Analysis and Prevention Guide for Rug Pull Eyewash

In recent years, the cryptocurrency market has flourished, attracting a large number of investors. However, this has been accompanied by a plethora of scams, with the most common being the Rug Pull eyewash. According to statistical data, the losses caused by Rug Pull eyewash reached as high as $2.8 billion in 2021, accounting for 37% of the total revenue from cryptocurrency scams that year. Even more concerning is that this trend has not slowed down. In April 2023, the DeFi industry was once again hit by a Rug Pull, resulting in losses of over $6.2 million for investors, involving 32 projects.

In these events, the BNB chain became the network most severely affected, with losses of approximately $4.5 million, accounting for over 73% of the total losses. Following it are Ethereum and Arbitrum, which suffered losses of $1.05 million and $182,000, respectively.

Definition and Types of Rug Pull

Rug Pull is a common eyewash in the DeFi space. It usually manifests when project developers suddenly withdraw liquidity from exchanges, causing the token price to plummet; or they exploit centralized permissions and contract vulnerabilities to abscond with investors' funds without any warning.

A recent suspected Rug Pull incident occurred on April 26, 2023, involving the decentralized exchange Merlin in the zkSync ecosystem. Shortly after the project launched its presale event three days prior, approximately $1.82 million worth of USDC and ETH was stolen from the protocol. According to analysis, this may have been a Rug Pull executed by malicious developers exploiting a vulnerability.

Rug Pull is mainly divided into three types:

1. Liquidity theft: Developers withdraw all tokens from the liquidity pool, causing investors' assets to drop to zero instantly.

2. Restricted sell orders: Developers restrict through code, allowing only them to sell the tokens. Once the price rises, the developers dump the tokens they hold, leaving worthless tokens for other investors.

3. Dumping: Developers sell a large amount of their held tokens in a short period, causing the price to plummet, and the tokens held by other investors subsequently depreciate.

How to Identify and Prevent Rug Pulls

To avoid becoming a victim of a Rug Pull, investors need to be vigilant about the following signals:

1. Anonymous or opaque development teams: Projects with a lack of public information often carry risks.

2. No liquidity lock: Check if the token has a liquidity lock set, which should typically be locked for 3-5 years.

3. Sell order limit: Attempt to buy a small amount of tokens and sell immediately; if you encounter obstacles, it may be eyewash.

4. Price abnormalities: especially in cases where the number of token holders is limited.

5. Unreasonable high yield promises: Excessively high annualized returns usually indicate high risks.

6. Lack of third-party audits: Legitimate projects usually conduct independent code audits.

In addition, investors should also:

• Verify whether the contract code is open source and has undergone rigorous auditing.
• Check whether the project has security guarantees and emergency measures
• Check whether the project has a highly centralized permission structure.
• Verify the token issuance against the white paper

The Importance of Due Diligence

It is crucial to conduct thorough due diligence before investing in any cryptocurrency project. Investors should:

• Verify the background and past performance of the project team
• Carefully read the project white paper and other related materials.
• Assess the transparency and communication quality of the project
• Check if the smart contract has been audited by a reliable third party.

Remember not to be swayed by the short-term hype of the project or the fear of "missing out on opportunities"; you should spend enough time on research and analysis.

Conclusion

Rug Pull has become a major ailment in the cryptocurrency field, causing huge losses. This article details the definition, types, and methods for identifying and preventing Rug Pulls. Investors should remain vigilant, learn to recognize potential fraud signals, and conduct thorough research before investing. At the same time, the entire industry needs to work together to strengthen regulation and enforcement to create a safer investment environment. As the crypto industry continues to develop, individual investors, regulatory agencies, and law enforcement need to keep up with the times to jointly combat fraud and protect investor rights.