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Crypto News

What Are Rug Pulls in Crypto and How to Avoid Them?

Author

John Asher

Tags

Reading time

7 mins
Last update

Author

John Asher

Tags

Reading time

7 mins
Last update

Author

John Asher

Tags

Reading time

7 mins
Last update

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The decentralized finances (DeFi) are a rapidly growing sector in the global financial market. As their usage increases, so does the potential for scams. One of the most popular scams is called ‘Rug Pulls’ and they can be incredibly damaging if not avoidedR. These scams, which involve the sudden and unexpected withdrawal of funds from an investment, have cost investors millions of dollars.

In this blog post, we’ll look at what a rug pull is, how to identify it, and how to protect yourself from it. We will also talk about some DeFi like FROSTIES NFT, RING Financial, CHAIN LINK and explain you if they were honest projects or Rug Pulls.

What is a Rug Pull?

A rug pull is a type of scam in the cryptocurrency market. It typically involves a team of developers creating a project with a whitepaper and token offering, only to ‘pull the rug’ out from under investors by disappearing with the proceeds of the sale. It’s a type of exit scam, where the developers take the money and run.

It’s becoming increasingly common, with reports of dozens of rug pulls occurring in the past year alone. It’s a major problem for the crypto industry, as it undermines trust in the sector and can lead to significant financial losses for investors.

Rug pulls can have a devastating impact on token holders. Not only can you lose the money you invested, but you can also be left with products or tokens that have no real value. This can be especially damaging if you’ve invested a significant amount of money in the project.

Moreover, rug pulls can have a negative impact on the entire cryptocurrency market. It can lead to a decrease in trust in the sector and make it more difficult for legitimate projects to get funding.

How Crypto Rug Pulls Work?

The term “rug pull” is derived from the literal image of a rug being pulled out from under one’s feet, suggesting that investors were tricked into investing in a project that was never going to succeed. This type of scam is especially dangerous for those who invest without doing proper due diligence, as it is often hard to detect until it is too late.

Crypto rug pulls can take on many forms, from limited-time offering (LTO) scams to pump and dump schemes and exit scams. In an LTO scam, the project team will offer a limited amount of tokens at a highly discounted rate, claiming that they will be worth a lot more in the future. They will then exit the project with the funds, leaving investors with nothing.

Pump and dump schemes are another popular form of crypto rug pull, where the project team will artificially inflate the price of the tokens by promoting them heavily and buying them back periodically. This is done in order to attract more investors and to give the team an opportunity to sell their tokens at an even higher price.

Exit scams are the last type of crypto rug pull, where the project team will abruptly exit the project with the funds they have raised, usually without any warning. This is done in order to avoid any legal recourse and to protect their own funds.

No matter what the form, crypto rug pulls can be devastating for those who have invested. It is important to do thorough research before investing in any project, and to remain cautious of any project that is not open and transparent about its team and its operations.

Signs of a Crypto Rug Pull Scam

The best way to avoid a rug pull is to be able to identify it. Here are some of the most common signs of a rug pull:

  • The project has no real-world use-case or application.
  • The team has a history of rug pulls or exit scams.
  • The team is anonymous or changes frequently.
  • The project is hyped up on social media with little or no substance.
  • The project has no open-source code or documentation.
  • The project has an unusually high circulating supply.
  • The project has multiple token listings with no real use case.

If you see any of these signs, it’s best to avoid investing in the project.

Was FROSTIES NFT a Rug Pull ?

The infamous Frosties rug pull was a classic example of a rug pull with devastating effects. Frosties was a collection of colorful, animated ice-cream-inspired characters in the fun, lighthearted vein of Doodles. The collection dropped on January 9th 2022 when the Frosties Discord server vanished alongside the original project’s Twitter profile, having briefly displayed the message, “I’m sorry.”

The Frosties scam led to the theft of at least $1.2 million, moved in a series of rapid transfers of funds from Frosties’ OpenSea wallet to other accounts, leaving a community, which numbered roughly 40,000 at its peak, stunned.

Other research has also mentioned that large transfers have also taken place. This time, the scammer used Tornado Cash, an Ethereum-based tool that obfuscates the source of funds by using stealth addresses.

