Friday, January 21

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

Key facts:
  • Avoiding tokens that don’t undergo a code audit is one way to avoid being scammed.

  • An estimated $ 2.8 billion in cryptocurrency has been mined from victims this year.

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 the information from blockchain analytics firm Chainalysis, this is a new type of cryptocurrency scam that typically 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. Fountain: 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 $ 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?

Para 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 gain access to them. 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.