Popular Science | Various Types and Typical Cases of "Rug Pulls" in Crypto Projects

Author: Crypto Adventure

Original Title: 《Slow Rug Pulls: The Wild Nature of Cryptocurrency Projects》

Compiled by: Linqi, Chain Catcher

According to Chainalysis data, the DeFi and cryptocurrency industry has witnessed a considerable number of scammers, with various project exit scams in 2021 causing losses exceeding $2 billion. Of the total $7.7 billion in cryptocurrency scams that occurred last year, project exits accounted for nearly 40%. When virtual asset developers manipulate token values to make them appear more profitable, scams occur. Subsequently, developers abandon the project and take away investors' funds.

However, crypto enthusiasts can avoid this situation, though it is very difficult. Crypto OGs often encourage investors to DYOR, but what does that actually mean, and what should be done to avoid being scammed?

How "Exit Scams" Happen

Developers create a cryptocurrency or DeFi project and make it very profitable for investors. Once investors put enough money into the project, the developers may cash out and abandon the project.

The projects that exit scams are essentially crypto projects where developers have invested little effort. They are operated by a group of individuals whose goal is to defraud speculative investors. Their plans can be completed in days or months, depending on how "perfect" the scam model is. Additionally, the assets in these projects may appear somewhat similar to other cryptocurrencies in the market.

Types of "Exit Scams"

Liquidity Theft

To make the tokens they create tradable, developers need to create a liquidity pool to hold a certain amount of tokens to support investors in buying and selling. In most exit scams, developers provide a liquidity pool where investors can lock up newly minted tokens and another cryptocurrency, such as ETH.

As the value of this scam token increases, investor funds begin to flow into the pool, and they swap it with their ETH, which is locked in the liquidity pool for a specified period. Investors then continue to buy and sell tokens, potentially helping to increase their value. Subsequently, more ETH is injected into the liquidity pool.

At some point, the malicious development team will withdraw ETH from the liquidity pool, leaving behind worthless tokens. Therefore, investors cannot swap their worthless tokens back; instead, the project team cashes out the stolen ETH or engages in other operations.

Disabling the Ability to Sell Tokens

The outcome of this scam is almost the same as liquidity theft, but the process is different. In this scam, developers add some code that prevents investors from selling their tokens back to exchanges.

Investors can buy the scam tokens, but only developers can sell their tokens because the related code is fraudulent. As the price rises and people start trying to cash out their tokens, they realize they cannot sell them. At some point, when the scam project team believes the price is high enough, they will sell all the investors' scam tokens and run away with the money.

Developers Cashing Out

Cashing out may not sound like a scam in a free market, but it qualifies as one because the scam project team treats it as their sole purpose. Like the first two scams, malicious developers launch a project with an exaggerated value proposition. They make certain promises, usually involving token functionalities under development or platforms being built, while indicating that they will be launched soon.

But in reality, developers mint or create a worthless token, leaving themselves a large portion from the start or buying them at a low cost on the market. As a "revolutionary" product promise entices investors to buy worthless tokens and the price rises, the project team cashes out all their tokens. This cashing out can be a one-time event or occur gradually over time, making this type of exit scam less obvious. In either case, investors will see their investment funds wiped out, leaving only worthless tokens left by the project team that ran away with the money.

Exit Scams in Crypto History

OneCoin

OneCoin is essentially a massive Ponzi scheme and is currently known as the most significant crypto scam, having stolen approximately $25 billion from investors. Although authorities cracked down on the OneCoin project in 2017 and arrested its leaders, some founders of the project went missing, and the scam continues. Worst of all, this Ponzi scheme never issued any cryptocurrency from the start.

BitClub Network

BitClub Network is known as one of the largest cryptocurrency Ponzi schemes. The platform attracted funds using marketing advocates and dubious marketing strategies. According to the planned slogan, investors would receive guaranteed profits from their Bitcoin mining. The scam leader stole approximately $722 million from investors in December 2019.

Squid Game Token

Squid Game Token is a more recent and well-known exit scam that leveraged the popularity of Netflix's hit series "Squid Game." At the time, the price of SQUID skyrocketed by over 230,000% within weeks, after which investors were unable to sell their tokens. On November 1, 2021, the project team stole approximately $3.4 million from investors, with the token plummeting from $2,861 to $0.01 in just 5 minutes.

How to Avoid Exit Scams

Now that you know the most important signs of exit scams, let’s analyze some strategies that can be applied to your crypto research to avoid such scams.

Some online tools can help detect exit scams, and Token Sniffer is one of them. Token Sniffer continuously records hacked and scam tokens, so every project it lists is an exit scam.

Rug Doctor is a tool for analyzing crypto projects that has passed a code of conduct for newly launched projects, highlighting the analysis of their exit strategies. Once Rug Doctor identifies high-risk tokens or DeFi projects, it lists them on its website, adding risk scores and breaking down the danger signals found in the projects.

Blockchain explorers like Etherscan or Binance Smart Chain explorer can detect high-level scam operations. Users can search for the token address of a cryptocurrency, which will lead to a corresponding tracking page. The tracking page displays total supply, the number of actual holders, transaction records, and more.

Additionally, interested parties can review the history of a project before it launches sales and ensure that it has passed security audits from reliable platforms like Solid Proof.

For new cryptocurrency projects, if the top 10 wallets hold more than 20% of the tokens, or worse, if a large portion of the tokens is stored in one wallet, this is a potential exit scam danger signal. If one or more "whale" wallets cash out all their investments in the form of an exit scam, the value of the tokens will plummet.

Conclusion

The names of these scams may resemble legitimate cryptocurrencies. As the blockchain industry becomes more prominent, exit scams are becoming increasingly common in cryptocurrency and DeFi, and scams are also beginning to enter the NFT space. However, with careful research and by looking for obvious signs, investors can avoid them.