rug pulls are a thorn in the side of risk-taking investors eager to get in early on the hottest
projects before they go big this type of scam is proliferating these days due to the deafening hype
around decentralized finance non-fungible tokens web 3 various metaverses and the promise of riches
this is exacerbated by the crypto industry's lack of regulation sometimes misplaced faith
in anonymous teams and the general demographic of crypto users which consists mostly of millennials
and gen z's with excess funds little fundamental understanding of crypto and often lacking
real drive or incentive to learn the technical intricacies of blockchain technology this is not
a description of every crypto investor but it does describe many of them ciphertrace has reported
that defy hacks reached a whopping 361 million dollars from january to july of 2021 nearly a
three-fold increase from 2020 data however a rug pull doesn't require a bad actor to hack
a protocol or anything in fact they simply need to pull the proverbial rug from under investors
that they've lured in with promises of lucrative returns and disappear with their funds quickly
if you want to dabble in crypto especially defy it is extremely important that you learn how to
spot a rug pool because once your funds are stolen it's almost impossible to recover them and unlike
some centralized exchanges most d5 platforms do not offer insurance for losses so on today's coin
market cap episode we're going to be explaining exactly what a rug pull is and how you can avoid
one but first my name is trev and here at coin market cap we are on a mission to make crypto
accessible all around the world that's why we love making videos for you that are packed with
information and are easy to understand and simple to share with your friends and family so if you
want something more than just hype and to actually learn about crypto make sure to hit the subscribe
button right now and to turn on notifications so you're not going to miss out on our new videos
and let's learn together so you might be asking yourself how does a rug pull work
a rogue pool is primarily a specific type of defy exit scam where malicious project teams pull out
the liquidity of their tokens and disappear with investors money a rock bowl may also refer to exit
scams in other blockchain sectors like nfts in these cases project founders disappear some time
after investors meant their nfts in a rug pool the scammers first generate a token and create
hype around it through marketing tactics mostly via twitter and telegram they then listed on a
decentralized exchange or decks like uniswap or pancake swap usually paired with another
popular token like eth or bnb at this stage they are likely to inject substantial liquidity into
their pool and ramp up marketing efforts in order to attract significant exit liquidity from buyers
this is the time when unsuspecting investors buy their tokens in hopes of making crazy gains
once the scammers are satisfied with the number of tokens bought they will drain the pool's liquidity
usually eth b b or seoul and leave only their worthless scam tokens so the market gap is 2.1
trillion dollars and now the mark oh oh it went to zero
in many cases investors will also be incentivized to deposit liquidity into the token's pool which
requires buying the token pair this is generally how a rug pull is executed in d5 albeit with a few
variations and extra steps so for example let's say you bought the hypothetical rug token from
uniswap instead of just holding on to your rug you want to take advantage of their one thousand
percent apy by becoming a liquidity provider for the rug dash eth pull you then buy an equal amount
of eath pair it with your rug and deposit them both in the pool to earn a yield when the rug
is pulled you lose not only your eath but also the eat used to buy rug which will be rendered
worthless and that brings us to nft rug pools in the non-fungible token space it's even harder to
determine a potential rug since several projects like board ape yacht club have launched with suit
anonymous founders yet turned out to be successful however careful due diligence can still go a long
way to prevent being hoodwinked how to catch a rug pool liquidity has no time lock a time lock on a
token pool's liquidity is the most sure-fire way for teams to build public trust in their project
as it eliminates the possibility of them making away with investors funds note that most of the
liquidity needs to be locked preferably 95 to 100 percent with a long time horizon unfortunately
determining whether liquidity is locked may be too technical for the average crypto joe
your best bet is to ask the developer team in the discord or telegram group to provide proof
of locked liquidity if they can do so then that's a good sign but don't take anything at face value
if you know someone who has relevant d5 development experience ask them to help you verify
if a project's liquidity is locked anonymous or fake founders anonymity gives malicious developers
a shield that protects them from accountability which provides a lot of opportunities to pull off
a rug while bitcoin's founder may have been anonymous satoshi never asked anyone to buy
