Giovanni breaks down rug pulls, where scammers drain liquidity pools after launching tokens. $113 million was stolen this way in the first seven months of 2021. Six checks protect you: verify the team, read third-party audits, test if you can sell, check token distribution, confirm liquidity is locked, and use sites like Token Sniffer and RugDoc.
This is Sam, a crypto investor. He just put his savings into a new hot defi token. The price of the token is already skyrocketing. 5x10x100x. Sam thinks of himself as an investment genius. He goes to bed dreaming of the Lambo he will buy the following day. When he wakes up in the morning, Sam checks the balance in his account and sees it is almost zero. What? How can that be possible? Sam is devastated. It looks like he was a victim of a classic rug pull. From January to July 2021, $113 million were stolen via rug pulls, the most common type of scam in the booming decentralized finance space. While overall crypto related crime has been steadily decreasing, fraudulent activity in defi has been on the rise.
The bad guys have moved over to the defi space. We don't have anti money laundering controls. We don't have suspicious activity reporting. We don't have monitoring reporting. It's a wonderful world of opportunity. That's why is just criminals go where it's easier to go.
Unfortunately, returning stolen funds after a rug pull is almost impossible. That is why prevention is crucial. In this video will explain how to spot a rug pull and avoid losing money while investing in defi. But before we get into it, don't forget to like the video and subscribe to our channel. So how does a rug pull work? A rug pull is a malicious scheme in which crypto developers create a worthless token and list it on a decentralized exchange. Here, the new token is traded within a liquidity pool against an established token such as eth. To attract investors into the liquidity pool, the scammers promote the project on social media, promising high returns. As more and more investors put their eth in the liquidity pool, the price of the new token increases. At a certain point, the scammers pull the rug. They drain the pool of all the eth and disappear with the funds. That immediately crashes the price of the new token, leaving all investors holding the worthless bags. Now that you know what a rug pull is, how can you spot one? To answer this question, we reached out to two DeFi experts. For safety reasons, they both asked to remain anonymous. Here are six tips you can use before putting your money into a defi token. Tip 1 Check the team's background and social media. Find out information about the token's development team. If the developers are anonymous, it's already a red flag. If the team's information is available, you should check how solid the reputation and background are.
It's really about measuring the trustworthiness of the team. Are they anonymous? If not, who are they? Do they have a background in the industry? You often see websites where they've just taken some random LinkedIn photos and created a fake team. Many of those have been exposed.
Another important thing to check is the project's social media and telegram chats. This helps to understand how genuine the enthusiasm around the token sees and how authentic the community involved is.
Fill out how people are acting in there. Does it look like they're talking to each other or it's a lot of people talking? Are people allowed to bring up topics that are not only promoting the token? That's a really important part. And so for example, you might come in there and say, hey guys, so what happens when. And this asks some kind of hard question, any kind of hard question. And if you get banned, probably a scam. If you get muted or deleted, probably a scam.
Tip number two, Was the project audited? A legitimate project should undergo an auditing process by a reliable third party service. If it wasn't, then you should be cautious. It means the code may contain bugs that could be exploited to steal users funds. Unfortunately, audits are usually expensive and few projects can afford them. And even if the project was audited, make sure you read the actual audit.
People say, oh, they're audited and they go in, but they don't read the audit. And the audit says, these people can steal your money. Don't put your money here. These people can steal your money. But people would never read it because they say it's audited.
Test your ability to sell. Sometimes fraudulent projects contain hidden code that prevents people from withdrawing their funds from the liquidity pool. That is why you shouldn't invest a large amount of money into a project or coin until you know for sure if and when you will be able to sell.
Before you put money in these things, one thing I always do, every time, even if we look at the code, let's say I'm going to put $100 in there. I put $1 in and I pull $1 out. Does it work? Okay, it works. 20 in, 20 out. Did it work? Okay, then I'll go in.
Check the token's distribution. Check the token concentration. If a large amount of the tokens are concentrated in the hands of a few people, that is a red flag. It means that a bunch of whales could potentially dump their bags and crash the token's price. You can easily check the token's concentration by using a block explorer such as Etherscan or bscscan. Tip is the liquidity locked. Another important thing to look for is whether the liquidity has a time lock on A time lock is security mechanism that prevents developers from removing the liquidity from the pool and make away with your funds.
As long as most of the liquidity is locked, you know 95 to 100% is locked, then there cannot be a rug pull.
Now you're probably wondering things are getting too technical. How do I even check these things? Don't worry, these are a few online tools that can help you out. Tip 6 Check independent auditing Websites Platforms such as Token Sniffer, Ragdoc and Bscheck EU are run by experts who audit Defi tokens. They break down most of the metrics we mentioned here so far and rate the tokens according to risk levels. Also, there are telegram communities where you can ask about a specific project.
There's lots of people in there and you can say, hey guys, I'm thinking about going into this thing, I'm not sure about it. Can someone take a look and the coders and so forth in there will go look for you.
Ultimately, identifying a project as a rug pull is not straightforward. In the unruly DEFI space. The border between a fraudulent project and the latest meme coin can be very subtle. Sometimes it all comes down to your own goals and appetite for risk. If you are looking for solid, legit projects with real use cases, then the indications we have given you are going to be valuable. But if you are looking for quick gains and decide to ignore this advice, go in at your own risk.
No matter how safe it is, people are still going to go into unsafe things because the unsafe things are going to be the ones that are more likely to return the biggest returns quickly. If you go to Satoshi street bets, everything you see is basically a scam. Like 99% of it. You can pretty much bet it's going to be a scam. But if you get in and get out at the fast at the right times, you're probably going to make some money too.
The goal of DEFI is democratizing financial services through a trustless and permissionless system. With almost no barriers preventing crooks from entering the space, Defi is flooded with get rich quick schemes and fraudulent projects. That is why at cointelegraph we want to provide you with the information you need to navigate these rough waters. Hopefully with our tips you'll feel a little safer. Thanks for watching this report. I'm your host Giovanni and see you next time.
