Detailed Explanation of Rug Pull Eyewash: The Hidden Dangers in the Encryption World and How to Avoid Risks

In recent years, the cryptocurrency market has been booming, attracting a large number of investors. However, this has been accompanied by the rise of various eyewash schemes, the most common of which is Rug Pull. According to statistics, the losses caused by Rug Pull scams in 2021 amounted to as much as $2.8 billion, accounting for 37% of the total revenue from cryptocurrency fraud that year. More shockingly, in just April 2023, there were 32 Rug Pull incidents in the DeFi industry, resulting in losses of over $6.2 million for investors.

In these events, BNB Chain was the most severely affected, with losses amounting to approximately 4.5 million dollars, accounting for over 73% of the total. Next were Ethereum and Arbitrum, with losses of 1.05 million dollars and 182 thousand dollars, respectively.

The Essence and Types of Rug Pulls

Rug Pull is a common cryptocurrency eyewash, usually manifested as the project team suddenly withdrawing liquidity pool funds or using centralized authority and logical loopholes to abscond with investors' funds, resulting in a sharp decline in token prices.

Rug Pull can be mainly divided into three types:

1. Liquidity theft: The project party withdraws all funds from the liquidity pool, causing the token value to drop to zero.

2. Restricted Sell Orders: Developers restrict ordinary investors from selling tokens through code, allowing only themselves to sell.

3. Dumping: Developers sell a large amount of their held tokens in a short period, causing the price to plummet.

How to Identify and Avoid Rug Pull

Investors should be wary of the following signals:

1. The identity of the development team is unknown or anonymous

2. Lack of liquidity locking mechanism

3. There are restrictions on sell orders

4. Token holders are concentrated and the price fluctuates abnormally

5. Promising unrealistic high returns

6. Not audited by a third party

In addition, investors should also:

• Check if the project is open source and has undergone rigorous auditing.
• Pay attention to whether there are relevant security guarantees.
• Verify whether the project permissions are decentralized
• Verify whether the token issuance is consistent with the white paper.

The Importance of Conducting Due Diligence

Before investing in any encryption project, investors should conduct thorough due diligence:

• Verify the background and track record of the project team
• Carefully read the project white paper and other materials
• Understand the details of smart contracts
• Confirm whether it has been audited by a trusted third party.
• Do not let hype and FOMO emotions affect your judgment.

By conducting thorough due diligence, investors can significantly reduce the risk of encountering a Rug Pull.

Conclusion

Rug Pull has become a major ailment in the cryptocurrency world, causing huge losses. This article details the definition, types, and methods for identifying and avoiding Rug Pulls. Investors should remain vigilant, learn to recognize risk signals, and conduct thorough research. At the same time, the entire industry needs to work together to strengthen regulation and enforcement, creating a safer environment for investors. Only in this way can the cryptocurrency market achieve healthy and sustainable development.