In the wild west of cryptocurrency, opportunities for striking it rich abound. New projects launch daily, seemingly offering endless wealth opportunities, yet dangers lurk in the shadows.

According to data from the on-chain risk identification platform ChainAegis by SharkTeam, there were 551 security incidents in the Web3 sector in the first half of 2024 alone, with total losses exceeding $1.492 billion. Compared to the same period last year, the number of security incidents increased by 25.51%, and losses surged by 116.23%.

（Source: ChainAegis)

Among these, Rug Pulls accounted for 243 incidents in the first half of the year, surging by 331.15% compared to the first half of 2023, with total losses amounting to $122 million, an increase of 258.82% year-on-year.

What is a Rug Pull Scam?

“Rug Pull,” literally meaning “pulling the rug,” is widely known in the cryptocurrency industry as an “exit scam,” where the project team suddenly abandons the project. It is one of the most common scams in the Web3 world, often occurring in the DeFi sector.

The typical Rug Pull tactic involves launching a token project and artificially inflating trading volumes and user numbers to increase its visibility and attract more investors. Once the token’s price rises to a certain level, the team abruptly withdraws a significant amount of funds from the project or sells many tokens, triggering a drastic price drop and shutting down the project. The investors’ tokens lose value, leading to substantial financial losses.

What are the Common Types of Rug Pulls?

DeFi has become a hotbed for rug pulls, often tied to liquidity. Three common types of rug pulls in this space include liquidity theft, sell-order restrictions, and token dumps.

Liquidity Theft

Liquidity pools are the backbone of the DeFi ecosystem, serving as the foundation for automated market makers (AMMs). They rely on funds provided by liquidity providers (LPs) to facilitate trading. LPs deposit their cryptocurrencies into these pools to provide market depth and, in return, receive a proportional share of the trading fees generated.

Liquidity theft is the most common type of rug pull. Beyond external malicious attacks, it often involves the project team acting with malicious intent. Project developers may deliberately introduce backdoors or vulnerabilities into the smart contract. Once the liquidity pool has accumulated sufficient funds, it can drain the entire pool, causing it to collapse and leaving investors unable to withdraw their funds or trade.

Sell-order Restrictions

In a rug pull, sell-order restrictions are a malicious market manipulation mechanism. This allows project insiders to sell their tokens first, maximizing profits while delaying or preventing ordinary investors from offloading their holdings.

These restrictions are often hidden, with developers incorporating clauses into the smart contract. This can include limiting trading hours or implementing whitelists that only permit project addresses to sell tokens during specific timeframes. Sell orders from regular users may be rejected or face delays. Additionally, restrictions on transaction sizes can hinder investors from selling all their tokens at once during market downturns, forcing them to sell in smaller quantities as the token price plummets.

Token Dumps

Token dumping is a common and central phase in a rug pull. It typically occurs after the project team has attracted many investors to purchase tokens and provide liquidity through various means.

The process usually involves the project team or its affiliates pre-holding a substantial amount of tokens. These tokens may have been acquired through pre-mining, private sales, or purchased at a low price during the initial token offering. After intense marketing, artificial volume creation, and other tactics to entice investors, the project team will initiate a massive sell-off of their tokens once the token price has risen and the liquidity pool is sufficiently funded. This sudden influx of sell orders causes the token price to plummet rapidly.

As liquidity dries up, other investors cannot sell their tokens at a reasonable price or may even be completely locked out of the market. Once the token dump is complete, the project team typically shuts down all project channels (e.g., social media, website). It transfers all acquired funds to their controlled wallets, disappearing without a trace.

A prime example of a rug pull is the meme project on Avalanche, Snowdog. During the peak of Avalanche’s popularity, Snowdog capitalized on the Dogecoin craze and attracted significant attention with its stated goal of creating a reserve currency backed by protocol-owned liquidity. However, shortly after launch, insiders of Snowdog allegedly exploited a hidden challengeKey to massively dump SDOG tokens through Snowswap, realizing over $17 million in profits and causing the SDOG price to crash by 90% within half an hour.

This is a classic rug pull scenario. The Snowdog smart contract was not subject to a thorough audit, and after a period of intense marketing, the project team exploited a contract vulnerability to conduct a massive sell-off, triggering a price crash and ultimately disappearing.

Beyond the common types mentioned above, rug pulls can manifest in other ways. For instance, malicious actors may mimic or clone well-known projects by creating an almost identical token or platform to deceive investors into believing it is the original project or a fork. Once investors have invested their funds, the perpetrators can then dump their tokens, causing the price to collapse. Another common tactic is to airdrop free tokens to a large number of users to attract them to the market. Once the token price rises, the project team can sell their large holdings, causing a price crash.

How to Identify and Avoid Rug Pulls

In the cryptocurrency world, where opportunities and risks coexist, how can ordinary investors identify and avoid rug pull scams to minimize asset losses?

First and foremost, users must conduct thorough due diligence before deciding to invest in any project.

Gain a deep understanding of all aspects of the project, including the team’s background, the project’s white paper, whether the smart contract is open-source, and whether reputable third parties have audited the code. Also, assess the community’s engagement and transparency. Be cautious of projects with anonymous teams, vague or overly ambitious white papers, and communities lacking transparency or timely information updates.

Secondly, users should learn to leverage blockchain explorers and other on-chain tools for deeper research. Investigate the concentration of token holdings; if a few addresses predominantly hold the tokens, these holders can easily manipulate the market and profit from a Rug Pull. Check if the token’s liquidity is locked and for how long. If liquidity is not locked or locked for a short period, the project team can withdraw funds at any time, significantly increasing the risk of a Rug Pull.

Source: etherscan.io

Additionally, never put all your eggs in one basket when investing in projects. Even if a project seems very attractive, do not invest all your funds. Learn to diversify your investments.

Even after investing, continuously monitor the project’s progress. If the project suddenly experiences significant updates—such as unauthorized contract changes or liquidity shifts—remain vigilant, as these could be early signs of a Rug Pull.

Lastly, cryptocurrency scams are constantly evolving and varied. In addition to the above suggestions, users should continuously educate themselves and strengthen their risk awareness. Never click on unknown links, download applications from unofficial sources, or cross-verify any transaction or signature information requiring confirmation.

Furthermore, users can better protect their assets and accounts using appropriate tools. For instance, when interacting with a Dapp and unsure about potential vulnerabilities in its smart contract, tools like GoPlus Security and Token Sniffer can be used for contract code inspection. Users can also install plugins like Scam Sniffer, which alert users to risks when phishing contracts attempt to authorize interactions through airdrops. Similarly, wallets like Rabby Wallet offer risk scanning features, providing alerts about potential vulnerabilities or actions that could lead to financial loss before contract interactions, and they also parse transaction details on the signing page.

Conclusion

Rug pulls pose an ongoing threat to the cryptocurrency industry. Users can better identify and avoid these scams by understanding the different types and characteristics of rug pulls. Implementing rigorous due diligence, diversifying investments, and taking other precautionary measures can further protect users’ assets and minimize risks.

More importantly, developing a secure and compliant cryptocurrency industry requires the collective efforts of multiple parties. As ordinary investors, we should remain vigilant and continuously educate ourselves about the market to enhance our ability to identify risks. At the same time, trading platforms, security auditing firms, and regulatory bodies should assume their respective responsibilities and work together to promote the industry’s sustainable development, creating greater value for all ecosystem participants.