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What Is Defi Rug Pull & How You Can Safeguard Your Money From It?

Understanding The Risk Of Rug Pull & Bank Run Found In Defi Protocols!

I Feel:

“If you are not aware of the pros & cons of the Crypto projects you are invested in or looking to invest in, you may be taken by surprise, by market manipulation, smart contract bugs, or from any black swan event. You may end up losing your hard-earned money. So it’s always advisable to DYOR:(Do Your Own Research)”

In the recent past, one major rug pull event was reported by Decrypt, Where they stated :

The price of $TITAN fell to zero, prompting Iron Finance to call for all holders to withdraw liquidity from the pools after being hit by what it called a “bank run.” This rug pull reportedly may have hit the billionaire Defi investor Mark Cuban’s whose wallet balance may also have fallen with it

This kind of bank run issue is one of the associated risks which need to be factored in by all you Defi investors. So today I would like to decode Rug Pull for you and hope that it helps you in making more informed investment decisions going forward

So let’s get started by understanding:

What the heck is Rug Pull?

This Crypto universe accommodates multiple Blockchain-based, DEFI’s, DEXs, DApps, Smart Contract projects which have given a new tool for the common man to invest and grow. The dream of financial freedom has never been so realistic ever before, this trustless crypto world has given new hope, new power into the hands of humanity to exercise and change their fate.

But with all these apparent promises also come unexpected risks which may even shatter those dreams, if you are not accountable for all your investment done. There are always some bad people out there who are looking to make your life hell with their selfish intention to get quick-rich, so they are not afraid to manipulate this highly unregulated market of cryptocurrency to their advantage.

Defi platforms are the most vulnerable to this kind of malicious intentions and also being highly unregulated they are prone to such attacks. So as a retail investor may attract the risk of losing all your money being staked or pooled in these Defi projects. One such risk is Rug Pull.

A rug pull is a malicious manipulation in the cryptocurrency universe where Defi project owners(Developers) may abandon the project and run away with investors’ money , saying that there is some software issues whicn needs to be fixed

Rug pulls are common mostly among the Defi ecosystem and Decentralized exchanges(DEXes) are the largest victim of the same. Many new Defi projects sprung up with their own native token, which developers pair with popular tokens like ETH, USDT, DAI, etc, and allows users to swap the same against the paired tokens, luring investors with higher rewards. But as the number of investors rises they run away with your established ETH/DAI/USDC/USDT etc which you pooled in their protocols

The developers with malified intention find it extremely easy to create their token ion Defi platforms, as these platforms provide the freedom to do so without auditing every token being listed on their network. Etehreum blockchain is mostly used by such developers as it is open-sourced and has ERC-20 standards which provide the ease to create such tokens

How One Can Identify Such Projects & Protect Their Fund?

One easy way out is to check what is the liquidity of the given pool attached to the given project. Higher liquidity is a sign of strength in the Defi project, but that doesn’t solve all the issues, one should also check the legacy of such project and who is behind this project.

For example, UniSwap, Bancor, AAVE, Compound have been existent for more than 2–3 years and have sufficient total value locked into their Defi ecosystem, so infuse some kind of trust in their investors.

Never blindly follow any news or fud and plan to invest, just because you are getting higher returns for pooling or staking your coins. Always research deeply about who are the founders of the Defi project you are looking to invest upon. Who is backing those flounders? Have there been any past issues reported against them and many more questions like this?

Liquidity pool is the foundation behind any Defi project, as without sufficient liquidity they can not provide the trading functionality like

  • Token Swapping
  • Automated Market Makers(AMMs)
  • Crypto lending & Borrowing
  • Crypto mining /Yield Farming etc.

All the above services come together to fuel the Defi Engine and they required enough liquidity in the associated liquidity pool to function smoothly.

So always look to find out what is the lock-in period this platform enforces over the pooled tokens most reputable & trusted projects lock the pooled liquidity for a certain period to safeguard investors interest

One thing which may look speculative is the sudden burst in the token price in the given liquidity pool. This is also termed Coin Skyrocketing.

So, If you notice that there is a sudden rise of the coin price from 0–100x or 50x for that matter, within a given day, you need to be, cautious of this speculative move, as this can be a kind of trap to trigger, so-called FOMO and a way to lure more investments into their project.

There can be newly launched Defi pools, which may offer you high returns for your pooled token. They want to have higher liquidity too so they may do so, but you need to be cautious when any projects start offering the unexpected 500 % or 1000 % returns, which are not normal for established Defi players.

So the famous saying :
All that glitter is not the gold “

This is what you should apply and make your decision with extra caution.

Some Major Reported Rug Pull from The World Of Defi:

As per messari report:

More than $284 million has been lost as a result of Defi hacks since 2019, according to research by Messari. The crypto research provider says that the average amount stolen in these incidents amounts to $11.9 million.

Thodex:

In 2020, Thodex — a Turkish cryptocurrency exchange with about 400,000 users — was accused of pulling an exit scam. Thodex website went down and they announced that: “They are temporarily closed” to address an “abnormal fluctuation in the company accounts.”

Thodex, CEO allegedly took $2 billion of customer funds with him & fled to Turkey.

Meerkat Finance:

Theblockcrypto reported one such incident of rug pull incident of Meerkat finance,

This DeFi project was reported to drain $31 million worth of crypto assets. On its official Telegram channel, the team claimed that its smart contract vault was compromised.

Summary:

There are many such incidents that are being identified and reported, so given the rise of a bank run, rug pull & exit scams you need to be more responsible with your investment strategy. You need to educate yourself well and avoid investing in any new Defi projects blindly.

These malicious hackers take advantage of your get-rich-quick & FOMO instinct to trap you very often, but if you are a strong-headed and cautious investor who ask a lot of question and then take the calculated risk, you may safeguard your money & sleep peacefully

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@pramodAIML

@pramodAIML

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Passionate Blogger & Tech Entrepreneur | Founder of FinTech Startup | Write about AIML, DevOps, Product Mgmt & Crypto