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How Not To Lose All Your Crypto in a Rug Pull

Posted on 5/3/2021 by Mark

“The greatest thing about crypto is that anyone can launch a token. The worst thing about crypto? Anyone can launch a fucking token” - Sun Tzu, probably

The crypto industry shifts the balance of power from centuries-old institutions to web apps coded overnight. From ageing Wall Street tycoons to 20-year-old Twitter pundits with Pepe profile pictures. From financial instruments, grounded in reality, to scarcedigital artwork grounded in… well, no one really knows. And that’s its greatest strength. Cryptocurrency is a leap in monetary technology allowing anyone, anywhere, to lay the foundations for a financial system decoupled from

the rigid, centralized structures we’ve come to know. In this Wild West 2.0, we’ve seen some of the greatest minds work on some of the greatest technologies in monetary history, unencumbered by restrictions of any kind. Unfortunately, we’ve also seen bad actors take advantage of investors.

What’s a rug pull?

You’re standing on a rug when someone decides to yank it out from underneath you. You land on your ass, nursing whatever’s left of your dignity as you wonder: how could I not have seen this coming? The premise is pretty similar in crypto. You invest in some exciting new token on a decentralized exchange (or DEX). Everything’s looking good so far. Its anonymous creators have written four tweets about how the project is going to change the world. Telegram is abuzz with people talking about this radical financial tool – it doesn’t do anything yet, but SOON.

You’ve finally found a low-cap gem that’s about to go 100x. Your wife’s boyfriend will stop laughing at you after he hears about your trade of the century, right?

Wrong! Or at least, highly unlikely. This scenario has played out numerous times on protocols like Ethereum and BSC. While you and other naive idiots have been hyping the project, the devs are plotting their grand escape. To get things started with the token, they’ve provided yuge amounts of liquidity to the DEX – meaning that they’ve staked their stacks of $SCAM to make it easy for people to buy and sell the token. 

Remember that there isn’t a middleman, so it’s important that this liquidity is provided for trading to work. Once the token has actually accrued some value, that’s when they strike. The creators immediately ‘pull the rug’ by removing all their liquidity and selling their tokens for others. You (and all the other investors) run to the DEX to try and offload your tokens, but it’s a race to the bottom. The value plummets, and you’re left stuck with worthless bags.

How to avoid rug pulls

Rule number one: don’t give your money away to complete strangers. It seems obvious, but many of you really enjoy doing it in your quest for obscenely high APYs.

Plenty of crypto developers use pseudonyms online, but they’ve built up reputation in the community. To pull off an exit scam in this way, they’d be sacrificing a lot.

Contrast that with newcomers. It takes a couple of minutes to create a Telegram/Twitter account and tell people that you’re an expert developer, when in reality you’re just good and copy-pasting smart contract code. It takes a couple of seconds (and no reputation loss) to vanish without trace. There are exceptions to the rule, of course. Some new developers may be the real deal. 

So let’s talk about rule number two: check to see if the liquidity is locked. If it is, that means that the developers can’t withdraw their liquidity before a predetermined date. You can search for the token you’re interested in on platforms like Unicrypt.

Take this one with a grain of salt. Just because liquidity isn’t locked, doesn’t necessarily mean that there’s an impending rug pull. But it does mean there’s nothing to stop one from happening.

Rule number three: DYOR.

We know – what’s the point in aping if we need to waste our time on things like due dilligence and common fucking sense? But it pays off. It may be too much effort, but you can also greatly benefit from learning the basics of Solidity – the code that powers all of the tokens on Ethereum. Doing so will allow you to pick up on dirty tricks like the 'buy-only' code. Or the ‘infinite mint’ function that enables devs to create as many tokens as they like, whenever they like (we like to call this one The Federal Reserve).

Ultimately, the best advice we can give you is to be smart about what you’re buying:

• Whitepapers and websites don’t mean much without code behind them.

• An anon team that springs up out of nowhere can disappear back into nowhere.

• Liquidity can be pulled at any time unless it’s locked.

• Don’t put all your eggs in one basket, even (especially) if it promises ridiculously high returns.