of the supply. This focus could bring about significant sell-offs.
Check the contract for go-off triggers like minting as many tokens and/or changing other contract parameters. RugDoc or Token Sniffer are one of the tools to identify this problem earlier if you have no idea about coding.
4. Monitor community and social media activity
Community Engagement: Look for real social media activity. Avoid bots or inactive developers.
Fake Enthusiasm: Always check if the project promises unrealistic or product heavy marketing with the least value. HypeRug pulls almost definitely use hype in bringing about quick investments.
5. Use Reputable Exchanges and DEXes
Stick to trusted exchanges like Binance and DEXs. Avoid lesser-known platforms with inadequate security checks.
Beware of âCopycatâ Tokens: Be wary about tokens that closely mimic the names or symbols of famous meme coins, as it can be a trick played by scammers.
6. Keep an eye on unusual price movements.
Pump and Dump Schemes: If a price spikes out of nowhere and then quickly craters back to Earth, that usually means you just witnessed this type of scheme in action. An immediate red flag is if a token price increases 10x or something ridiculous with no indication of new developments and announcements.
Watch Liquidity: Keep an eye on the liquidity pool for strange withdrawals. As with HubrisOne, this could signal large or regular withdrawals by developers in preparation for a rug pull.
7. Implement risk management
Only Invest What You Can Afford: Meme coins are highly speculative. Never invest what you cannot afford to lose.
Naturally, all the money you want to invest will not be put into one meme coin or any high-risk token. This is why diversification can aid in reducing losses.
8. Blockchain analytics or tracking tools
Token Trackers & Alerts: Use tools like Etherscan, BscScan, Nansen, and DeBank for monitoring wallet activity, big transactions, or liquidity shuffles.
Beware of Red Flags: Visit Token Sniffer or RugDoc before investing to find potential scams and assess the smart contract security measures along with an easy risk warning up front.
