Savvy investors are always looking for projects in their early stages that appear to be bound for success. If you’re lucky, getting involved early could result in huge returns – just ask the Winkelvoss twins, who invested in bitcoin (BTC) nearly a decade ago and have since become billionaires . On the other hand, “aping” into a project without doing thorough research can end in financial disaster, such as those who were lured by the Baller Ape Club non-fungible tokens ( NFT ) and collectively lost $2.6 million to scammers.

This appetite for high-risk, high-reward investment is particularly prevalent in the crypto space, where a steady stream of new projects builds buzz and encourages new investment. But unlike regulated financial markets, the crypto ecosystem is still in its early stages, and bad actors continue to find new ways to trick unsuspecting investors into making bad decisions.

One common scam in the crypto space is called a “rug pull,” where a developer or creator will promote a project such as a new coin or NFT release and then disappear with investor money. The perpetrators of rug pulls are difficult to track down after the fact, as the decentralized and pseudonymous nature of blockchain allows those involved to conceal their identities.

The term “rug pull” comes from the phrase “pulling the rug out from underneath.” Many of these illegal schemes appear legitimate and enticing until the minds behind the project decide to suddenly drain investor funds.

The emerging DeFi space is prone to rug pull scams because of the lack of intermediaries involved in transactions and the potential for massive returns . Additionally, many new cryptocurrency projects start out in the same place – a new, attractive token will emerge and investors will pour money into the project hoping that it rises in value – making these types of scams even more difficult to detect early on.

“Rug pulls are prevalent in DeFi because with the right technical know-how, it’s cheap and easy to create new tokens on the Ethereum blockchain or others and get them listed on decentralized exchanges ( DEX ) without a code audit,” Chainalysis explains. Code audits allow third parties to conduct security checks, ensuring that any smart contracts associated with the token are free of vulnerabilities.

Rug pull scams are also common in the NFT space, where heightened interest in crypto art and a constant influx of new projects have created an attractive environment for scammers. Many new collectors are still figuring out how to navigate the space, and popular projects like CryptoPunks have yielded millions of dollars in returns for early investors. How to stay safe from rug pulls

Rug pull scams may not always be obvious, though there are ways to better detect these types of fraudulent projects and keep yourself safe.

Many new projects don’t have a track record to prove their legitimacy or safety. While choosing to invest in an NFT project like Bored Ape Yacht Club is not entirely without risk, the project has established trust within its community over time. Some (not all) scams will often lazily imitate features from other popular projects, signaling that the project may not have originality or long-term value for investors.

While it may be tempting to jump into a hyped-up project quickly, there’s a reason a common refrain in the crypto space is to “do your own research.” It’s extremely important to thoroughly examine the project, its team and blockchain features before deciding whether to invest.

While founders of NFT or DeFi projects often keep themselves anonymous, that approach could also protect them from being held accountable in case the launch of the project goes wrong. In some cases, the founders may maintain a pseudonymous crypto identity that they will use for years across projects and accounts. If their identities are visible, be sure to check out their social media accounts and other available information to see if they interact with other known people in the space and have legitimate followers.

Many legitimate DeFi projects will also audit their smart contracts to ensure there are no bugs in their code, a promising sign to investors. However, this process can be expensive and time-consuming and audits are not a guarantee that a project cannot be tampered with down the line.

In addition, it is also helpful to look through a project’s website, Discord channel, roadmap, white paper and associated materials to look out for anything that seems suspicious.

Any project that promises sky-high returns should be carefully considered because DeFi scammers need liquidity to fund their scheme. […]

source What Is a Rug Pull? How to Protect Yourself From Getting ‘Rugged’

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