Rug Pull eyewash: Principles, Identification, and Prevention

In recent years, the cryptocurrency market has been booming, attracting a large number of investors. However, various eyewash schemes have emerged alongside it, with Rug Pull being one of the most common. According to data platforms, in 2021, Rug Pull scams swindled approximately $2.8 billion in cryptocurrency from victims, accounting for 37% of all cryptocurrency scam revenues that year.

The latest data shows that in April 2023, the DeFi industry once again faced a wave of Rug Pulls, resulting in losses exceeding $6.2 million across 32 projects. Among them, BNB Chain was the hardest hit, with losses of about $4.5 million, accounting for more than 73% of the total losses. Ethereum and Arbitrum suffered losses of $1.05 million and $182,000, respectively, ranking second and third.

Definition and Types of Rug Pull

Rug Pull is a common cryptocurrency eyewash, mainly manifested by developers suddenly withdrawing from the DEX liquidity pool, causing the price of the coin to plummet, or exploiting centralized permissions and logical vulnerabilities to abscond with investors' funds.

Rug Pull mainly includes three types:

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

2. Restricted Sell Orders: Developers use code to restrict the sale of tokens only to themselves, selling for profit after the price rises.

3. Dumping: Developers sell a large amount of their held tokens in a short period, leading to a price crash.

How to Identify Rug Pull Risks

Investors should be wary of the following signs:

1. The identity of the development team is unclear or anonymous.
2. No liquidity lock set
3. There are restrictions on sell orders
4. Concentration of token holders, abnormal price fluctuations
5. Promising unrealistic high returns
6. Lack of third-party audits

Suggestions to Prevent Rug Pulls

1. Check if the project party has open-sourced the contract code and passed the audit.
2. Pay attention to the project's security guarantees and emergency measures
3. Verify whether the project permissions are decentralized, such as using multi-signature, time locks, etc.
4. Whether the white paper is consistent with the actual token issuance situation
5. Track the token issuance address and time

Conduct Due Diligence

Investors should:

• Be cautious of market speculation and avoid FOMO mindset.
• Verify the project team's background and past performance
• Carefully read the project white paper and other materials
• Understand the smart contract code and confirm whether it has been audited.
• Take ample time to research before making investment decisions.

In short, in the face of scams such as Rug Pull, investors need to remain vigilant and conduct thorough research. At the same time, all parties in the industry should work together to combat fraudulent activities, maintain market order, and promote the healthy development of the cryptocurrency industry.