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What Is A Rug Pull In Crypto – And How To Avoid One

Many are hesitant about the crypto industry is the lack of accountability and laws, and hence the potential for scams. One of the popular crypto scams is a rug pull, when a project team pumps the project’s token before running off with the funds, which means investors effectively lose all the money they’ve put in.

There are several types of rug pulls in crypto, such as liquidity stealing (the most popular), limiting sell orders (so no one else can sell the tokens), and dumping (which drives down the price of the token). One of the big problems is that crypto rug pulls aren’t always illegal, no matter how unethical they might seem. This also means that sometimes, the people who committed this may never be held accountable.

An example of a well-known rug pull recently is the SQUID coin rug pull which fulfilled the above conditions, had a crash after a spike, and also had limited sell orders. Many investors lost their funds, and the developers ran off with about $3.4 millions from investors.

Here are 3 main things we should do to keep ourselves from falling prey to such scams and/or identifying potential rug pull projects:

Be wary of projects with anonymous founders and developers

This is a huge red flag. Many crypto projects are created by people who only disclose their psedonyms – and complete anonymity means unaccountability, which means they’re unlikely to have any consequences if they run off with your money. Rug pulls have often been done by anonymous founders who promise high returns. Hence the credibility of the people behind the projects should definitely be taken into account; you can look into projects that host AMAs, and have a clear leadership team.

Do background checks into the project and ask questions

Read the white paper and do searches on the page. Often, potential rug pull projects have promotional materials or their white paper filled with vague claims and horrendous English. They’re also unlikely to have clear answers to questions on how the project works, or what their forward plans are like. If they have a community (they should!), ask all the possible questions you could think of and what could go wrong before investing. Check out their Twitter, Discord, Telegram or any other socials they have to understand what you’re going to be putting your funds into. An active social presence, community engagement, and time taken to launch the project (i.e. not an overnight project) is often a green flag that you can consider investing in this.

Understand the liquidity

Very low liquidity means that the token may be difficult to exchange for other coins or fiat, and the developer might be able to easily manipulate the token’s price. The trading volume should be at least 10 to 40 per cent of the coin’s total market capitalization. The Total Value Locked can also be used to check the legitimacy, as a very low TVL could increase the risk of a rug pull.

After doing our research, we found a positive example of an upcoming project that can be considered that will still give you gains with a lower risk of rug pulls.

Today, we will be sharing about a protocol that fits the profile of a safe project.

The United DAO Protocol

The United DAO protocol will be launched in March 2022. The founder and advisors are doxxed from Singapore, with their details clearly on the project for everyone to contact and check out. They also have experience in relevant industries, which is a huge plus. Next, the project’s Telegram, Discord and Twitter has been active since its announcement, which has gone on for a while – it isn’t an overnight project, and it definitely has social presence and community engagement.

On their whitepaper, they shared about the problems with current DeFi 2.0 DAO projects, such as the underlying assets losing value due to poor treasury management, or ‘rug pulls’ initiated by anonymous founders and developers.

They also highlighted that they are aiming to take the next step towards DeFi 3.0, achieving both asset-backed stability and purchasing power through Establishing True Credibility, Strong On-chain Governance and Active Risk Management for their stakeholders.

With the above, they certainly tick off the 3 boxes for a project that would not be susceptible to a rug pull.

You can purchase their token UTD via bonding on United DAO or Uniswap once the liquidity pool is launched in March 2022.

Read more about them on www.uniteddao.io

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