Eyewash in the World of Crypto Assets

In recent years, the craze for Crypto Assets investment has been accompanied by the rise of fraud activities. Among them, rug pull has become a common type of eyewash. According to statistics, the losses caused by rug pull schemes reached as high as $2.8 billion in 2021, accounting for 37% of the total revenue from Crypto Assets fraud that year.

In April 2023, the DeFi industry once again suffered a wave of rug pull attacks, resulting in losses of over $6.2 million for investors, involving 32 projects. Among them, the BNB chain was the hardest hit, with losses of approximately $4.5 million, accounting for more than 73% of the total losses. Ethereum and Arbitrum ranked second and third respectively, with losses of $1.05 million and $182,000.

Definition and Types of Rug Pulls

A rug pull is a type of Crypto Assets eyewash, usually manifested as developers suddenly withdrawing from the DEX liquidity pool, causing the coin price to plummet, or using centralized authority and logical loopholes to abscond with investors' funds. On April 26, 2023, the zkSync ecosystem DEX Merlin allegedly experienced a rug pull event, resulting in a loss of approximately $1.82 million.

Rug pulls mainly include three types:

1. Liquidity theft: Developers withdraw all tokens from the liquidity pool, rendering the tokens held by investors worthless.

2. Restricted Sell Orders: Developers restrict through code, allowing only them to sell the tokens. When investors purchase enough tokens, the developers will liquidate their positions.

3. Dumping: Developers sell a large amount of the tokens they hold in a short period, causing the coin price to plummet, making the tokens in the hands of other investors worthless.

Methods to Identify and Avoid Rug Pulls

Investors should be wary of the following signs that may indicate the risk of a rug pull:

1. Unknown or anonymous development team
2. Lack of liquidity lockup
3. There are restrictions on sell orders
4. The number of token holders is limited, but the price skyrockets.
5. Suspicious high-yield promises
6. Lack of third-party audits

To reduce investment risks, investors should also conduct the following checks:

• Is the project open source and has it undergone strict auditing?
• Are there relevant security guarantees and emergency plans?
• Does the project have the ability to transfer user funds with high authority?
• Is the project authority highly centralized, or does it adopt management methods such as multi-signature and time-lock?
• Does the actual issuance of the token match the description in the white paper?

The Importance of Due Diligence

Before investing in any Crypto Assets project, it is essential to conduct comprehensive due diligence. Investors should:

• Verify the project's team background and track record
• Carefully read the project white paper, website, and other materials
• Confirm whether the smart contract has been audited by a trusted third party.
• Be wary of excessive hype and FOMO (fear of missing out) mentality

Investors need to ask themselves: Does the project team have a good reputation in the crypto community? Do they have prior successful project experience? How is the transparency of the project?

Conclusion

Rug pulls have become a major threat in the world of Crypto Assets, causing significant losses. This article introduces the definition and types of rug pulls, as well as how to identify and avoid such eyewash. Investors should learn to recognize potential risk signals, such as high return promises, anonymous development teams, lack of audits, and transparency.

Before investing in any project, thorough research or seeking professional audit opinions should be conducted. With the continuous development of the crypto industry, individuals, regulatory bodies, and law enforcement agencies need to work together to prevent and combat fraud, protecting the interests of investors.