Crypto investors: How to prevent the rug being pulled from under you
Blockchain technology brought together the security of cryptography and the accessibility of the internet and promised to revolutionise the way the world transacts in finance. There would be no need for central banks and other intermediaries like banks and information would be stored securely, making it impossible for other users to add, delete or change.
Yet, the crypto space is plagued by scams that robbed investors of more than $7.7 billion in 2021. Of this amount, more than $2.8 billion were wiped out by what is known as ‘rug pulls’ or ‘pump and dump’ schemes by malicious entities and developers.
Rug pulls are typically characterised by an inordinate increase in the price of a crypto token and occur when the token developer artificially inflates the token’s price, only to then desert the project and escape with investor funds.
These pump and dump schemes accounted for barely 1 percent of all crypto scams by value in 2020. That share shot up to 36 percent in 2021, reflecting a rapidly growing problem for crypto investors all over.
Modus operandi
Crypto tokens act as the transacting medium for blockchain projects that have specific use cases such as decentralised finance (DeFi), gaming, media and entertainment. These tokens have a defined supply mechanism and are minted in specific scenarios such as when validators on the underlying blockchain participate in the consensus mechanism.
However, in some cases, developers may write the token code with certain loopholes so that they can steal funds without investors having any control over them.
Hard rug pulls involve the project’s developers escaping with the money raised for developing the project further and are usually done during the initial token launch phase or immediately
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