Will Smith Inu was A Rug Pull: What Are Rug Pulls and How can You Avoid Them?
A recommendation from a verified account is not enough reason to invest in a blockchain asset. The fact that the project is named after a popular person, movie, or company doesn’t cut it either. You enter into investments bearing some significant level of risk, doing so without carrying out any form of research just shoots your risk chart off to the moon.
Cryptocurrency projects worldwide fall into 4 broad categories:
Allows you to make money from the growth of a blockchain project.
Serves as a utility token to get access to a product in the company's ecosystem.
A fun project. See Burger King's Whoppercoin.
A scam aka rug pull.
What is a Rug Pull?
A rug pull is crypto jargon for a scam. It is derived from the ordinary meaning of the phrase, "to pull the rug out from under (someone); to withdraw support unexpectedly."
In a rug pull, the developer(s) of a Crypto project promotes a new project—typically a new token—to investors, and then disappears with the money invested. This amount usually runs into tens of millions or even hundreds of millions of dollars.
“According to Chainalysis, rug pulls accounted for 1% of cryptocurrency scam revenue in 2020. In 2021, the figure increased by 37%.”
Rug pulls are typically very attractive offers, typically too good to be true. They are super easy to pull off due to the huge rate of ignorance in the cryptocurrency industry.
"The allure of fast, easy gains is often too tempting to resist.”
~ Konstantin Richter, CEO of Blockdaemon
Due to the massive adoption most rug pulls enjoy, they become very popular, and news of their existence and crash spreads faster and wider, compared to other legit projects.
“Rug pulls are what stain the reputation of blockchain as an innovation.”
~ Afridex Exchange
How Rug Pulls Happen
Tokens are easy to create. A person or some persons can create new tokens on Ethereum (ERC 20) or another blockchain. The next step is to list the token on a decentralized exchange (DEXes) or an unregulated peer-to-peer platform for crypto traders for sale.
Using a decentralized exchange offers them the opportunity to sell the token without a code audit of their smart contract. These code audits help to confirm that whatever claims presented on the project’s white paper can be executed independently by the smart contract. Claims like "the impossibility of withdrawing funds from the project by the developer" must be proven enforceable by the smart contract.
As you read earlier on, rug pulls play on the ignorance and greed of people. After creating the tokens and listing them for sale, the developers take to social media to make big promises about the project.
The desire for quick money lures many to buy the token without bothering to carry out research.
Common Indicators of A Rug Pull
Rug pulls are typically created around trends. An example is the Squid Game token launched just after the Netflix series with the same name took to the mainstream.
No Official Ties
There are usually no official ties between the creator of the project and the person or company whose reputation the project is feeding off. An example is Kodakcoin. Another clear example is the WillSmith Inu.
Low liquidity is when it’s hard to convert the coin or asset into cash. Projects with little liquidity have higher risks of unstable prices and price manipulation.
Anonymity relatively means unaccountability. While the blockchain space respects anonymity, the core team of a project must have proven track records as good actors in the cryptocurrency industry.
Another indicator is a clustered community of over-hyped buyers. If the supporters are a recycled audience, that’s s red flag.
Over-hype is especially suspicious when the core team behind the project avoids questions aimed at attacking the legitimacy of the project and chooses to focus ONLY on the benefits of the project. This is a red flag REGARDLESS of the reputation of members of the core team.
Never assume the legitimacy of a project, Do Your Own Research (DYOR). Afterwards, do not excuse away the loopholes you find in the course of your research.
Finally, you don’t need to jump into every Crypto project you see to grow your investment portfolio. Contrary to uninformed opinions, not all crypto projects are potential rug pulls. DYOC and stick to a handful of projects for the long run.