There’s no doubt that crypto veterans are more focused on the benefits of Defi than the inherent risks. However, the disruptive advantages of crypto assets attract innocent investors, as well as digital scammers, who see the potential to make quick gains in the industry.
Often these hackers and attackers pose as credible representatives offering ‘too good to be true’ dividend incentives for buying digital tokens.
Although Defi is a relatively new and developing industry, the emergence of sneaky strategies of scammers is resulting in million-dollar losses for eager and often affluent investors.
As the Defi sector expands and crypto coverage options take the scene, we are quickly understanding that it seems the most effective way forward to minimise the risks and avoid negative repercussions is to create awareness.
Let’s take a look at what defines a rug pull exit scam.
What’s a Rug Pull?
Remember the infamous pump and dump schemes that frequented the market during the ICO boom of 2017? If you do, let’s hope you weren’t one of the victims who fell for these malicious agendas.
The scheme is as old as time, and we’ve seen the simple string of operations play out in multiple industries before Defi, including on Wall Street. Through smooth-talking and manipulative marketing strategies, the Jordan Belfort’s of crypto entices buyers into an attractive high potential project, pushing the token price up, hence the ‘pump’. Only to then dump the token price by withdrawing liquidity at peak prices, leaving many investors dumbstruck with empty pockets.
Similar to pump and dumps, one of the most occurring exit scams since 2020 is the more advanced rug pull scheme. So how does a rug pull compare to a pump and dump?
“A rug pull happens when founders start a crypto project with the sole intent being to cash out and disappear with investor funds”.
These project developers suddenly remove liquidity from the market in cohesion, leaving investors with worthless tokens. These types of exit scams most commonly occur on DEX. Developers tie their tokens to other cryptocurrencies allowing them to drain liquidity and leave with the valuable counter token. Alternatively, project owners might discretely create backdoors in their smart contract codes to syphon out investors’ capital.
How To Spot Rug Pulls Red Flags
Fraudsters are becoming increasingly meticulous at hiding their ulterior motives. Let’s discuss identifying and avoiding some of the red flags you should be looking out for when investing in DeFi projects. It is important to note that if the project you’re scrutinising raises one or several red flags, it does not necessarily mean the project is destined for an exit scam. The appearance of red flags merely indicates to be on guard and further investigate the project. The abundance of red flags is a whole different story though.
- Disengaged Developers
One potential warning sign of a project that you don’t want to get involved in is one with distant developers. Be aware when the teams’ focus is purely on flashy marketing strategies and mass promotion rather than dealing with the nitty-gritty protocol concerns and security assurance for users. Do the developers engage in user discussions and questions of legitimacy, like AMA’s and audits? Or is the team worried the community will discover unlocked backdoors?
2. Largely Centralized Token Distribution / Few Wallets
Stay clear of large centralized projects, where project developers hold more than 45% of tokens in circulation. This can be a red flag for investors considering buying the token. It is always advisable to check token distribution and the anonymity of token holders before investing. After all, the appeal of digital currencies stems from the characterization of decentralization.
3. The Promise of High APY
As mentioned, new projects are usually more susceptible to hacks or protocol integration failures. Some projects promise/guarantee high initial gains for token holders, for example, a 5000% APY. Occasionally this is the case for new projects wanting to boost liquidity. However, it is highly unlikely for an established project. Take caution to FOMO (fear of missing out) strategies enticing buyers by promising high initial returns.
How to avoid a rug pull
Did you do your research on a project and you want to take a moonshot? Covering your crypto is the answer to accessing significant upside potential without the extreme downsides like falling victim to a scam.
No more need to worry about rug pulls. Here at CryptoArena.Africa, we aggregate crypto solutions to avoid the risks effectively. With the right crypto coverage, you can safely invest in any Defi project without the threat of incurring huge, unprecedented rug pull losses. Why wouldn’t you want to spare some of your time to learn everything about crypto to protect yourself against the massive financial losses you could incur if the rug is pulled?
When in doubt, take a crypto cover out.
Always do your own research before investing in any crypto project. Very, importantly also, diversify your investment so that your risk is spread across different assets.
Conclusion
As decentralization continues to revolutionize the world of finance, the avenues to which hackers or developers can exploit protocols and smart contracts is ever increasing. The black hats pulling the rugs from under investors feet are not going anywhere, and neither are we. We are excited about how DeFi coverage gives users the ability to increase control over their finances in an uncontrolled paradigm.