Was CHAIN LINK a Rug Pull?

In 2017, Sergey Nazarov and Steve Ellis created Chainlink. At its core, the project acts as a “bridge” between a blockchain and off-blockchain environments.

It is a decentralized oracle network that provides real-world data to smart contracts on the blockchain. Smart contracts are pre-specified agreements on the blockchain that evaluate information and automatically execute when certain conditions are met. LINK tokens are the digital asset token used to pay for services on the network.

Chainlink can facilitate secure communications between Ethereum projects and various off-chain data. Because Chainlink’s LINK token is built on the Ethereum platform, LINK is compliant with the Ethereum platform’s protocols.

But due to the very pronounced volatility and weakness of altcoins has caused the project to fall apart. Rumors circulated that the project was a scam, but it was clear that it was not a rug pull.

Now let’s talk about another project that was not a Rug Pull but rather was the victim of a cyber hack.

What happened with RING Financial?

Before we explain how RING Financial was unfairly accused of being a scam and a Rug Pull, let’s first look at how RING Financial became one of the top DeFi’s with their project.

RING Financial was intended to be the ideal solution so sought after by crypto enthusiasts. It was the all-in-one platform that wanted to make cryptocurrencies more accessible. With RING Financial, you will no longer have to waste time and search for the best cyptos on the market yourself before making any token purchase.

RING Financial’s algorithms would take care of everything. It is important to note that RING Financial has been growing at an unprecedented rate and paying its noders daily. This is completely contrary to the scamming techniques of Rug pulls.

As RING Financial became more and more popular, the other DeFi’s that were its direct competitors started to lose their prospects. Obviously, this started to attract hackers who started to look for loopholes in the smart contract to commit scams against RING Financial.

This is how on December 5, 2021 between 2:01 and 2:06 pm, a hacker was able to take advantage of a loophole to commit fraud. It may surprise you, but it only took 5 minutes for the hacker to carry out the crime against RING Financial.

We were able to get all this information because of the blockchain scanner that was able to save the information about the transactions made related to RING Financial. We were even able to get the links of the transactions. You can check them here.

Wallet executing transaction for hack exploit: 0xfe58c9e2ecb95757be6f4bca33162cfa346cc34f

Ring smart-contract address: 0x521ef54063148e5f15f18b9631426175cee23de2

Ring reward pool address: 0xa46cc87eca075c5ae387b86867aa3ee4cb397372

Transaction hack exploit:

TRX 1

link: https://bscscan.com/tx/0x596d38494ea5ae640b2a556a7029692928f15713d22b5948477c4eb4a92cf68e

TRX 2

link: https://bscscan.com/tx/0xfc890c855709bb6aeb5177ee31e08751561344402a88af13e7dfd02b9a2f6003

TRX 3

link: https://bscscan.com/tx/0x35c2f1ed9c5ce13a714af6c0dcbbce8fe720f7d6212232b6dd3657d8799a10f1

From all of the above, we can deduce that RING Financial was not a rug pull. What really happened is that RING Financial was rather a victim of the weakness of smart contracts. Indeed, a hacker took advantage of this to commit scams and frauds. Which resulted the crypto

community accusing RING Financial to be a scam.

Tips for Staying Safe in the Crypto Market

Here are some tips for staying safe in the crypto market:

  • Only invest what you can afford to lose.
  • Do your research. Research the project and the team behind it.
  • Join official Telegram or Discord groups and ask questions.
  • Look for signs of active development, such as working code and ongoing updates.
  • Be aware of the different types of rug pulls and be on the lookout for any suspicious activity.
  • If in doubt, avoid investing in the project.
  • Diversify your investments.
  • Don’t invest based on hype or FOMO (fear of missing out).
  • Use reputable exchanges and wallets.
  • Don’t trust anyone or anything blindly.

Rug pulls can have a significant impact on the crypto market. They undermine trust in the sector and can lead to significant financial losses for Noders, as we saw with RING Financial. They also make it more difficult for legitimate projects to get funding, as token holders become warier of investing in new projects. It’s important to understand what a rug pull scam is and how to identify it. By following the tips in this blog post, you can protect yourself from rug pulls and stay safe in the crypto market.