bitcoin only to mine it in d5 projects ask you to put your hard earned money in their hands
which makes it extremely important that their real identities are attached to the project you
need to check the founders social media accounts to determine whether their identities are verified
and that their records are not fabricated some teams are clever in hiding their anonymity by
creating fake linkedin or twitter profiles which requires you to determine how solid and reliable
their information is if they have little to no interactions relative to their followers
slash connections that's already a bad sign moreover if their follower account is extremely
low then that could also be a red flag anonymous founders are even more prevalent in the nft space
where they can raise several million dollars worth of crypto with nothing but a picture of an
ape or other animals and a half hazard discord group setup in this case you're either going
to have to take a bigger gamble or use other metrics to spot a potential rug pool and the
next point is unrealistic projected returns on investment if something is too good to be true
chances are it is scam d5 projects more often than not claim to offer high rewards ranging from 500
to 5000 apy since they need high liquidity to run their operation your common sense will come
in handy in determining roi figures that are unsustainable and that brings us to the next
point which is unaudited projects a genuine crypto project must have its smart contracts audited by
an independent security firm preferably before they list their token or allow investors to gain
exposure other projects may deviously postpone the auditing process but put it somewhere on the
roadmap to give investors unwarranted confidence an unaudited smart contract could hide bugs that
allow the founders or someone else to steal users funds through a back door furthermore investors
should check the audit report themselves some projects just indicate that they've been audited
which can delude investors and for all you know an audit report might reveal the con artist planned
exit route if you look closely unfortunately smart contract auditing is expensive enough that many
projects including legitimate ones can't afford it in such a case you can alternatively check
independent auditing websites like tokensniffer or rugdock that may have made their own free audit of
the project available the next point is lack of effort or innovation scam projects are not built
to last hence the founders don't put a whole lot of effort into them the most obvious sign is a low
quality website in fact some of them may only put up a launching soon page this also applies to scam
white papers which are usually ambiguous highlight several buzzwords like d5 blockchain metaverse or
gamefi as well as copy paste descriptions from other projects if a protocol's whitepaper or
docs page doesn't make sense you should rethink its legitimacy moreover if a project is merely
a clone of another or doesn't bring anything new or innovative to the space that's a red flag at
best you're putting your hard-earned money into a low-quality project at worst you're going to get
exit scammed and that brings me to the next point which is funds that are concentrated among just
a handful of holders if large amounts of tokens are in the hands of a few holders chances are that
they are the team wallets disguised as regular holders this allows them to easily manipulate
the price at the expense of innocent investors note that developers don't need to completely
drain a pool's funds to perform a successful rug pull for example if a couple of hands control just
60 of the total supply they could easily sell them in one sitting and crash the token price
to avoid this you need to check the coins blockchain explorer on etherscan or bsc scan
to find its token distribution as a rule of thumb a non-team wallet should not hold more than five
percent of the token supply unless it's locked and the next point is stealth mints a stealth
mint is when an nft project flies under the radar until the mint is launched which makes it so much
easier to create fomo in a short period while it has some advantages too many malicious developers
have used it as an avenue for rugging to be safe avoid projects that use this approach so now that
we've shed some light on the steps needed to avoid falling prey to crypto scams it's important to
note that these don't totally guarantee the safety of your funds as the technology evolves there will
always be surprises with hackers uncovering newer and more sophisticated ways to steal crypto funds
moreover these measures aren't as effective in isolation for instance if you're able to verify
that the team wallets are locked but fail to identify that more than half of the token supplies
is in the hands of an unlocked external wallet they can still rug you the same is true with
half hazard background checks you need to do your due diligence religiously or not invest
at all hey did you like that video yeah well make sure to hit the like and subscribe button
and while you're at it go check out these videos because if you like this one you're definitely
going to like these so what are you doing go check them out click on them right now now