Rug pulls in the DeFi space are one of crypto’s most intricate scams.  A vast majority of them have not been reported.  Solidus data reports, “More than 188,000 rug pull tokens have been deployed on Ethereum, Polygon, BNB Chain, and other leading blockchains – far more than previous estimates.”

Rug Pulls in DeFi Ecosystem

Rug pulls in the cryptocurrency space refer to cryptocurrency developers abandoning a project and running away with investor money.  This is very common in the DeFi space, particularly in centralized cryptocurrency exchanges. There have been many such scams:

• Phishing link scams about NFT pre-mint event where platforms like Discord, Twitter, Telegram, and even On-Chain are used to attract investors to the malicious scheme. To qualify to participate users will have to give their seed phrase or private key or wallet details.
• Ice-phishing happens when interacting with DeFi applications where the user is required to delegate authority to third party, eventually the 3^rd party takes total control of the tokens.
• Event spoofing entices free tokens and eventually the investor is led to phishing websites.
• Scammers mint NFTs with forced affiliation to a notable NFT creator and sell it at a higher price.
• Ponzi schemes based on unrealistic ROI and an eventual rug pull

Rug Pull DeFi Scheme

Bad actors create a token and list it on the DEX and then pair it with major cryptocurrencies.  Bold promises and hard promotions by cryptocurrency investors. Those who have some reputed major tokens with good liquidity like ETH or others will land up swapping their token for the DeFi Liquidity Pool.

When a substantial number of investors have put their money in to the process, the creators of the DeFi token withdraw all the money from the liquidity pool and push the price of the DeFi token to Zero.  The creators of the DeFi in exchange have already got valuable crypto.  Investors lose their valuable crypto to a value less DeFi token.

Temporary hypes are created in all social media channels to motivate investors to put their money in to the new scam DeFi token.  The coin skyrocketing in price within hours. People are driven to a FOMO and they land up investing in the token.  Some rug pulls happen within a short period of the project launch and others happen after a longer period.

When will the Rug Pull End?

We are in the early stages of Defi with lots of hype and bubbles. DeFi has the potential to reshape the currency financial industry.  There are smart contract scanning technology which helps spot rug pulls early and accurately.  DeFi scammers use various techniques like honey pot scams, hidden mint technique, hidden balance modifiers, fake ownership renunciations, hidden fee modifiers, external contract calls and more.  With improved technological advancements to identify such threats it will be possible for cryptocurrency companies to identify bad actors.

Organic DeFi and Organic ROI is not too far away.  We are in the initial days of the technology.  With a few more innovations to ensure security for investors DeFi is going to be good. The standards for security and integrity of DeFi will be slowly increased and when all of these happen the rug pull will end. Until then due diligence and not to run after too good to be true ROI.