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How to Avoid Rug Pull

Cryptocurrencies are booming and everyone wants to get their hands on these assets. Some get over ambitious and jump in without proper research and encounter “rug pull”. This happens due to the lack of doing DYOR (Do Your Own Research) and picking up the coins that turn out to be a scam or a “Rug Pull”.

What is Rug Pull:

Cryptocurrencies are trustless, decentralized, virtual digital assets. The trustless environment of cryptocurrencies offers a peer-to-peer atmosphere where people can make the transaction without knowing each other and without the involvement of any third party. The decentralized nature of cryptocurrencies offers the freedom to take the control of assets however this also means there is no to call if something goes wrong.

This ‘trustlessness’ and decentralized nature is exploited by scammers in many ways to implement rug pulls or crypto scams. The rug pull is a mechanism where the developer or team of a cryptocurrency project abandons the project or flees with the investors’ funds. Scammers use the approaches of “Yanking Liquidity”, selling a large number of shares, and the inability to sell the assets. If you are still not sure about what is a Rug Pull and want a deeper dive into the topic, consider reading this article here[MNM1] .

1.    Advance Approach to Spot a Rug Pull:

Developers are shrewd and they use deceptive tactics to win the trust of initial investors by promising or offering them huge rewards. This inspires more people to get in and once there is enough money in the project they just ‘pull the rug’. The following are relatively advanced methods to spot such rug pulls.

1.     Xerox Layouts:

Scammers want easy money by shortcuts so they don’t want to spend time writing codes and whitepapers and developing websites all with new layouts. Open source is a term used for projects which are open source and have their source code publically available. Even Bitcoin was released as an open-source project back in 2009. They just choose an open-source project copy its code and layout and boom the project is ready to fool around. These projects just outsource images or even use google search images in their projects instead of wasting weeks crafting new ones.

2.     Liquidity:

Liquidity plays an important role in the price strengthening of a project because that’s where your funds go. You can do a liquidity check only if you are investing in a token as big projects like AAVE and Compound have billions of dollars to provide liquidity. If you’re still confused about what is a Liquidity Pool, read our article here. Lower liquidity means it is easier to manipulate the price of a token to 2x, 5x, and even 20x with a small amount if the liquidity is a few thousand dollars. However, if the richer liquidity means there will be more price stabilization.

3.     Inovlving Social Media Influencers:

This is the most evident sign to spot a rug pull when just a random singer speaks sponsored words to coax you to buy a token. These influences have a good following on their social media and they don’t necessarily know about the project they are selling; they don’t care much unless they are being paid well. Influencers don’t really do the research or read a whitepaper for you. Especially the A list celebrities don’t have time to read the contract code or look at the website. A small briefing with a good share suffices. If you can’t let these choose your romantic partners then don’t let them choose your coins as well.

4.     Whitepapers:

Speaking of whitepapers, converting visitors into investors and potential buyers it’s crucial to craft out perfect words with perfection. This has a psychological effect on the readers and creates an opportunity for good conversion. Writing has many phases and even revising a single page takes days. So, when it comes to whitepapers, the good projects take their time to perfect however, the daydreaming scammers don’t pay much heed to it as it takes time and hard work. A good whitepaper includes statistics images and numbers to explain the use case of the project with a very practical roadmap. The length is, needless to say, also important because any whitepapers include in-depth details about the project. so, if a whitepaper is less than 15 pages, call it a sale page instead – no I don’t you!

5.     Looking at the Code:

The most efficient way to authenticate a project is to look at the code of smart contracts. Projects run on codes so if there is something not right like only allowing developers to sell the tokens, your eyes must catch it in the first go.

2.    Simple ways to spot Rug Pull and DYOR:

The above-mentioned ways are tricky and not everyone can look at smart contracts and understand the syntax. Luckily there are simpler ways to Spot a rug pull and DYOR (Do Your Own Research). For those who are not aware, DYOR is a term that is used to inspire people to do the proper research before investing in or buying a token or a coin.

1.     Blockchain Explorer:

Blockchain explorers are a great tool to check the authenticity of a token on the said blockchain. For example, you are planning to invest in a Dogecoin token. Since Dogecoin is a token of Ethereum Blockchain, you just need to visit EthScan and paste the following address in the search bar to see who holds these tokens the most.

Scroll down and click on the “Holders” tab. If the top wallets are holding 20% or more of the total quantity then probably you should avoid investing.

2.     Websites Tools:

There are plenty of credible websites which can read the smart contracts for you and point out if there is anything not right. The first website RugDoc can help you read the contracts and point out the problems. A similar website called Sniffer can also check malicious contracts to warn investors about scams.

To conclude, make it your habit to go through a proper research mechanism. The hack is to do everything yourself and not fall for the traps laid by people winning referrals and huge cuts from your loss. Scammers are becoming smart every day and they use advanced approaches to snatch off hard-earned money. Do proper research before investing and if you sniff even a smaller error don’t let the coaxing promises blind you.

Stay SAFU!

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