DeFi Rug Pulls: How to Spot and Avoid Them

Cryptocurrency (crypto) and Decentralized Finance (DeFi) have transformed the international finance ecosystem, but the rapid growth of crypto and DeFi has been coupled with a 600% rise in fraud in just 12 months. This past year, $2.8 billion was stolen from investors in the crypto markets through a scam called a rug pull. Crypto rug pulls are notoriously hard to identify, but here at Arkius, we’ve engineered robust protections for our users. Arkius employs crowd-sourced Certifications that allow anyone to spot and avoid highly sophisticated crypto rug pull attempts. This article will explain the elements of a rug pull, how to spot them, and how Arkius, with the help of crowd source Certifications, helps you avoid them.

How to avoid crypto rug pulls

Rug pulls are a deceptively simple form of fraud in the DeFi space. Developers of rug pull scams will promote a project through complex marketing schemes and then withdraw all the value from the project’s liquidity pool once the token price has increased. The tokens are then exchanged on another marketplace and are essentially made untraceable.

A recent example of a rug pull can be found in a Squid Game-inspired cryptocurrency. It had nothing to do with Netflix or Squid Game director Hwang Dong-hyuk, but the token quickly experienced wild volatility, rising in value from $628.33 to $2856 in 10 minutes. Minutes later, the coin traded at $0.0007. The scammers are believed to have stolen approximately $3.3 million.

Sounds unavoidable, right? Not quite. Although developers in the crypto community often work anonymously and these scams commonly occur on Decentralized Exchanges (DEXs) where tokens can be listed without an audit, there is a way for any investor to spot and avoid this modern take on a classic exit scam. Here are five questions to ask when considering investing in a new project:

1. Have I thoroughly researched the project and team? What is the size of the team? Do they have a traceable presence in the media?

2. What is the token’s utility? Does it serve a purpose or is it driven by hype?

3. Where is the project listed? Is it only available on a non-audited platform?

4. Are tokens held primarily by the development team? If developers hold no (or few) tokens, it’s likely that the project is “unruggable.”

5. How is liquidity managed? Reputable projects should have periods where liquidity is locked and cannot be withdrawn.

How Arkius can help protect you from rug pulls

The Arkius three-way ecosystem has a crowd-sourced Certification network in the DeFi space that will help people spot rug pulls. Certifications validate certain qualities or attributes of a product, service, or organization. Arkius Community Members subscribe to Certifications that provide verified, crowd-sourced information such as: Are the developers known or anonymous? What percentage of tokens does the development team hold? Is there token utility? Is the token traded on a trusted exchange?

Let’s look at the Arkius project as an example of how Certifications can ensure Arkius Members stay safe from rug pulls (note — these are potential certification criteria that can be created by anyone with a “Certifier” role):

• Project Name: Arkius
• Transparent Project Team: Yes — no anonymous team members; chat with team members on Discord
• Social Activity: Yes — see updates on Telegram and Twitter
• Project Overview: Yes — A blockchain-powered dApp delivering trusted content and ideas certified by third parties, validated by the community and customized to each participant’s interests and values.
• Token: Yes — ARKIUS is a utility token intended to be used within the Arkius dApp
• Token Limits: Yes — ARKIUS supply will be capped
• External Audit: Yes — Certik audit of smart contracts with subsequent audits scheduled as contracts are updated
• Token Distribution: Yes — Spread across rewards, team members, development fund, treasury, and bonding curve
• Liquidity Lockup: Yes — up to five-year vesting period
• Unlimited Sell Orders: Yes — Arkius does not limit the number of tokens you can sell
• Exchange Activity: N/A — Launching soon!

Certifications through Arkius will revolutionize content in the crypto space and will give people more transparency and confidence as new projects launch.