‘Rug pulls’: Avoiding the cryptocurrency scam
What is 'rug pull'
It's a brand-new kind of cryptocurrency scam. The phrase "pulling the rug out" is where the name originates. The way it operates is as follows: a developer lures investors to a brand-new cryptocurrency project, but leaves before the project is completed. The investors are left holding worthless money as a result.
Problem with 'smart contracts
It is not merely a crypto phenomenon. Crypto, however, may be particularly open to attack. The use of "smart contracts," or agreements managed by computer software rather than the legal system, is common in cryptocurrency initiatives. If things don't work out, there is limited redress.
DeFi projects, NFTs
In decentralized finance or DeFi, efforts that seek to undermine industries like banking and insurance, rug pulls are particularly prevalent. Rug pulls have also been associated with NFTs, or non-fungible tokens, which grant digital ownership of paintings and other assets.
How to protect yourself
Investors can protect themselves by choosing established cryptocurrency projects, making sure the code of any new project has been reviewed and verifying the developers’ identities.
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Pick established products
Rug pulls are most common with new projects that haven’t gotten the same scrutiny as more established cryptocurrencies. Newer projects may have vulnerabilities that make it possible for their organizers to siphon value away from investors.
Finding established projects
One way to find established projects is to look at centralized exchanges such as Binance, Coinbase, and FTX. While presence on a large exchange is by no means a guarantee of its quality or investment potential, these businesses often will review assets before listing them.
Know the code
The fate of any investment in cryptocurrency or blockchain projects rests on the integrity of the project’s computer code. One way to evaluate is to see if it’s been audited by a respected professional organization. Projects themselves advertise if they have good marks.
Know about the people
Some of the biggest red flags in the cryptocurrency world come down to human factors. Reputable developers often have websites and references that can establish their credentials.