Crypto scams are becoming increasingly sophisticated. For example, deep fakes of Ripple CEO Brad Garlinghouse are being used to try and trick people out of money. In turn, the broader community will have to become equally sophisticated to steer clear of traps being set by shady crypto projects.
One particular type of crypto scam proliferates today—rug pulls. These are an exit scam wherein crypto developers abandon a project and run away with investor funds. A rug-pulled token traded at a certain price on charts before the bottom suddenly fell out. In these cases, the founding team generally disappears, taking with it most liquidity, and leaving the community holding the proverbial bag.
Rug pulls and other scams proliferate due to the ease with which developers can create certain, generally useless tokens. Once a token has been created, all you need next is a website and social media presence to come across as a bonafide digital asset product. And on social media, anybody can fake a following by buying followers and paying them to like and comment.
Rug pulls typically are conducted by teams unwilling to show their faces or little team credibility, which can be established by examining employment history, industry connections and social media profiles.
While in some rug pulls the team dumps their token on the market after an initial pump, in others developers code malicious back doors into their projects. Both prove difficult to investigate and prosecute. That’s why it’s so important to know what to look for when it comes to crypto rug pulls.
In some cases, a creator wallet could have some clues to the viability of a token launch. If it appears to be a personal wallet with a history of small transactions, a token launch could be an attempt by an individual to steal funds from would-be investors. The wallet might also be new, which could also be a red flag, especially if other information about the team behind a particular project is hard to come by.
In rug pulls, teams often conduct “straw” purchases immediately following the listing of their token. Rug pulls often begin with a procurement of liquidity, followed by related wallets making initial purchases in order to create a pump. Creators and related wallets then sell and stop providing liquidity.
Reputable projects lock founder tokens for a period of time before they can be liquidated. If a project has not locked tokens, it is likely founders intend to sell early in order to lock in profit, which could lead to a drop in the token’s price and loss of funds. A project might choose to escrow liquidity with a well-known launchpad. Either way, a project’s team ought to be public if they are launching a token with allocation for core team members.
When examining a project, learn about a project’s use case and whether or not the token has native utility. The project might have a functioning and audited product on test net or at least a public GitHub where progress can be tracked.
Examining a cryptocurrency’s white paper can also lend key insights into what’s going on under the hood. If a white paper is confusing, and written in an ambiguous and unclear manner, you might be looking at an exit scam. White papers cover a wide range of topics, including the summary, the mission, the tokenomics, how the contract works, the team behind it, and more. If the white paper skirts over these important details, it’s best to write the project off for the time being. Each project should undergo an external audit, though such audits don’t necessarily examine a project’s long-term viability. Just that the code checks out.
A brief overview of a project’s marketing could give you insights into its integrity. If a project is telegraphing that you will get rich by buying the token, stay away. If, on the other hand, a project uses marketing opportunities to educate about its offering and the wider space, it could be that the project takes its position in the industry seriously as intends to stay for the long haul. If a project seemingly has a lot of media coverage, be sure it is not sponsored promotions.
Ultimately, the best way to avoid a rug pull is to participate in those digital asset communities with clear and proven use cases. For a wide range of people, perhaps sticking to the top ten coins at any given time is the best way to start.
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