Recently, I’ve been thinking about the "rug pull" that’s often discussed in the crypto market. It’s truly a frightening scheme.

Simply put, it’s when the development team runs off with investors’ funds. When the project starts gaining momentum, they suddenly sell off the tokens and disappear. Investors are left holding worthless tokens. Because DeFi is an unregulated field, scams like this are rampant.

Looking at real cases makes the danger clear. OneCoin was a project launched in 2014 by “Crypto Queen” Ruja Ignatova, but it turned out to be a massive scam that defrauded billions of dollars worldwide. She ran away in 2017 and is still missing. The same goes for Squid Game in 2021. Riding on Netflix’s popular drama, they sold tokens under the guise of a P2E game, but the developers ran off with the funds, causing the token price to drop nearly to zero. AnubisDAO raised $60 million in just hours, then liquidity vanished immediately.

What’s frightening is the mechanism behind these scams. Developers embed backdoors into smart contracts to steal crypto from investors. Or they use a “dumping” tactic, quickly selling their tokens to crash the price. Even worse are restrictions on sales to addresses other than certain ones. Scammers can sell as much as they want, but ordinary investors can’t sell at all. In the end, assets become worthless.

There are several points to watch out for to spot a rug pull. First, be cautious if the development team is opaque or has no track record. Fake social media accounts are common. Whether liquidity is locked is also important. If it’s not locked, developers can withdraw everything at any time. Sudden, sharp price swings of new coins are suspicious too. If only a limited number of users hold the tokens, price manipulation is easier.

Tokens promising abnormally high profits are also suspicious. An annual interest rate in the triple digits is often a sign of a rug pull or Ponzi scheme. You should also check if they’ve undergone external audits. Just claiming “audited” by the team isn’t enough; you need to verify if the auditor is truly trustworthy.

Legally, regulators worldwide are fighting rug pull scams. The SEC in the US and the FCA in the UK are actively taking action, and in May 2023, the EU introduced the comprehensive Markets in Crypto-Assets Regulation (MiCA). People involved in rug pulls face hefty fines, asset confiscation, and imprisonment. However, the decentralized and anonymous nature of crypto trading makes enforcement difficult in reality.

Ultimately, the best way to protect your assets is to thoroughly research information yourself. Check the team’s background, liquidity status, whether an audit has been done, and if there are sales restrictions. Keeping an eye on these warning signs is the best way to safeguard yourself from rug pulls.