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‘Rug pull’ is the term for when the creators of a crypto project artificially inflate the price of a token through shadow wallets and marketing gimmicks before dumping everything on the market and making a run with the investors’ money.
A recent example of rug pull is the collapse of the SQUID token. The token was positioned as a meme coin and took advantage of the virality of the popular Netflix show ‘Squid Game’. When the token reached a valuation of USD 2,850, the developers drained funds from the liquidity pool and barred users from selling them thereby drastically reducing the value of the token to the point where it was eventually rendered useless. This allowed the creators to siphon off millions of dollars and walk away without a trace.
These scams are a significant impediment to effective cryptocurrencies adoption, and combating them cannot be left only to law enforcement and regulators.
If you are a crypto enthusiast or investor, here is a checklist to do your due diligence so that you can keep away from rug pulls and invest in genuine, high-quality projects.
5 Steps To Avoid A Rug Pull Like A Boss
- Scrutinize The Team
The team is ultimately responsible for realizing the project’s vision and ensuring its profitability. As a result, when doing your research, the most critical aspect to consider is the team. In most rug pulls, the creators of the crypto project prefer to keep their names out of the public eye and stay anonymous. In such a case, you should definitely be wary of investing in that token.
Besides this, if the team is doxxed, a perusal of the developers’ past experience and competence, as well as the project’s whitepaper, could be an important sign of locating a genuine project.
- Examine The Project’s Utility
One of the most crucial aspects is the project’s utility. BAYC and VeeFriends, for example, have great utility coded into the smart contract.
Coming to cryptocurrencies, you can verify the utility by reading about the tokenomics and what the token would be used for. Many scammy cryptocurrency projects tend to ride on trends and position themselves as meme coins with no real utility.
Further, if the utility is too good to be true, it probably is!
- Look For Timelocks
Timelocks are widely regarded as a reliable sign of a project’s legitimacy. It is a piece of code that disables a smart contract’s functionality to transfer a token until a given period of time has elapsed.
If a project lacks a timelock, it may be an indicator that the developers are not committed to the platform’s long-term viability and hence, might be a pump-and-dump scheme. UnRekt.net has a list of time-locked projects along with their contract addresses.
- Bet On Locked Liquidity
Developers of valuable projects usually relinquish control over the liquidity pool to build trust and rapport with the investors. This is known as locked liquidity and it stops developers from transacting any of the pool’s tokens, making it nearly impossible to steal tokens or drastically lower liquidity.
Therefore, the longer the pool is locked, it is less likely for a rug pull to occur. However, determining if the liquidity is locked can be a difficult task unless the team themselves disclose it.
DeFi ventures like Aggregated Finance employ a DAO governance model where the community controls the project’s treasury. Moreover, the project has set up a DAO custodianship owned by a reputed company for assurance to the community. In this sense, it adds an extra layer of trust on top of the present liquidity lock.
- Lack of Audits
The most notable cryptocurrency projects will have independent security audits and financial transparency reports published on their websites or social media that vouch for their authenticity. While a project without a third-party audit isn’t necessarily fraudulent, make sure that you DYOR before pitching in your hard-earned income.
Quick 6-Point Project Legitimacy Checklist
Here are 6 red flags that investors ought to watch out for before entering a project:
- Anonymous team
- One or more members of the team has a marked history
- Riding solely on superficial trends
- No timelocks or long-term vision
- Confusing or too-good-to-be-true roadmap
- No audits by trusted ventures
Final Thoughts
It is vital to remember that the crypto industry is still in its infancy and is extremely volatile and therefore, users should tread carefully before investing their earnest money. If you are unsure about making your investments, check out Aggregated Finance, a decentralized investment platform.
Aggregated Finance has a unique model featuring a treasury fund that will be used to allocate assets accumulated through smart contract deployment to high-quality, valuable crypto-native ventures.