Rug Pull Explained: Common Traps in Crypto Assets Investment and Prevention Strategies

In recent years, with the rise of Crypto Assets investment, various scam tactics have emerged. Among them, Rug Pull has become a common type of scam. Data shows that in 2021, losses from Rug Pull scams reached as high as $2.8 billion, accounting for 37% of the total revenue from Crypto Assets scams that year. In April 2023, the DeFi industry experienced another Rug Pull, resulting in losses of over $6.2 million, involving 32 projects.

In these incidents, BNBChain was the most severely affected public chain, with losses of approximately $4.5 million, accounting for over 73% of the total losses. Following it are Ethereum and Arbitrum, which lost $1.05 million and $182,000 respectively.

Definition and Types of Rug Pull

A Rug Pull is a type of Crypto Assets scam, typically characterized by project developers suddenly withdrawing liquidity pools or exploiting centralized permissions and vulnerabilities to abscond with investors' funds. On April 26, 2023, zkSync's ecological DEX Merlin was alleged to have conducted a Rug Pull, resulting in approximately $1.82 million in losses.

There are three main types of Rug Pulls:

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

2. Restrictive sell orders: Developers restrict through code, allowing only them to sell the tokens. After investors buy in, developers then sell off to profit.

3. Dumping: Developers sell a large amount of self-held coins in a short period, causing the price to plummet.

Methods to Identify and Avoid Rug Pulls

To avoid becoming a victim of a Rug Pull, investors should pay attention to the following points:

1. Pay attention to the background of the development team: Anonymous or unknown development teams may pose risks.

2. Check liquidity lock: Legitimate projects usually lock 80%-100% of the liquidity pool.

3. Beware of sell order restrictions: Try to buy a small amount of tokens and sell immediately to test for any restrictions.

4. Pay attention to unusual price fluctuations: especially in cases where there are fewer token holders.

5. Approach high yield promises with caution: excessively high returns may indicate high risks.

6. Verify third-party audits: Reputable projects often undergo independent audits.

In addition, investors should also:

• Check if the contract code is open source and has undergone strict auditing.
• Understand the project's security guarantees and emergency measures
• Verify whether the project permissions are decentralized
• Compare the white paper with the actual token issuance situation

The Importance of Due Diligence

Before investing in any crypto project, conducting thorough due diligence is essential. Investors should:

• Do not be influenced by project hype and FOMO emotions.
• Verify the background and past records of the project team
• Carefully read the project whitepaper and other materials
• Understand the details of the project's smart contract
• Confirm that the contract code has been audited by a trusted third party.

Conclusion

Rug Pull has become a major threat in the Crypto Assets world, causing significant losses. This article introduces the definition, types, and methods to identify and avoid Rug Pulls. Investors should remain vigilant, learn to recognize potential signs of fraud, and conduct thorough research before investing. Additionally, as the industry develops, individuals, regulatory bodies, and law enforcement need to work together to prevent and combat such fraudulent activities, ensuring the protection of investors' interests.