Inventory of Rug Pull events in the crypto world

Crypto world's Rug Pull events inventory

Chibi Finance is suspected to have experienced a Rug Pull, with $1 million worth of cryptocurrency drained. The stolen funds have been converted into approximately 555 ETH, and after being bridged from Arbitrum to Ethereum, were transferred to Tornado Cash.

What is a Rug Pull?

Rug Pull, which literally means “carpet pulling,” is actually a term unique to the cryptocurrency industry. It is commonly used in the DeFi (decentralized finance) and cryptocurrency communities. A Rug Pull refers to the deceptive and malicious behavior of cryptocurrency project developers or individuals who suddenly abandon the project and use funds invested by users or participants. Rug Pulls often occur in projects that lack transparency and have vulnerabilities in smart contracts or governance structures. Once developers or insiders prepare to exit, they will employ various strategies to drain project funds. This may involve exploiting vulnerabilities in smart contracts, massive token dumping, or eliminating liquidity from decentralized exchanges, leaving investors or users with worthless tokens or unable to recover their investment.

How does a Rug Pull work?

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1. First, create and promote. The creators of the project develop and promote a new cryptocurrency or token, often with enticing promises or features to attract investors. For example, investing funds to invite KOLs and communities to promote the project.

2. Accumulate initial funds. Investors begin to purchase and invest in tokens, causing their value and liquidity to increase. With more and more people participating, the project gains momentum.

3. Prepare to run away. At some point, when the project has accumulated a large amount of funds, the token price rapidly rises, and the developers or insiders behind the project secretly plan to dump their tokens.

4. Rug Pull. Developers and insiders prepare to exit, massively dumping tokens, using contract vulnerabilities to withdraw funds, and eliminating liquidity.

5. Investors suffer heavy losses. Due to reasons such as developers dumping tokens and liquidity being removed, investors are left with worthless tokens, and developers disappear from public view, leaving investors in disarray.

A review of historical Rug Pull events

FairWin (2019): FairWin was a Ponzi scheme operating on the Ethereum blockchain. It promised high returns through a decentralized application (dApp) called FairWin smart contract. However, the project’s developers ultimately absconded with investors’ funds, causing an estimated loss of millions of dollars.

PlusToken (2019): PlusToken is a cryptocurrency Ponzi scheme originating from China but affecting global participants. It claimed to offer high investment returns and attracted a large number of participants. However, in mid-2019, the operators of the scheme disappeared, taking with them an estimated $2 billion worth of cryptocurrency.

YAM Finance (2020): YAM Finance was a DeFi project built on the Ethereum blockchain. It aimed to create a decentralized stablecoin and liquidity mining platform. However, shortly after launch, a coding flaw was discovered that rendered the project unsustainable. The YAM token plummeted to zero in value, causing significant losses for investors.

Meerkat Finance (2021): Meerkat Finance was a decentralized liquidity mining project on the Binance Smart Chain (BSC). It claimed to offer high returns through its treasury. However, within 48 hours of launch, the developers depleted the project’s funds, resulting in losses of approximately $31 million.

How investors can avoid Rug Pull events!

1. Thoroughly research any project or investment opportunity before committing funds. Understand team members, their backgrounds, and their previous projects. Check for transparency, community involvement, and a strong roadmap for project development.

2. Evaluate the credibility and legitimacy of the project team. Look for well-known and respected developers, advisors, and community members associated with the project. Lack of transparency in team members or their qualifications may be a red flag.

3. Evaluate the project’s community involvement. Active, transparent communication from the team is essential. Look for regular updates, responsiveness to community issues, and participation on social media platforms and community forums. Exercise caution if there is a lack of community involvement or if the team evades answering important questions.

4. Check if the project has undergone a thorough smart contract audit by a reputable third-party auditing company. This helps ensure code safety.

5. Verify that the project’s liquidity is locked in timed-release contracts or reputable decentralized finance (DeFi) platforms such as Uniswap or PancakeSwap. Liquidity locks reduce the likelihood of withdrawals.

6. Find projects that implement token vesting plans for team members and founders. This means their tokens will gradually be released over time, reducing the risk of sudden token dumping that can lead to price manipulation.

7. Look for information from the wider crypto community. Search for comments, feedback, and discussions on social media platforms, cryptocurrency forums, and reputable cryptocurrency news websites.

8. Don’t put all your eggs in one basket. Diversify your investments across multiple projects and asset classes. This helps to reduce investment risk.

9. When investing in new or untested projects, start small. This allows you to evaluate the credibility of a project before investing more capital.

10. If something looks too good to be true or raises suspicion, trust your instincts and proceed with caution. Don’t invest in projects that make unrealistic promises or are overhyped but lack substance.

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