The development of crypto assets such as Bitcoin and Ethereum has opened up opportunities for other assets to grow. Unfortunately, some irresponsible people take advantage of the growing popularity of crypto to profit at the expense of users. One of the many ways someone can commit fraud or scam people under the guise of crypto is a rug pull. To avoid scams, you need to have an understanding of how they work. So, what is a rug pull and how can you avoid falling victim to one?
What is a Rug Pull and How Does it Work?
“Rug pull” is a term that is often used in the crypto space. This term means ‘pulling the carpet’. In English, to pull a carpet from someone’s feet means to take an asset suddenly. But in this case, “rug pull” describes a scam where the developers behind a new crypto asset close or leave their project and take investors’ money away. This results in big losses for investors, and may lead them to sell their crypto assets to reduce losses.
Rug pull scams are common in the Decentralized Finance (DeFi) ecosystem, especially in the Decentralized Exchange (DEX) where anyone can create tokens, pair them with other assets like Ethereum, and list them for trading. DEX allows anyone to create new tokens without any restrictions and also does not require approval from certain authorities for investors to make profit by trading DeFi assets. A rug pull makes it so that people who have assets that have been drained of liquidity can’t trade fake tokens that have already been purchased. The rise of rug pull events in the DeFi ecosystem is a warning to be more careful when investing there.
Usually, the perpetrators will attempt to attract potential investors by making their tokens go viral on social media and even creating a community through Telegram groups. They will also register tokens with names similar to other popular assets so that people will mistakenly buy these fake assets. After they collect a lot of money from investors, they will then close the assets and take away the profits.
Why Do Rug Pulls Happen?
Currently, rug pulls are very common on the DEX platform. This is because the type of trading on the platform allows its users to create tokens for free and without auditing. In addition, the token creation process is also easy in open-source blockchain protocols like Ethereum. All these factors open up many opportunities for developers to commit rug pull scams.
How to Avoid Rug Pulls?
It is extremely difficult to retrieve lost assets after being scammed by a rug pull scheme. Therefore, it is important to learn how these scams occur and preventative measures you can take to avoid being duped. There are several factors that you need to consider before investing. For example, before you choose an asset, make sure to do some background research on details like who the main token holder is, the team that created it, and the amount of liquidity they have. Usually, developers will not include large amounts of liquidity. If the results are suspicious, you are better off avoiding investing in these assets.
You can also check the project through GitHub. If you see that the asset is dormant or a branch of another project, that could be a bad sign. If you are a beginner in crypto, it’s a good idea to start investing on a safe platform so you don’t have to worry about rug pulls. Tokenomy is a secure place for you to start investing because it is regulated under the Labuan Financial Services and Security Act 2010 (LFSSA), which regulates security licenses in the investment sector. Tokenomy is also user-friendly for beginners because there are low-risk investment options such as deposits or crypto staking. You can also practice with a top-up demo account with unlimited virtual capital before making real trades on TokenomyX. So what are you waiting for? Start investing on Tokenomy right now!