Since the dawn of decentralised finance, scams have been the bane of every degen’s life; how many low cap gems have scarcely been ape’d into, for fear of being a thinly veiled scam coin? Despite the latest trend of “doxxing”, and other tenuous means of verification and facadThe definitive degen guide to not losing your money in DeFi rug pulls or getting rekt by crypto scams.
Do your own research and show off your new crypto bags.es of legitimacy, rug pulls are increasingly rife within the DeFi space. This article may be able to help with these problems, and equip the intrepid investor with the information needed to stay #safu in the shifting sands of Satoshi’s playground (or, in layman terms, it might help you avoid getting rugged).
Rug-Pulling is a rather new term in crypto, but the concept has been around for years; ever since the first onslaught of ICOs back in 2017, in fact. Everyone everywhere wanted to profit off the hype that was ICOs, and many people lost a lot of money. According to the study by ICO advisory firm Satis Group, over 80 percent of 2017's ICOs were "identified scams." It may be a little different nowadays, with IDOs replacing ICOs, and meme coins taking over the internet, but the thought of wanting to scam people out of money, that has stayed.
Crypto data platform Messari showed in late April that over $284 million has been stolen in DeFi hacks since 2019. Tokensniffer claims to have tracked 50,142 tokens and 2,434 scams or hacks as of July 16th. One of the most recent ones was WhaleFarm losing 99% of value and stealing $2.3M. Before that, TurtleDex, which drained $2.5 million, Meerkat Finance, with $30 million in BUSD and BNB stolen, and finally, Uranium Finance, with a whopping $50 million gone. With a little more research and digging, some of these losses could have been avoided.
Hopefully, this article will serve as some use in teaching the proper skills of doing your own research in the crypto space before you ape into another “Elon Token” that steals your money.
Research is a learned skill and a systematic process. Hopefully with enough experience, someday, you’ll be able to spot a shitcoin from a mile away and be able to tout to your friends the real cutting-edge crypto developments. First, however, you need to build up your knowledge base and the basics of research.
To start with, you need to understand how stacked the odds are against you. 99% of the tokens in the space will never hold value beyond a hype pump. When the attention goes, so does the value.
So why do you have to do this on your own? Well, because in crypto you don’t trust ANYONE. If there’s some influencer telling you to buy a token, it’s very likely they’re gonna dump their bags on you. Especially if they’re telling you to do your own research (DYOR).
What is a “Rug Pull?” And what are the different types?
You need to first understand the various flavors of rugs. The classic rug pull means that the creator can yank the value out of the contract either by removing LP tokens OR dumping the reserve tokens they hold into the market. “Liquidity locked” doesn’t mean much.
There’s the slow rug, which is where a token scheme is set up to drive new blood in and then siphon value out of the market by dumping the reserve tokens they hold, which they either pre-mined or bought for pennies. See all dog ponzis and Bitclout.
The sly rug, where the team either claims to be hacked (but it was really them) or they’re just letting the insiders rug the value from the retail buyers.
The pump and dump. This is when insiders are manipulating the market to deceive retail into buying from the market creating exit liquidity for their heavily discounted bags. Super easy to do with AMMs, high temporary demand + low liquidity (depth) = pump and dump.
How to Avoid a Rug Pull
These 11 tips should really give you an edge on the market if you truly use them to guide your thought process while looking at the newest and hottest token. These have been developed over many years of experience in the industry.
Look before you ape. Surprisingly this needs to be said, but you should actually look at the project before you ape money in. Don’t get FOMO, look for humans doing stuff and look for a real community (not just crypto gremlins). Look for active development, because that’s hard to fake.
Look for Product. Does the project actually have any tech or is it vapourware? Is it novel technology or is it a lazy fork? It can take just an afternoon to fork a DeFi project, so ask yourself, has anyone done any actual work? If not, it has zero value and is destined for rug city.
Look for accountability. Who’s gonna face the music if someone does a runner? Is the founder gonna have to go through the trouble of faking their own death in a boating accident, or are they anons? Anons can be legit too, but set a high barrier for trust.
Transparency. It was sad to see the death of whitepapers late last year, but now people actually buy tokens that don’t even have a website. If they’re not making it easy for you to DYOR, stay the hell away. Finding out who has the management keys is also part of this, but only a small component.
Understand the token economics. Look for asymmetry in the market. Ask, how many tokens were sold pre-market? How much of a discount was there? Are they going to get dumped on for a decade by VCs? This is before you actually get to: does the token have real utility? Does it do anything? There is a longer guide by Ivan On Tech to understanding token economics that might help you out.
Who holds the rug? Make sure to check the holders of the token. Single wallets might hold enough to end the game. Even a few % of the tokens can do this if liquidity is thin. Does the token supply have 15 zeros? That’s designed to make it difficult to understand, so steer clear.
