The cryptocurrency industry possesses a notoriously high barrier to entry – with complex systems that require a certain degree of technical knowledge. This is doubly true for anyone wishing to launch their project. Yet, recent strides in simplification have made token deployment a quick, cheap endeavor. This allows legitimate projects to get up and running rapidly, but also allows malicious actors to perform a constant string of “rug pulls” and exit scams.
A rug pull occurs when a project exhibits itself as legitimate and begins selling its coin/token to investors. After they’ve collected an acceptable amount of investor capital, they remove any trace of their project and abscond with the capital – leaving investors with nothing. Exit scams are not new to the cryptocurrency sector – BitConnect famously made off with millions, if not billions, of investor funds in 2018.
However, the recent proliferation of decentralized platforms has allowed unscrupulous parties to accelerate their game. The Binance SmartChain in particular suffers from dozens of small-scale rug pulls every day. While each scam generates comparably small losses, the sheer volume shakes investor confidence in the entire platform.
The World of Decentralized Finance
In the past, a project would need substantial auditing to appear on a major cryptocurrency exchange. This didn’t prevent exit scams or rug pulls, but it did make it more difficult for such an action to succeed. The advent of decentralized finance, in which the token creator adds liquidity and lists the token themselves, removed those protections. This opened the path to ‘liquidity pulls’, with projects rug pulling the liquidity pool itself to seize all funds invested thus far. When this became too blatant, ‘soft rugs’ became more prevalent. Some of the larger recent rug pulls include:
An example of the “soft rug” phenomena, the Polywhale developer wallet liquidated the majority of their KRILL tokens for an estimated gain of over $1 million.
Iron Finance (TITAN)
In a strange example, Iron Finance’s TITAN cryptocurrency effectively saw a third-party rug pull as a security exploit that allowed users to generate infinite IRON stablecoins. They then traded this IRON for TITAN, collapsing the price. Famous investor Mark Cuban brought the situation to the public’s attention, for better or worse.
After a successful presale and issuing of liquidity on several exchanges, the Turtledex platform pulled a hard rug pull, removing the liquidity across all platforms. They then deleted their social media pages and absconded with the stolen funds – worth upwards of $2.5 million.
Avoiding Exit Scams and Rug Pulls as an Investor
As the creation of tokens becomes easier, and listing remains open to all on major decentralized exchanges, rug pulls will continue to occur. Investors should strongly consider any project before investing, particularly in the decentralized finance space. Even beyond the threat of intentional rug pulls, many new projects prove themselves to be simply incompetent.
The safest option is to avoid projects unlisted on major exchanges. Investing in a new project that is both legitimate and successful is the equivalent of winning the lottery – unlikely at best. Particularly in the DeFi sector, any project that offers a return on investment that feels unbelievable is likely too good to be true.
The cryptocurrency market offers tremendous potential for profit in the long term – without risking funds on questionable projects. Investors should, instead, focus on major cryptocurrencies with proven track records.