How to Avoid a Rug pull Branded Voices Advertise

But unless you have tons of money sitting around to throw away, it’s best to stay on the platform you trust. A legitimate crypto often has at least tens of millions of dollars in its network, even if it’s not one of the most popular. Not to mention they usually have a fair amount of tokens locked in for certain durations.

Another way to pull the rug is by disabling buyers’ ability to sell. Malicious actors can add code to their token’s smart contract, which doesn’t allow users to sell back their tokens on DEXs. Knowing the signs of a potential rug pull can save you a lot of financial dilemmas. Unless you’re an experienced trader who’s spent years in the game, avoid venturing too deep into the DEX space.

In a scheme that sounds like something out of a thriller, the team replaced their secure and audited contracts with malicious ones that enabled them to steal locked investor money. They also cleverly mimicked the name of Compound Finance, a legit DeFi interest-earning protocol, to lure their marks into investing. Once the creators of a rug pull have amassed a large amount of liquidity providers with substantial capital, they pull all the available assets out.

FrostiesUnluckily for Nguyen and Llacuna, this was right around the time the Department of Justice began paying closer attention to cases of fraud in the crypto world. Launched on January 7, 2022, Frosties was an ice-cream-themed collection of 8,888 NFTs that went to great lengths to market itself as a “cool, delectable, and unique” project. If there’s anything we’ve learned from the DOJ, most recently with its Frosties NFT bust, it’s that the Justice Department isn’t messing around. Back in February, the Justice Department announced it had appointed its first-ever crypto enforcement team director, Eun Young Choi, to head the National Cryptocurrency Enforcement Team . But even if you do your homework, there’s no guarantee of success.

In November 2021, the rug was pulled from underneath investors. The token “developers” removed liquidity and the price toppled from over $2,000 to being worth just a fraction of a cent. Soft rug pulls aren’t illegal, although they are highly unethical. This is because the project’s operation doesn’t necessarily halt once dumped, and the coin may not have been developed with fraud in mind. As more people begin to buy the token, its value will likely jump – especially because only a select few people can sell it. Once the coin reaches a certain price point, the bad actors can sell off their tokens and make off with all of the investor’s money.

In either case, this is done to siphon all the funds from the community that bought into the project. Rug pulls have been particularly common in decentralized finance, or DeFi, projects that aim to disrupt services such as banking and insurance. NFTs, or non-fungible tokens, that provide digital ownership of art and other content, have also been involved in rug pulls.

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DEXs, as opposed to centralized cryptocurrency exchanges, allow users to publish tokens for free and without audit. Token creation on open-source blockchains such as Ethereum is also straightforward and free. The developer gives themselves a bigger portion of the project.