Rug Pull in the Crypto Assets World: Identification and Prevention

In recent years, the Crypto Assets market has been booming, attracting a large number of investors. However, this has been accompanied by the rise of various scam tactics, the most common of which is the "rug pull". According to data, the losses caused by rug pull scams in 2021 reached as high as $2.8 billion, accounting for 37% of the total revenue from Crypto Assets scams that year.

Latest data shows that in April 2023, the DeFi industry once again suffered from a serious rug pull incident, leading to losses of over $6.2 million for investors. Shockingly, this event involved 32 projects. Among them, the BNB chain was the hardest hit, with losses of approximately $4.5 million, accounting for over 73% of the total losses. Following closely are Ethereum and Arbitrum, with losses of $1.05 million and $182,000 respectively.

Definition and Types of Rug Pull

Rug Pull is a common Crypto Assets scam tactic, usually manifested as project developers suddenly withdrawing funds from the liquidity pool, causing coin prices to plummet; or taking advantage of centralized permissions and logical vulnerabilities to unexpectedly abscond with investors' funds. This behavior is particularly prevalent in the DeFi space.

A recent suspected Rug Pull incident occurred on April 26, 2023, involving the DEX project Merlin within the zkSync ecosystem. According to on-chain data monitoring, shortly after the launch of Merlin's three-day pre-sale event, approximately 1.82 million USD in USDC and ETH was stolen from the protocol due to malicious developers exploiting a vulnerability to execute the rug pull. As of the time of publication, the incident is still under investigation.

Rug Pull mainly includes three types:

1. Liquidity theft: Developers extract all tokens from the liquidity pool, causing investors' assets to instantly become worthless.

2. Restricted sell orders: Developers restrict through code so that only they can sell the tokens. After the price rises, the developers dump their holdings, leaving worthless tokens for other investors.

3. Dumping: Developers quickly sell a large number of tokens after a massive promotional campaign, leading to a sharp price drop and significant losses for other investors.

Key Indicators for Identifying Rug Pulls

To avoid becoming a victim of a Rug Pull, investors should pay attention to the following aspects:

1. Development Team Background: An anonymous or unknown development team is often a red flag.

2. Liquidity Locking: Projects lacking a liquidity locking mechanism have higher risks. The ideal Total Value Locked (TVL) should be between 80% and 100%.

3. Sell Order Limit: Test for sell order limits by attempting to buy a small amount and then immediately selling it.

4. Price Anomalies: Especially in cases where the number of coin holders is limited, a sudden price surge may indicate an impending sell-off.

5. Suspiciously high returns: An excessively high annual percentage yield (APY) often indicates higher risk.

6. Lack of external audits: The absence of reputable third-party audits is an important warning sign.

In addition, investors should also:

• Check whether the contract code is open source and has undergone rigorous auditing.
• Check whether the project has relevant security guarantees and emergency measures.
• Confirm whether the project has highly centralized permission management.
• Verify whether the token allocation described in the white paper matches the actual issuance.

The Importance of Due Diligence

Before investing in any Crypto Assets project, it is crucial to conduct thorough due diligence. Investors should:

• Verify the background and past performance of the project team
• Carefully read the project white paper, website, and other relevant materials.
• Check if the smart contract has been audited by a trusted third party.
• Be wary of excessive marketing and promotional strategies that create a sense of urgency.

Conclusion

Rug Pull has become a major problem in the Crypto Assets field, causing huge losses for investors. This article details the definition, types, and how to identify and prevent this type of fraud. We explore some key indicators such as high return promises, anonymous development teams, lack of audits, and transparency, all of which may suggest that the project has fraud risks.

To protect their asset security, investors should learn to identify and avoid projects that may have the risk of Rug Pull. It is essential to conduct thorough research or seek auditing opinions from professional teams before investing. As the Crypto Assets industry continues to evolve, individual investors, regulatory agencies, and law enforcement must work together to prevent and combat such fraudulent activities, ensuring the healthy development of the market.