You might have heard people on Twitter sharing their stories of losing almost everything in a Crypto scam. Before I explain what is a rug pull, I would love to show you some obvious signs of a crypto scam. This article is only for educational purposes to explain how rug pulls & degenerative Yield Farming works.
Here, we will dive a little deeper into multiple ways used by fraudulent projects to dupe people for their hard-earned money. I would like to clarify before starting this that I don’t participate in a majority of the ICOs or IDOs to minimize the risk of losing money in a scam.
What is a Degenerative Yield Farm?
You may already be familiar with this type of Yield farming. Out there in the wild west of Defi, there are projects offering 40,000% Annual Yield & has all the characteristics of a scam to look for. They have locked liquidity, the social media page has multiple people shilling the project & the whitepaper claims of it solving a bunch of non-existing problems.
Sooner or later the project turns out to be a rug-pull and people find it has code written in the smart contract which sends the funds locked in the liquidity pool to the project developer. Many people lose hundreds or thousands of dollars by investing in these high-yield risky bets out of which 99% turn out as scams.
That being said, a platform offering a decent APY of 12% may not necessarily be super secure.
Seven Signs to look out for a Rugpull
Have you ever noticed that all the yield farms have pretty much the same layout? This is because they are reusing the original code from multiple places of reputed products in Web 3. Why is this important? Because you can tell if this is a scam by looking at the amount of time one invested in developing it.
For example, did they just spend 10 minutes outsourcing some new images or by using Google Images, or did they spend a couple of weeks coming up with a brand new design to host a new company that helps their technology platform?
Authentic platforms take months to build before they even launch their Version 1. Degenerative Yield farms can literally be set up in minutes.
So checking liquidity can be done only if you are investing in a specific token not an actual project/platform like Aave, Curve. However, checking the amount of liquidity is a very powerful indicator of how likely a token is to be a scam.
For example, a token with less than $10,000 in liquidity can easily be manipulated by double, triple, or quadruple the price. It also means the developer doesn’t have much money to invest in the token.
On the other hand, a token like Uniswap has more than $34 million dollars in liquidity. If you’re new here, liquidity refers to the amount of value in tokens that can actually be traded.
Social Authority/Social Proof
Remember how your favorite influencer is telling you that Save the Kids was going to become the next big project & then if you bought some they would do something extra for you. This is another big sign that rug-pull is imminent if any large influencer is promoting a project that they are no part in.
Good projects will advertise themselves. Just ask yourself, how much money did Bitcoin spend on advertising?
Especially genuine projects never reach out to influencers. Always cross-check if some A-grade celebrity is promoting a project that isn’t Bitcoin or Ethereum. Most of them won’t even look at the code of these coins or read the whitepaper. They get paid to shill a project and that’s what pays their bills.
Never let these people influence your investing strategy. FOMO is a bad thing, especially in equities or crypto.
Remember when you go to buy an online course or a book the information on the product page is so well written. The information is psychologically vetted to make sure it is the best emotional buying response from your side. This is very true for everything that we see on the internet. Impulse buying is real and can be dangerous for your financial integrity.
These pages can take months to perfect & when they do people fall for them too easily. The same applies to a whitepaper for a crypto project. They must include stats, diagrams, market opportunities, charts, etc. If the Whitepaper is less than 20 pages, it is not a WhitePaper but a sales page designed to get you to invest your money.
Looking deeper into the Code
Moving on, one of the best ways to avoid a rug pull is simply looking at the smart contract or the token code. There are many ways to do this but the best way is to go to a blockchain explorer and use the contract inspecting tool to spot something fishy. This article was supposed to be easy but I know this can a bit more complicated.
Another way around would be to ask someone who knows what to look for. You can also go to a website called Rug Doctor. They have a free tool to inspect the contract for you and inform visitors of ongoing scams.
Secondly, you may wanna bookmark Token Sniffer. It’s an amazing website that compares similar tokens and if they are 100% similar or even 80% similar to another token, it is not unique & that can be a huge red flag for rug pulls. Rugpulls often don’t build anything from scratch but they simply click Ctrl + C & Ctrl + V.
This is advice for which you can actually use a blockchain explorer. Most explorers for Polygon, Ethereum, Binance Smart Chain lets you see all the tokens of a project out there.
Just paste in your token address & you will be able to see all the top wallets to hold that token. If more than 20% of all tokens are held by one wallet, or even if the top 10 wallets, you could be getting rugged. The idea here is that one person could sell all their tokens & crash the price.
This is one of the easiest ways to spot a rug pull.
Total Value Locked (TVL)
In terms of investing, you can actually check a metric called TVL. TVL is the total dollar amount of coins & tokens invested into the project. For example, Aave which is a well-known bluechip borrowing & lending platform has over $20 billion dollars invested in it.
Compare that to a scam rug pull on Crypto Moon Shots, it could be around a couple $100,000 dollars locked. It is nothing compared to a genuine project like Aave or Curve Finance.
With all that being said, I hope readers don’t fall for any scam rug pulls.