Rug Pulls, a prevalent type of cryptocurrency scam on DeFi and has grown this year

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Fraud crimes linked to bit­coin (BTC) and the oth­er cryp­tocur­ren­cies on the mar­ket have reg­is­tered a con­sid­er­able increase in 2021, with the Rug Pulls or ‘car­pet pulls’, as one of the illic­it activ­i­ties with the most pres­ence and growth.

Accord­ing to infor­ma­tion from the blockchain ana­lyt­ics firm, Chainal­y­sis, it is a new type of cryp­tocur­ren­cy scam that usu­al­ly occurs on decen­tral­ized finance plat­forms (DeFi), such as decen­tral­ized exchanges (DEX). .

The crime is based on the fact that the devel­op­ers of a cryp­tocur­ren­cy project, usu­al­ly of new tokens, unex­pect­ed­ly aban­don it or with­draw the liq­uid­i­ty of the asset, tak­ing with him the funds that users invested.

The firm itself defines it as the cas­es in which devel­op­ers build what appear to be legit­i­mate cryp­tocur­ren­cy projects, which go beyond wal­lets for invest­ment oppor­tu­ni­ties, before tak­ing investors’ mon­ey and disappearing.

Accord­ing to Chainal­y­sis, the rug pulls have become the fastest grow­ing type of scam in the DeFi ecosys­tem this year, cov­er­ing 37% of all income obtained from illic­it activ­i­ties in 2021 alone, com­pared to 1% in 2020. That rep­re­sents an approx­i­mate $ 2.8 bil­lion in cryp­tocur­ren­cies extract­ed from vic­tims in the cur­rent year.

The firm spec­i­fies that most of these crimes imply that devel­op­ers cre­ate new tokens and pro­mote them so that their val­ue increas­es, pro­vid­ing liq­uid­i­ty to the project, just like most DeFi projects.

«How­ev­er, in the rug pulls, the devel­op­ers with­draw the liq­uid­i­ty funds, send­ing the price of the token to zero and then dis­ap­pear “, they say, and clar­i­fy that this scam is preva­lent on DeFi because with the right tech­ni­cal knowl­edge, “it is cheap and easy to cre­ate new tokens on the Ethereum blockchain and oth­ers like it and have them list­ed on decen­tral­ized exchanges (DEX) with­out a code audit.”

That last point is cru­cial: decen­tral­ized tokens need to be designed in such a way that investors hold­ing gov­er­nance tokens can vote on things like how assets are used in the liq­uid­i­ty pool, which would make it impos­si­ble for devel­op­ers to drain pool funds. . While code audits that would detect these vul­ner­a­bil­i­ties are com­mon in the space, they are not nec­es­sary to list them in most DEXs, which is why we see so many rug pulls.

Chainal­y­sis, blockchain ana­lyt­ics firm.

Amount of mon­ey stolen in cryp­tocur­ren­cies as a result of the rug pulls. Source: Chainalysis.

Not everything happens in DeFi projects

Chainal­y­sis clar­i­fies that not all rug pulls They start out like the DeFi projects, recall­ing that the biggest case of scam of this type this year orig­i­nat­ed in Thodex, a cen­tral­ized exchange in Turkey, a fact record­ed by Cryp­toNews. In this case, the CEO of the com­pa­ny dis­ap­peared after the exchange house pre­vent­ed users from with­draw­ing their funds.

In total, and in that exam­ple, users lost more than $ 2 bil­lion in cryp­tocur­ren­cies, which is equal to 90% of all stolen value.

«How­ev­er, all rug pulls in 2021 they start­ed as DeFi projects ”, they warn. That is why they cit­ed Anu­bis­DAO, which was the sec­ond largest scam case of its kind in 2021, where USD 58 mil­lion in stolen cryp­tocur­ren­cies was the bal­ance of the crime. This, they say, ‘pro­vides an excel­lent exam­ple of how rug pulls in DeFi ».

Look­ing back, Anu­bis­DAO was launched on Octo­ber 28, with the promise of a decen­tral­ized cur­ren­cy and backed by a bas­ket of assets. After rais­ing near­ly $ 60 mil­lion from investors, who received the project’s ANKH token in exchange for financ­ing, all funds, pri­mar­i­ly wrapped ether (wETH), dis­ap­peared from AnubisDAO’s liq­uid­i­ty pool and moved to a num­ber of new addresses.

Anu­bis­DAO, Chainal­y­sis explains, used con­tracts cre­at­ed with Balancer’s liq­uid­i­ty start-up pro­to­col to receive and retain the wETH sent to its liq­uid­i­ty pool in exchange for ANKH tokens.

How­ev­er, the man­age­ment that imple­ment­ed the liq­uid­i­ty pool con­tract was already in pos­ses­sion of the vast major­i­ty of the liq­uid­i­ty provider tokens for that pool. 20 hours after the sale start­ed, the address that cre­at­ed the group cashed in on its mas­sive stock of tokens, which allowed them to take over almost all the wETH and ANKH in the group.

‘Then the thief moved it through a series of inter­me­di­ate wal­lets. Short­ly after this, the Twit­ter account that had act­ed as the pub­lic face of Anu­bis­DAO went offline and the val­ue of ANKH plum­met­ed to zero, ”the com­pa­ny explained.

Amount of mon­ey stolen in cryp­tocur­ren­cies by rug pulls in 2020 vs. 2021. Source: Chainalysis. 

Token from The Squid Game, another example

Like those men­tioned, there is anoth­er exam­ple, dri­ven by trends. The SQUID token, inspired by the famous Net­flix series “The Squid Game”, Was a clear sam­ple of a rug pulls.

The fact was reg­is­tered by CriptoNoti­cias last Novem­ber. At that time, it was learned that after reach­ing a price of USD 2,856, the asset fell 99.9%, while the page and social net­works of the project were deactivated.

The life­time of this project, which promised games and prizes like the series, was just 6 days. Accord­ing to some Twit­ter users, the cre­ators of the token would have fled with about $ 2.6 million.

What to do to avoid being victims of Rug Pulls?

For Chainal­y­sis, There are ways to avoid falling vic­tim to these types of scams. They rec­om­mend, ini­tial­ly, “avoid new tokens that do not under­go a code audit.”

A code audit, to clar­i­fy, is the process by which a third-par­ty com­pa­ny ana­lyzes the smart con­tract code behind a new DeFi token or project, and pub­licly con­firms that they do not con­tain mech­a­nisms that allow devel­op­ers to get hold of the assets. investor funds.

Anoth­er method so that investors are not scammed is be care­ful with tokens lack­ing pub­lic infor­ma­tion expect­ed from a legit­i­mate project, such as a web­site or whitepa­per, as well as tokens cre­at­ed by peo­ple who don’t use their real names.

While DeFi is one of the most inno­v­a­tive areas of the cryp­tocur­ren­cy ecosys­tem, where there are great oppor­tu­ni­ties for ear­ly adopters, it is also a con­ducive space for scams to arise.

For that rea­son, explains the firm, “it will be dif­fi­cult for DeFi to con­tin­ue growth if poten­tial new users do not feel they can trust new projects.”

So it’s impor­tant that trust­ed cryp­tocur­ren­cy infor­ma­tion sources, be they influ­encers, media out­lets, or project par­tic­i­pants, help new users under­stand how to spot shady projects to avoid scams.

Chainal­y­sis, blockchain ana­lyt­ics firm.

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