Rug Pull eyecandy: A New Type of Risk in the Crypto Assets Field and Prevention Measures

In recent years, with the rise of Crypto Assets investment, fraudulent activities have become increasingly rampant. Among them, Rug Pull has become one of the most common eyewash in the crypto world. Data shows that in 2021, Rug Pull scams swindled approximately $2.8 billion in Crypto Assets from victims, accounting for 37% of all Crypto Assets scam revenue that year. Even more concerning is that in April 2023 alone, the DeFi industry experienced 32 Rug Pull incidents, resulting in losses of over $6.2 million for investors.

In these events, BNBChain became the most severely affected chain, with losses of approximately $4.5 million, accounting for more than 73% of the total losses. Following closely are 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 encryption eyewash, usually manifested as developers suddenly withdrawing liquidity from a DEX liquidity pool, causing the coin price to plummet, or using centralized authority and logical loopholes to abscond with investors' funds. This behavior is particularly common in the DeFi space.

Rug Pull mainly includes three types:

1. Liquidity Theft: Developers withdraw all funds from the liquidity pool, causing the token value to drop to zero.

2. Restrict Sell Orders: Developers restrict through code, making themselves the sole party able to sell the tokens.

3. Dumping: Developers quickly sell off large amounts of tokens, causing the price to plummet.

How to Identify and Avoid Rug Pulls

Investors should be aware of the following risk signals:

1. Unknown or anonymous development team: Lack of transparency and accountability.

2. No Liquidity Lock: The token supply is not locked, increasing the risk.

3. Sell Order Restrictions: Some investors are unable to sell their tokens.

4. Price Anomalies: Especially in cases where the number of coin holders is limited.

5. Suspicious High Returns: An excessively high annualized return may indicate risk.

6. Lack of External Audits: Projects without third-party verification carry potential risks.

In addition, investors should also pay attention to:

• Is the contract code open source and has it undergone rigorous auditing?
• Are there relevant security guarantees and emergency measures?
• Is the project authority overly centralized?
• Does the token issuance situation conform to the description in the white paper?

The Importance of Due Diligence

Before investing in any crypto assets, conducting comprehensive due diligence is crucial. Investors should:

• 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 undergone reliable third-party auditing.
• Be wary of excessive hype and marketing strategies that create FOMO (fear of missing out) mentality.

Conclusion

Rug Pull has become a significant threat in the Crypto Assets world, causing substantial losses for investors. By understanding its characteristics, types, and preventive measures, investors can better protect their asset security. However, as the encryption industry continues to evolve, individuals, regulatory bodies, and law enforcement must work together to prevent and combat such fraudulent activities. Before making any investment decisions, it is essential to conduct thorough research and seek professional team's audit opinions if necessary, to minimize risks.