Why Crypto Rug Pulls Happen in DeFi and How to Avoid It

[Bitstar_coin]

What Is a Crypto Rug Pull?

A crypto rug pull happens when developers create a token paired with a valuable cryptocurrency, list the token on decentralized exchanges (DEXs), and then pull all the funds out after the investor’s buy-in.



How Does a Rug Pull Happen?

Rug pulls usually happen within the decentralized finance (DeFispace by pulling funds from a liquidity pool. A liquidity pool is a pile of investor funds locked in crypto pairs that allow users to trade between different cryptocurrencies. Crypto pairs usually include a popular cryptocurrency like Ethereum’s (ETH) because it’s a well-established platform token with high availability.


Why DeFi Became a Common Space for Rug Pulls
As the name suggests, DeFi protocols have no centralized oversight relying only on smart contracts, making it a prime target for DeFi rug. With DeFi projects, bad actors can create tokens, raise their profile and recruit investors. By using DEX platforms like SushiSwap or Uniswap, the tokens are created and listed without audit. All the scammers need to do is create a token with some apparent value, promise use cases, and create a market appeal for investors to buy it.

Real Examples of Rug Pulls

1 Luna Yield
2 Thodex
3 Compounder Finance
4 WhaleFarm

Signs That an Exit Scam and Rug Pull Is About to Happen

* Yields Are Too High
* Creators Remain Anonymous
* Coin Prices Skyrocket
* Extensive Marketing Tactics
* No Liquidity Lockup

How to Avoid a Crypto Rug Pull

* Check liquidity
* Review Github, Whitepaper and Social Media Channels
* Confirm Team Credibility
* Look at Holders and Listings on DEX Platforms

Useful Sites to Use to Check Smart Contract

* Tokensniffer
* BSChecker
* Cryptach

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There are many scam projects out there trying hard to take investors money, i thought it will be useful to educate ourselves about exit scam and rug pull to prevent us especially newbies from falling victim. Please add any useful contribution that will help others.

[pealr12]

Good post, scam projects are everywhere, unfortunately, it is hard to identify them because some of these projects look very sophisticated, the scammers are putting more effort to make the project look legit while it is just false appearance,
I have had such an experience long time ago which is very painful, I don't invest in new projects anymore, any new tokens I have are from bounty, only existing projects are worth it, or the ones already trading in good exchange with a known team.

[jc12345]

Thanks for this. Lets say a long standing traditional coin/token creates a token on a Defi platform. Can a rug pull still happen if the token creator that is more trustworthy does not rug pull it themselves?

[ryzaadit]

- YIELD
Some of the YIELD needs will adjust depending on how many users staking, If the yields just open off course will have high % APY. Not many

- Anonymous Team.
In my opinion, it depends on the type of project & coins themselves. Type project like who really care with anonymous feature like privacy coin, their team have some option to remain anonymous as long their project is self-funded no ICO/Crowdfunding. Any crowdfunding project need a real team document, because is the law due they are crowdfunding some money.

- I don't think points number 3 should be put.

- No comment about these.

- "No Liquidity Lockup"
Liquidity lockup is also not guarantee the project is legit, If scammer want to sacrifice some money let's say put 100 BNB into Liquidy but he get more than that. The scam still can be happen, because they will get a money from sale + team allocation token.

[batang_bitcoin]

Thanks for this. Lets say a long standing traditional coin/token creates a token on a Defi platform. Can a rug pull still happen if the token creator that is more trustworthy does not rug pull it themselves?

If the developer has a history of good standing for his project, at least you get some trust. But that doesn't mean that it won't change his mind of doing a rug pull if there's an easy money there.
Always be on the ground and don't trust quickly. That's what's going to make you stronger on this market. There's the foundation for that token but always think of any possibility.

[hyudien]

How to Avoid a Crypto Rug Pull

* Check liquidity
* Review Github, Whitepaper and Social Media Channels
* Confirm Team Credibility
* Look at Holders and Listings on DEX Platforms

Useful Sites to Use to Check Smart Contract

* Tokensniffer
* BSChecker
* Cryptach

Interesting info, and would really help how people can be more careful and prioritize reviews as specific as possible. It doesn't just fall on beginners. So this information will be very valuable and can be disseminated. Again, the rampant fake tokens are difficult to avoid or clearly identify. However, minimizing the alternative to reviewing it and doing some research is the best option before putting any money into it.

[cryptomaniac_xxx]

How to Avoid a Crypto Rug Pull

* Check liquidity
* Review Github, Whitepaper and Social Media Channels
* Confirm Team Credibility
* Look at Holders and Listings on DEX Platforms

Useful Sites to Use to Check Smart Contract

* Tokensniffer
* BSChecker
* Cryptach

Interesting info, and would really help how people can be more careful and prioritize reviews as specific as possible. It doesn't just fall on beginners. So this information will be very valuable and can be disseminated. Again, the rampant fake tokens are difficult to avoid or clearly identify. However, minimizing the alternative to reviewing it and doing some research is the best option before putting any money into it.

I guess everyone just really need to study first the project that we want to invest, AKA, do your own research (DYOR), not just in crypto world, but in anything that involves investment because there are a lot of scammers out there. 2017 was a big wake up call for crypto investors to really be careful because that is the time that we've seen a lot of projects doing some rug pull and history repeats itself again this 2022.