Cryptocurrency investors, beware: cyber criminals are draining the money from unsuspecting investors through something called a “rug pull.”
Rug pulls are a lucrative scam in which a crypto developer promotes a new project—usually a new token—to investors, and then disappears with tens of millions or even hundreds of millions of dollars. This particular type of fraud accounted for $2.8 billion in lost money for victims, or 37% of all cryptocurrency scam revenue in 2021, according to Chainalysis, a blockchain analysis company.
That’s a huge jump—rug pulls only accounted for 1% of cryptocurrency scam revenue in 2020, according to Chainalysis.
How rug pulls happen
The ease of the scam might be why it has become so popular. It's a fairly straightforward process to create new tokens on Ethereum or another blockchain, and get that token listed on decentralized exchanges (DEXes), or peer-to-peer marketplaces for crypto traders, without a code audit, according to the report.
Code audits are important from a security perspective because they assess any new code for errors, bugs, and quality standards set by the organization. Without assessing the code in smart contracts—also known as self-executing contracts—malicious developers can more easily introduce “bugs” or flaws, creating “backdoors” to steal user funds and perpetrate exit scams, according to a report by Elliptic, a London-based blockchain analysis provider.
“Smart contract platforms such as Ethereum and Binance Smart Chain allow developers easy access to build the smart contracts, which underpin rug pulls,” Konstantin Richter, CEO of Blockdaemon, a blockchain company, told Fortune. “Yet targets of such scams often don’t have the technical understanding to fully audit a project at a code level. The allure of fast, easy gains is often too tempting to resist.”
Look at the liquidity
One common trait of rug pull scams is when a new crypto project has low liquidity, meaning that it’s hard to convert the coin or asset into cash. Seasoned crypto traders avoid entering into projects with little liquidity because of the associated risks of unstable prices and price manipulation.
It can be helpful to check the liquidity of a cryptocurrency by looking at its 24-hour trading volume, according to Coin Telegraph.
“Small projects are more easily manipulated than big projects,” Richter said. “If there is low volume, low liquidity and a small community of over-hyped buyers, it may be time to back away.”
Never skip background checks
A first step in preventing rug pulls is to thoroughly research the crypto project before investing in it.