Rug Pulls: How to identify them and how to protect yourself

A “rug pull” is a figure of speech that describes the feeling of someone pulling a rug you were standing on unexpectedly, therefore leaving you to fall. In cryptocurrency, a rug pull is a common type of scam where the developers of a project abandon the project unexpectedly with the liquidity of the investors.

Rug pulls follow these common steps:

#1 Developers build a project (can be an NFT, Token, DApp) usually based on a meme or popular topic in the mainstream media by copying the whitepaper of another project.

#2 They then create a social media presence and popularity using advertisements (meme adverts), influencers, or celebrities to hype the project and make investors feel some FOMO.

#3 Over-ambitious promises are made about the objectives of the project and how it will be revolutionary.

#4 Upon launch, the project will be pumped and dumped in a relatively short period of time.

Rug pulls are common because crypto is not regulated in many parts of the world, which leaves the door open for bad actors to take advantage of it. Recent examples of rug pulls include the Squid Game Token (SQUID) scam, which was named after the popular Netflix show, but in reality, had nothing to do with it. Additionally, it is relatively easy to create a project by simply copying an existing project’s whitepaper and its open-source code.

These are some regular red flags that can be used to identify a rug pull:

• If it’s too good to be true, it probably is.

• Excessive promotion and hype before the product is launched.

• Projects with no underlying value or appear to be the derivative of another project.

• Projects with low social media presence and availability to the community.

• Projects that have not had a long existence before launch

• Tokens or DApps that have not had a code audit by the community.

• Ensure there is no lock-up or heavy demands on claiming liquidity.

• Unidentified founders or people with a negative history within the space. 

Unfortunately, despite all these red flags, some people are still tempted by the promise of high returns. The best advice we can give you is to not get too greedy. No such thing as a free lunch!