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There is nothing as frightening to any investor as a financial scam, especially one that wipes out one’s entire investments in a project. Such occurrences aren’t just an enclave of cryptos either. The 2008 stock market crash caused by the too-big-to-fall Lehman Brothers caused a devastating global wipe-out of people’s savings.
The rug pull scam is frightening, though it’s not quite to the scale of the massive mainstream financial crisis that sends entire economies reeling back several years. So what is this rug pull scam, how does it occur, and is there any way to lessen their susceptibility to it?
What is Rug Pull?
A rug pull is a type of scam mainly within the Decentralized Finance ecosystem. It is a malicious maneuver wherein cryptocurrency developers abandon a project running away with investors’ funds.
How it Occurs
The developers can do that by advertising the project aggressively and initially making huge investments to boost its attractiveness. Investors who now consider the project viable and lucrative invest massively to make it again. Usually, they rope in a pumper-dumper whale investor whose actions of moving large liquidity into the project attract even more investors.
The demand-supply forces naturally push the prices up over time. And that’s all the developers, and the whale was waiting for all this time. Once the prices hit their preferred targets, they stage an exit by pulling out all the liquidity they can. The action causes huge market shocks that send prices crashing, well below what investors put into it, sometimes going down to zero.
Most Susceptible Cases to Avoid
While Rug Pulls can theoretically happen to any project, whether in cryptos or traditional finance, some likely cases are. These cases have several inherent vulnerabilities that make them the most exposed. They include;
Small New Decentralized Exchange projects
A very new and small decentralized exchange (DEX) project has all the hallmarks of rug-pull susceptibility. Although, that is not to say all are culprits of such. The most likely ones seem not to have any inherent advantage to bring to the sector but seem to be feeding a huge hype to investors.
First, decentralized exchanges don’t have listing audits like their centralized exchange counterparts; anyone can list tokens anytime. Second, it is easy to create a token on blockchains like Ethereum due to their open-source nature.
Such exchanges usually have some of the best returns and also tend to have some obscure protocol. So they’ll pair these tokens with common cryptos like BTC or ETH to attract investors before pulling the scam.
How to Reduce Susceptibility to Rug Pull DEXs
Avoiding them needs vigilance from one’s side. To begin with, one should check on the liquidity in a pool about the pricing of tokens in the pool. Most legit DEXs have algorithms determining the price levels per the available token balance. But more is needed since other factors may also affect pricing.
It is also advisable to avoid projects whose prices suddenly rocket in hours without real causative action, such as upgrades. One can also check locks on pools. Most times, a legitimate DEX will lock pool liquidity for specified periods.
Small New Crypto Projects
Decentralized exchanges aren’t the only suspects; entire blockchains can also be potential suspects. There are about 22000 different altcoins, the bulk of which are very small and new.
Normally, altcoins are released backed with innovation or concepts to take a slice of the crypto-market pie. If not, they are launched with a good strong use case, either within a certain geographic area of operation or to attract a certain clientele. The aim is still attempting to gain market share.
However, it could be more questionable if a cryptocurrency is launched without a new blockchain or any inherent innovative feature or target market. Often, the blockchain will need an open-sourced protocol and some obscure protocol. Where one can access data regarding the blockchain, several wallets (usually owned by the developers) control a substantial amount of liquidity.
How to Reduce Susceptibility Rug Pull Blockchains
There are several features one can look out for to steer clear of such potential blockchains. First, one should only accept small new coins whose prices rocket in a few hours or days with a significant change in the parent blockchain.
It is also wise to try and avoid a blockchain that doesn’t seem to have a clear market penetration trajectory other than relying on a whale investor. It should avoid it if the same blockchain has no innovative feature but is still enjoying strong price gains.
Even worse is when the developers and a whale or two hold most of the liquidity in the coin. Thus, tiny meme coins are a likely Rug pull scam source since they satisfy all the above red flags.
You should always use a vigilant approach when you invest in any project; there is always a possibility of one’s investments draining into the gutter. Online-based investment opportunities which involve one entrusting their hard-earned currency are even riskier.
Cryptocurrencies are quite lucrative investments, with many billionaires and institutions noticing them. Vigilance is, however, advised to avoid a rug-pull scam. This article gives clear guides on avoiding the pitfalls that may result in one falling for a rug pull maneuver. But playing safe to safeguard investments is always a wise move.