What Is Crypto Rugpull? How To Protect Yourself

The crypto sector has experienced its own share of positives and negatives in the past decade. New concepts like DeFi, Staking, and Yield farming have been introduced to bring about improved financial products for investors to increase their earnings.

With new innovations comes dangers and rugpulls are one of them. The general goal of most crypto projects is to create tokens that will generate use-cases and earning opportunities for investors and founders.

However, founders may get greedy, sometimes putting their selfish ambitions over the progress of the project. When this happens in DeFi, the result is what we call the rugpull scam. In this article, you’ll learn about rugpulls and how to protect yourself from them.

What is a Rugpull?

Decentralized finance depends largely on decentralized exchanges that offer trading pairs for individuals to swap tokens. These exchanges depend on individual liquidity providers to fund pools and are usually open-sourced.

This means that anyone can create a token and list it on most DEXes as long as they can provide liquidity to deal with the initial wave of demand. Since there are no regulations for listing tokens rogue developers and criminals can take advantage of this to list tokens without any plans to develop the proposed project.

A rugpull occurs when a developer lists a token and elopes with investors’ funds without developing the token.

How Does it Work?

Let’s say a new token is created on Ethereum by developers using smart contracts. The developers list the token on a decentralized exchange like Uniswap and provide initial liquidity. This is followed by an extensive social media promotion where investors are lured with a demo website and promise of solving a particular real-world problem.

The developers can also use airdrops and giveaways to entice investors that the project is real and convince them to invest in the token. Once the project starts gaining traction and the coin value rises by a significant percent, the developer swaps his premined tokens for ETH and withdraws the initial liquidity plus investors’ funds from the exchange pool.

Thus, investors are left with valueless tokens since the creators have already emptied the liquidity pool.

How to Protect Yourself from Rugpulls

There are so many rug pulls out there that you may be discouraged from the whole idea of investing in tokens.

Fortunately, however, protecting yourself from rugpulls isn’t rocket science. Some warning signs show that a project is a sure scam. Learning to recognize and avoid these warning signs will keep you from falling for scams.

Here are a few tips that can help protect you from rug pulls, even if you’re a newbie.

Research the Project

Research about the project in which you are about to invest. Like most other investments, you don’t go into Defi investments without research unless you have some bucks to gift to scammers.

Look at their structure; a legitimate investment should provide answers to how their services work, the challenges the team and investors will likely face, and the proposed ways to tackle them.

Know the Team

Take your time to go through the developers’ business history, what they were doing before crypto, and their previous involvements with any projects related to cryptocurrencies?

However, if they follow the growing trend in crypto where developers remain anonymous, you can go through their media handles.

You can also chat up with the project developers to see if they’re capable of running a crypto-based project effectively.

Github

Github is perfect for finding out about developing Defi projects. Development activities are displayed when you search for a project on GitHub.

However, if you’re not familiar with code, you may not find anything on GitHub enticing. This option is only applicable to users who are familiar with blockchain code and structure.

If you are, you’ll become even more scam-resistant.

Check the Liquidity Pool

Researching the liquidity pool can give you a foresight of the motive of a particular project. A project with high liquidity is probably not a scam as scammers don’t invest so much in a project.

Also, be wary of tokens that get sudden price boosts. Scammers do pump their tokens to attract investors.

Conclusion

The crypto market continues to evolve with growing adoption globally but negative elements like rug pulls still exist. When investing in a token, you should be extra careful to make sure that you’re not buying into a big scam.

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