How to Protect Yourself from Rug Pulls

By Allan G..   |   9-22-2022 

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Like the regular financial system, the Web3 and crypto space may consist of bad actors who participate in the ecosystem solely to swindle people. This development has caused many people to criticize the crypto space and other related techs.

Aside from pump and dump, one popular question you hear among crypto investors is, what does rug pull mean? Or, how do you know a rug pull project?

As an investor, making informed decisions and avoiding scams will be a great skill that prevents you from putting your money into fake projects. To ensure that you do not fall victim to rug pulling, here are a few tips that could help:

Conduct due diligence - Thoroughly and carefully examine a project, the team members, and the ecosystem before investing. If you see any red flags, that’s your sign that something might be off. Paying attention to unusual patterns adopted by the project through reward, operation or roadmap can be a good way to identify a fake project.

Understand the price surge - Many Web3 and crypto projects will experience an incredible price surge, and that is expected. However, this is a need to understand the reason behind every price increment. The crypto market follows the regular law of demand; hence, high demand is a major reason for the price surges. However, a particular token can only be demanded when it is needed. Scammers can use the popular pump and dump strategy to increase the price of a project, and when this happens, price will increase unreasonably, and the investors pull out all they can get and abandon the project.

Rug pull is derived from the popular English expression pulling the rug. This happens when a crypto or Web3 project suddenly stops all activities after getting more people to invest in the project. The developers of such projects pull out all the money, leaving investors with worthless and untradeable assets.

Following the introduction of Web3, there are several instances of rug pulls. While some of these projects have successfully defrauded many early investors, they’ve also kept the crypto space and investors on the lookout for fake projects that lack the capacity to fulfill their promises.

What is rug pull in crypto, NFT, or Web3?

Types of Rug pulls

How to identity rug pull projects

Hard rug pulls - happen when developers utilize the smart contract code for their NFT project to steal money from investors. Such a contract may bind investors to a digital asset that serves no use or to a project that lacks direction. These types of rug pulls are prohibited since the code shows that the developers intended to mislead their investors.
Soft rug pulls - considered more nefarious because they are not against the law. Developers in this area abruptly dump their assets, instantly depreciating the NFT. Within minutes of an NFT project's launch, many rug pulls have had their project's Discord, website, Twitter, and all other online presence vanish.

The Web3 market can be a great ecosystem to conduct business, but it can be home to scams. Before investing in any new project, it’s important to do your research. That is the best way to protect yourself from rug pulls.

In conclusion

An ice cream-themed project called Frosties was initially marketed as an 8,888 NFT collection that was "cool, tasty, and unusual." The project's creators advertised raffles, merchandise, and even a "special fund to safeguard the Frosties longevity" on the now-deleted website. Nguyen and Llacuna, both 20 years old, have each been charged with one count of conspiracy to commit wire fraud and one count of conspiracy to commit money laundering in relation to the wrongdoings committed by the Frosties initiative. Each of these charges carries a maximum  20-year jail sentence.

An example of a well-known web3 rug pull

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