Rug pull is a scenario when the creators of the NFT suddenly stop backing it. As a result, the price of the NFT falls to zero, and the NFT’s investors suffer financial losses. The term Rug pull (verb – rugged) originated back in 2021 when a scammer located the NFT files on the blockchain and changed its contents to an image of a rug. A rug pull that left a rug!
There are three main types of rug pull –
- Stealing Liquidity:
To make a cryptocurrency tradeable, developers create a liquidity pool that holds an amount of the currency with which investors can buy and sell. During a stealing liquidity rug pull, a liquidity pool appears to be highly valuable, and that perception attracts other investors, thus increasing the value of the pool. The scam developer can withdraw the currency from the pool at any time, leaving behind a worthless token.
- Disabling the ability to sell tokens:
This is similar to stealing liquidity, but here the scam developer modifies the NFT’s code so that people who buy the token do not get the rights to sell it; ultimately eliminating their trade-ability. In other words, only the developer has the right to sell, resulting in a dud token once sold.
- Developers cashing out:
Here, the scam developer creates a project with an overblown value proposition that highlights a token feature or platform in development. In reality, however, the developer is minting a worthless token and keeps a large share for themself. Once more investors have bought or minted the token, effectively raising its prices, the developer will cash out their shares and runs.
How to spot a Rug Pull –
- The rule of thumb is to see the viability of a project instead of being swayed by the social media craze around it. Nevertheless, here are some red flags to keep in mind:
- The project appeared overnight.
- Research on how active the community is and whether their interaction is diverse. The more the interaction, the more genuine it is.
- Tracking the actual creators behind a project and researching them and their activeness in the community.
- Anonymous developers.
- Unlocked liquidity.
- Disproportionate token distribution, where creators have more than the community.
- Low effort website and lacking social media presence.
- Single person team increases chances of them not pulling through.
- Check for any discrepancies in the relationship between mods and owners/creators.
- The owners are not responsive to technical questions and issues.
- See and check for constant development/ and the project’s future plans (e.g. roadmap)
- Exciting but unrealistic goals on the roadmap.
- Random mint date changes prior to the original mint date with a huge reduction in floor price.
- Keep an eye out on rug day (mint day+1 day) for any unusual minting quantities and changes in price.
Tips to prevent being scammed –
- Never share your seed phrase.
- Never respond to unknown DM’s. Only answer when a trusted person has publicly asked you before.
- Do not click on any links unless you trust the source.
- Always go to discord and click on the official links.
- Use legitimate wallet apps and extensions.
- Keep track of the websites connected to your wallet.
- Have a second wallet connect first to a site you are interested in as a safety measure against scam websites, so you don’t lose your original wallet to them.
- “revoke.cash” – you can revoke permissions for your wallet that you have given to websites.
- Be careful in sharing your wallet address, especially for strange giveaways or DMs received until you checked the person/project.
- Beware of scam accounts on Twitter, there is a huge number of them.
- “dyor” – Do your own research.
- Do not interact with NFTs that were randomly airdropped into your wallet, if you have no idea why or from who. These could be malicious and steal cryptocurrency from your wallet.
- Keep cautious and skeptical all the time. Lucrative and unrealistic offers that seem to be legit are mostly scams.
- When you receive a DM leading to a cool project that is currently hyped and the minting page is exactly the same as the original page. Beware that any minting on such a page could lead to transferring money to a scammer.
- Always check with the project’s official Twitter or Discord for their official homepage and opensea address.
Examples of known scams–
- Onecoin – 2017
- Neitherconfirm – Rug scam – Mar 2021
- Iconics – 1000SOL – Oct 2021
- Squidgame Token – Nov 2021
- Frosties – 8888 Jan 2022