Rug Pull: A Dangerous Trap in the Crypto Assets World

In recent years, with the rise of Crypto Assets investment, cases of fraud have also been increasing. Among them, Rug Pull has become a common scam method. According to data platform statistics, the losses caused by Rug Pull scams in 2021 reached as high as $2.8 billion, accounting for 37% of the total revenue from Crypto Assets fraud that year.

In April 2023, the DeFi industry was once again hit by a Rug Pull, involving 32 projects and causing investors losses exceeding $6.2 million. Among them, the BNB chain suffered the most severe impact, with losses amounting to approximately $4.5 million, accounting for over 73%. Ethereum and Arbitrum ranked second and third, with losses of $1.05 million and $182,000, respectively.

Definition and Types of Rug Pull

Rug Pull is a type of Crypto Assets scam, usually manifested as developers suddenly withdrawing from the DEX liquidity pool, causing the coin price to plummet, or using centralized permissions and logical loopholes to abscond with investors' funds. On April 26, 2023, the zkSync ecological DEX Merlin was suspected of experiencing a Rug Pull event, resulting in a loss of approximately $1.82 million.

Rug Pull mainly consists of three types:

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

2. Restrictive Sell Orders: Developers use code restrictions to make themselves the only party able to sell the tokens.

3. Dumping: Developers quickly sell off a large amount of holdings after the token price rises, causing a price crash.

Methods to Identify and Avoid Rug Pulls

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

1. Unknown or anonymous development team
2. Lack of liquidity lock
3. There are restrictions on sell orders
4. Price surge caused by limited token holders
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 rigorous auditing.
• Pay attention to the security measures and emergency plans of the project.
• Assess whether the project's permission management is decentralized.
• Verify whether the token issuance is consistent with the white paper.

The Importance of Due Diligence

In order to ensure investment safety, investors must conduct comprehensive due diligence. This includes:

• Verify the background and past performance of the project team
• Carefully read the project white paper and other relevant materials
• Check if the smart contract has been audited by a trusted third party.
• Be wary of excessive hype and manufactured urgency

Investors should ask themselves: Does the project team have a good reputation in the encryption community? Do they have prior successful project experience?

Conclusion

Rug Pull has become a major hidden danger in the Crypto Assets world, causing huge losses. This article introduces the definition, types, and methods for identifying and preventing Rug Pulls. Investors should learn to recognize risk signals, such as promises of high returns, anonymous development teams, and lack of audits. It is crucial to conduct thorough research and seek professional advice before investing.

With the continuous development of the Crypto Assets industry, individuals, regulatory agencies, and law enforcement need to work together to prevent and combat fraud, and to maintain the healthy development of the market.