What is the rug pulling in crypto and 6 ways to spot it?
What is carpet pulling in cryptocurrency?
Carpet pulling scams occur when a team or developer withdraws support for a project, leaving investors with worthless tokens.
Imagine you are at a party where you experience an amazing game. Players are enjoying themselves, and there are great prizes to be won. You decide to participate, deposit your money and start playing. However, just as you are about to win, the game maker disappears with everyone's money.
That's what happened with cryptocurrency carpet pulling.
Decentralized finance (DeFi) crypto scams are common because there are no regulations governing the operation of projects. An individual or developer group creates excitement around a crypto project to attract traders. As excitement builds, more people invest by buying tokens or creating non-volatile tokens (NFTs).
Then the developers suddenly sold their holdings and disappeared, leaving investors confused and empty-handed. The sudden end of the project will cause the token price to drop significantly, and investors will lose most of their money.
How to identify carpet cleaners
In the exciting and dangerous world of cryptocurrency, the “carpet pool” can cause even the most seasoned investors to be alarmed. However, it is possible to spot red flags early on with your understanding of the carpet pulling in blockchain.
If you know the signs of a crypto rip-off, you can spot potential scams before it's too late. From vetting the project team to analyzing tokenomics and community engagement, here are the top steps to spotting red flags and making smart investment decisions. Knowing the warning signs of carpet pulling can help you prevent scams.
Unknown or unknown developers
Check the reputation and integrity of individuals behind new cryptocurrency ventures. Know that they are well known in the world of cryptocurrency. Evaluate their past performance and ability to deliver on their promises to conclude how efficient they will be when it comes to crypto carpet risk. Beware of fake social media identities and accounts. The quality of the project's website, white paper, and other media can also indicate legitimacy.
Lack of liquid lock
By checking whether a cryptocurrency is locked or not, you can distinguish a popular cryptocurrency from a fake coin. Locked liquidity refers to a mechanism where a certain number of crypto tokens are held in a smart contract for a certain period of time.
Without a liquid lock, the developers of the project can remove all the liquid whenever they want. Liquidity can be secured using time-locked modern contracts, ideally three to five years after the token is issued.
Limitation on sales orders
The code can prevent some investors from selling, while others can cheat. You can test this by buying a small amount of the new coin and trying to sell it immediately. If you can't sell tokens, it's a red flag that the project is fraudulent.
Explosive price fluctuations with certain tokens
Be wary of sudden price movements in new coins, especially those without a liquidity lock. Fraudulent cryptocurrencies tend to see significant price increases before declining. Use block explorer to find out the total number of token holders. If a limited number of users hold a cryptocurrency, the token is more vulnerable to price manipulation.
Suspiciously high yield
If it seems too good to be true, it usually is. An unusually high yielding new currency could be a Ponzi scheme if it doesn't pull the rug. Although not always a sign of fraud, tokens with triple-digit annual percentage yields (APIs) are often high risk.
No external audit.
Make sure the cryptocurrency you are considering investing in has been code audited by a strict third party. Potential investors shouldn't just trust the development team when they say an audit has been done. Instead, they should investigate who the auditor is and how reliable they are.
Examples of crypto rug pulling
Carpet scams are carefully planned by bad actors who use social media influencers and create scams to fool as many people as possible.
Here are a few well-known examples to help you understand how these scams work:
OneCoin
Ruja Ignatova, known as the crypto queen, co-founded OneCoin in 2014, positioning it as a revolutionary cryptocurrency. Later, it turned out to be a bogus Ponzi scheme that defrauded investors around the world of billions.
In the year In 2017, the crypto queen disappeared, delaying law enforcement. Her whereabouts are still a mystery. OneCoin is one of the biggest crypto scams in history.
Squid game
In the year In 2021, the Squid Game Project was launched, inspired by the popular South Korean Netflix series Squid Game. The promoters presented the project's native Squid Coin as an exclusive access to investors' Play and Earn (P2E) game.
The hype built, and the value of the token increased. However, the developers of the project suddenly disappeared after releasing their tokens and dumping the investors. The value of the token has dropped to almost nothing.
Anubisdao
AnubisDAO, a decentralized autonomous organization (DAO), promises high returns to investors and has raised nearly $60 million within hours of its launch. But the project's liquidity quickly disappeared when the developers ran away with investors' money.
The project's social media accounts were deleted and the website went offline, leaving the community upset.
How carpet pool works in cryptocurrency
In the world of cryptocurrency, a carpetbagger is akin to a vendor in a marketplace who sets up an attractive stall and runs off with buyers' money, leaving behind empty promises.
Suppose there is a busy marketplace where merchants sell various goods. Carpet pulling is like a salesman, luring buyers with the promise of expensive items. The seller will pre-list these items at a higher price. Just as the market buzzes with excitement, the vendor suddenly disappears, leaving behind their empty stall and worthless booking receipts.
In the crypto context, the seller can avoid this fraud in several ways. One way is for rogue developers to introduce hidden loopholes into smart contracts to either control the native token or steal cryptocurrency from investors. In such a carpet-dragging scheme, the dishonest nature of the developers is evident from the very beginning.
Second, developers can use a method called discarding. It involves fraudsters quickly selling their cryptocurrency holdings. This action will significantly reduce the value of other investors' tokens, leading to losses. Pump and dump schemes in crypto refer to market manipulation in which fraudsters intentionally inflate the price of a digital asset (pump) and then sell their holdings at a higher price. This move will result in huge losses for other investors.
Third, fraudsters can perform carpet dragging by limiting sell orders. They restrict token sales to everyone except certain addresses. This allows the fraudsters to sell their tokens whenever they want, while normal tokens remain unsellable, ultimately rendering their assets worthless.
Is crypto carpetbagging illegal?
Laws around the world are labeling crypto-rag crawls as fraud, theft or breach of warranty.
Most jurisdictions around the world consider crypto carpetbagging illegal. Regulatory bodies around the world, including the United States' Securities and Exchange Commission and the United Kingdom's Financial Conduct Authority (FCA), are actively cracking down on crypto ragtags.
People involved in carpet dragging face large fines, property damage and prison terms. Despite the penalty, the decentralized and often anonymous nature of cryptocurrency transactions poses significant challenges for law enforcement. Due to anonymous developers and the cross-border nature of digital assets, victims of road rage often have limited legal options.
Despite these challenges, efforts will continue to create better legal frameworks to regulate crypto. In the year In May 2023, the European Union introduced the world's first comprehensive set of cryptocurrency rules, known as the Markets in Crypto-Assets (MiCA) Regulation, which aims to regulate and protect crypto markets. As lawmakers' understanding of cryptocurrency increases, regulations in other parts of the world are expected to improve.
