What is a Soft Rugpull vs a Hard Rugpull?

Here are a few things to look out for when scoping out your next purchase to protect yourself from the next big scam.

  1. Simply put, a liquidity pool is a practical market maker for DEXs that offers buy and sell orders for specific tokens.
  2. Also, the ANKH/ETH liquidity pool was drained, leaving token holders with worthless tokens they could not immediately sell.
  3. Since its invention, the cryptocurrency space has experienced tremendous growth.
  4. A rug pull is a term for a scam in the crypto space where traders are left hanging with worthless assets.
  5. Knowing the identity of the team behind a project gives investors extra confidence to support the startup.

They confirmed their fears after they failed to unstake their funds from the Luna liquidity pools since the developers had drained them. The investors incurred a total loss of almost $10 million, making Luna Yield the biggest rug pull on the Solana blockchain. They require no complicated coding to execute and, without transparency around the project’s founders, it is extremely difficult for users and investors to know what is going on. It’s simple really, founders just up and (quietly) leave a project, leaving their communities waiting around anticipating big promises and developments that will never come. Frustratingly, whilst deeply malevolent, a soft rugpull is technically not illegal in the open shut way that a hard rugpull is as the project is technically still ongoing. This feature ensures that owners are unable to send the tokens to trading platforms for selling.

Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Checking the token allocation on blockchain explorers will help you know who holds the most significant amount of coins and how coins are allocated. If a few wallets hold big amounts of the coin supply, dumping the tokens quickly is easy, amplifying the risks of price manipulations and rug pulls.

The purpose of this website is solely to display information regarding the products and services available on the Crypto.com App. It is not what are cryptoassets intended to offer access to any of such products and services. You may obtain access to such products and services on the Crypto.com App.

What Are Rug Pulls in Crypto?

If the project is a scam, the team responsible for maintaining the pool would then withdraw from the pool, leaving investors with worthless tokens. The process is referred to as locked liquidity, and it stops project owners from withdrawing any of the assets in the pool, making it impossible to pull out. The longer the liquidity pool remains locked, the fewer the chances of a rug pull. Rug pulls assume several personas, including exit scams, pump and dump, cryptocurrency maneuvers, and many more. While these personas differ, they are all designed to steal from investors. Also known as “pump-and-dump” schemes, these rug pulls operate off of fabricated public hype, often fueled by social media.

It simply means you should do more research about the project before investing your hard-earned money in it. In the examples section above, we highlighted the plight of the Squid Game token investors who were able to purchase SQUID but could not sell them. If you encounter a project, and prior investors are expressing frustration about selling tokens, consider it a red flag. It is not clear whether the team carried out a rug pull or the smart contract contained a vulnerability that was exploited, but the project did exhibit all the telltale signs of a classic crypto rug pull. The project attracted a lot of interest at its height leading to a meteoric rise of 40,000% rise at its peak. However, Squid Game token was a classic rug pull scam with multiple red flags, including the inability to sell these assets.

SQUID could, purportedly, be used to redeem points and exchanged for other cryptocurrencies. A market is more liquid if there are large deposits of that asset held in a pool waiting for buyers or sellers. Alternatively, a platform could allow for direct trades between two market participants from their cryptocurrency wallets instead of trading from a pool. In this best cryptocurrency trading sites case, the more participants are trading a particular pair of assets, the higher the liquidity of this pair. A rug pull is a term for a scam in the crypto space where traders are left hanging with worthless assets. It occurs when a project’s team suddenly withdraws the funds from a project after garnering a significant amount of investment from their community.

Besides, it unearths the tell-tale indicators of rug pulls to help you avoid falling prey. “CertiK’s data shows that the attack remains the most popular hack for scammers, kucoin shares price chart market cap index and news with $6.3 million in crypto assets exfiltrated in April alone.” In contrast to a project that simply tanked, a rug pull doesn’t set out to create anything.

Unlocked liquidity and lack of vesting periods

Thirdly, click on the TX hash, and scroll down until you find the liquidity pool tokens transferred to the dev wallet. “This isn’t a crypto-only phenomenon. This is a people phenomenon. Crypto is just the latest way to do it,” says Adam Blumberg, a Houston-based financial planner specializing in cryptocurrencies. But digital currencies have become a hot target of rug pulls because of weak fundraising guidelines and emphasis on decentralizing finance. Non-Fungible Tokens (NFTs), which offer digital ownership rights of art and other creative works, have also been heavily involved in rug pulls. This article explains what rug pulls are, how they work, and how to avoid them.

How does a rug pull scam work?

The team started to distance themselves from the project shortly after launch, offering only sporadic updates, and it ended in a $6.3 million rug pull. A rugpull describes when a (malicious) team drains a project of its funds after luring users to invest through marketing and hype building. Rugpulls are notorious for being the bane of any new crypto investor trying to make it big. CertiK’s data shows that the attack remains the most popular hack for scammers, with $6.3 million in crypto assets exfiltrated in April alone.

This list of red flags begins with unknown or anonymous project leaders, a barren, low-quality website and a guarantee of high returns. Lofty goals to be completed in an unreasonably short timeframe may decorate a startup’s homepage, accompanied by suspicious social media activity, littered with buzzwords and a desperate sense of urgency. By itself, this factor does not make a project a possible rug-pull scam. However, if it is one of the several red flags, it gains weight and becomes hard to ignore. Auditing is essential, especially when done by an external and independent security firm. It is understandable for developers and project promoters to want to reward themselves for the work they undertake to bring a project to the market.

A scam is a fraudulent or deceptive scheme designed to trick individuals into giving away their money, personal information, and/or other valuable assets. Scammers use various tactics and strategies to manipulate their victims into believing they are dealing with a legitimate opportunity, service, or product, when in reality, their intentions are dishonest. First, find the token contract through a blockchain explorer or social media accounts of that token. Suppose the token you are interested in is a BSC token; visit bscscan.com to find out its contract. If it’s an ERC20 token (Ethereum token), visit etherscan.io and refer to our guide on how to use it. Polywhale’s price plummeted after its team abandoned the project, however not before they withdrew over $1million in tokens.

Nonetheless, it turned out that OneCoin was never publicly traded and could only ever be sold on the OneCoin Exchange with strict trading limits. If the wallet contains 0 holdings, then visit the transfer section to confirm if the wallet has sent LP tokens to burn addresses. Therefore, if liquidity is not burned or locked for a lengthy period, it can be pulled out from the pool anytime.

How Does a Rug Pull Work in Detail?

Other clear indicators of a rugpull are the deletion of official channels of communication such as a website, or Twitter and Telegram channels. However, both novices and seasoned pros continue to get caught out by the bad faith projects. Coupled with the security audit, it is important for the project team to avail the back-end code for the public. This way, potential investors who also understand the coding language can invest in auditing the code independently. Most projects opt to crowdsource and store their smart contract files on GitHub for easy access.

Indeed, investing in crypto has proven to generate more returns than most investments in the long run. However, as an investor, you must keep an eye on the multiple frauds and scams common in the space. A new type of scam known as a rug pull has taken root in the hype-filled crypto industry. Often, a hard rugpull will be executed through the use of a malicious backdoor coded into the project from its inception.

More often than not, it is impossible to recover as it depends on the kind of rug pull. If a rug pull was executed by an anonymous team, it makes it harder to recover funds. It was later discovered to be a rug pull, with Fatih Ozer (CEO) making away with about $2.7 billion of users’ funds. According to reports from the Turkish Interior Ministry, he fled to Albania but was later arrested.