Different types of rug pulls:
One of the most common scams in the crypto world is known as a “Rug Pull” – this is when a developer of a project makes it impossible for anyone holding the token to trade it into any other cryptocurrency. A Rug Pull is usually initiated by removing liquidity from a decentralized exchange (also known as DEX) like Uniswap.
There is also what is known as a “soft rug” pull – where the developer decides to abandon their project and dumps all of their tokens by trading them in to a different crypto asset (such as Ethereum or USDT) – tanking the price of the project.
What can be done to avoid rug pulls?
The best way to verify that you won’t get scammed by a rug pull is by doing some research and verifying the project’s team, checking if the liquidity is locked away for a reasonable period of time, and looking at how much money the developers have locked away.
Example of anti-rug pull safeguards
This will give you a decent idea about how serious the developers are about their project. To use a recent example of a project that I reviewed, the developers of the Mishka Token project locked 25 Ether worth of liquidity tokens for 1 year in unicrypt right after creating the liquidity pool.
Shortly afterwards, the developers bought back another 25 ether worth of tokens from the liquidity pool – totaling just over $120,000 worth of initial investment into their project’s liquidity.
Now, does this mean that the developers can’t rug pull? Kind of. This prevents the developers from pulling out their Uniswap Liquidity tokens – at least for the first year of the project. However, they could still dump the tokens they’re holding. Do I believe that they’d do that? No. But the chance for a soft rug pull is always present in any project.
How can soft rug pulls be avoided?
The only way to avoid a soft rug pull would be to make sure that developers also lock their tokens away for a period of time – however, not many new projects can get away with doing something like this, because it severely limits their access to tokens/funds that they might need to use for expanding the project without having to inject additional FIAT into it.
Do your research
While there is no way to be absolutely sure that some form of a rug pull won’t happen, the steps I listed above can help you by giving you a general idea of what to look out for. If you find a project that you’re interested in, dextools pair explorer gives you some interesting information about the project’s metrics – along with what they call a “DEXT Score” – a score calculated by them based on an algorithm that analyzes the information provided, the number of holders/transactions, the contract creation process, and the liquidity pool’s “security” score.
Again, there is no way to know 100% that a project is legitimate, but the simple process above has helped be avoid many obvious rugpull projects, so I hope that they will help you as well. If there are additional tips and tricks you’d like to see (or know of some that you’d like to share), drop a comment below and I’ll do my best to do more research on the topic(s).