Valuation. Outside of a bull market, everything trends back to its real value. If you’re holding something in the top 50 that’s an afternoon’s work, you’re gonna get rekt. Make sure to check out this guide to valuing a cryptocurrency.
Stay away from the shitcoin source. There are THOUSANDS of rugs a day on the low-fee rug chains. Just stay away. The chance of rug increases exponentially the newer the token. Trade doesn’t gamble and if you insist, gamble like you would do at the dog track, not like an investment.
Train your bullshit detector. Scammers aren’t that innovative, they reuse the same scammy tropes over and over again. “Big token burn guys!” Learn fundamentals and actually READ. Make it a goal to improve your knowledge constantly. Play the long game, and you’ll be greatly rewarded.
Respond to market context. Everyone is a genius in a bull market. Even the worst shitcoin can 100X in up-only mode. There are also tons of newbies hopping from coin to coin that don’t take the time to do their own research. Save yourself, do the due diligence, and consider going out of your way to educate others on holes you notice.
Never over-extend yourself in the market. Assume every trade can go to zero. Make sure you and your family are sorted before you go near the crypto markets. No amount of research can stop tokens from losing huge value if they’re overvalued at the start of a bear market.
Hopefully, this guide gave you some initial insights on what makes a project a total rug. But it doesn’t stop here, as you must go forth and hone your skills. Learn more, read more, research more. Go forth and find the projects making a difference with a team built to last through many bear markets.
How finance.vote’s dApp suite can protect the crypto community from rug pulls
finance.vote provides a plug-and-go governance infrastructure for DAOs; through a suite of dApps which all work synergistically with one another, finance.vote facilitates the path to decentralization, enables pop-up digital democracies, establishes a consensus layer for DeFi, and ultimately achieves online social coordination for the crypto community. All the factors needed to stay safe in the assuredly uncertain world of DeFi. Here’s how we do it:
auction.vote
auction.vote revolutionizes the IDO sector through an innovative price discovery mechanism, whereby consensus is achieved on the valuation of a token through organic auction methodologies. This eliminates arbitrary listing prices set by teams in advance of their IDOs and makes token launches more equitable and fair for investors. auction.vote also finds the optimal price for NFTs, providing consensus for investors and collectors around the price of highly subjective assets. If a project has plugged themselves into auction.vote, you can be sure that their IDO isn’t skewed in favour of VCs, early investors, and centralised teams; no more Xs between seed and public sale - just fair valuations and fair launches.
auction.vote revolutionizes the IDO sector through an innovative price discovery mechanism, whereby consensus is achieved on the valuation of a token through organic auction methodologies. This eliminates arbitrary listing prices set by teams in advance of their IDOs and makes token launches more equitable and fair for investors. auction.vote also finds the optimal price for NFTs, providing consensus for investors and collectors around the price of highly subjective assets. If a project has plugged themselves into auction.vote, you can be sure that their IDO isn’t skewed in favour of VCs, early investors, and centralised teams; no more Xs between seed and public sale - just fair valuations and fair launches.
yield.vote
yield.vote harnesses the power of DeFi and applies its principles to the yield farming industry. Previously, the mechanics of liquidity mining programmes were decided by the centralised teams running the projects; with yield.vote, it’s the users of token ecosystems who determine factors such as liquidity incentives, distribution schedules, liquidity levels etc, through DeFi governance principles. Say goodbye to teams pulling liquidity from yield pools, or changing the token emission schedules; if they’re using yield.vote, you know that the APY you signed up for is the APY you’re going to get, and your liquidity will be safu in an audited, rug-proof protocol.
yield.vote harnesses the power of DeFi and applies its principles to the yield farming industry. Previously, the mechanics of liquidity mining programmes were decided by the centralised teams running the projects; with yield.vote, it’s the users of token ecosystems who determine factors such as liquidity incentives, distribution schedules, liquidity levels etc, through DeFi governance principles. Say goodbye to teams pulling liquidity from yield pools, or changing the token emission schedules; if they’re using yield.vote, you know that the APY you signed up for is the APY you’re going to get, and your liquidity will be safu in an audited, rug-proof protocol.
bank.vote
bank.vote is an impartial, decentralised vesting protocol. Fed up of teams changing vesting schedules, giving their early investors even earlier access to tokens, and dumping on retail? So are we! That’s why we created this protocol; if a project is using bank.vote, you can be sure that the vesting schedule they initially laid out in their whitepaper (the vesting schedule which you agreed to when you bought their token) is the schedule they’ll be sticking to. There’ll be no possibility of changing it; once they plug into the bank, their token will immutably and irreversibly be distributed in line with the timeframes and quantities which were initially inputted.
bank.vote is an impartial, decentralised vesting protocol. Fed up of teams changing vesting schedules, giving their early investors even earlier access to tokens, and dumping on retail? So are we! That’s why we created this protocol; if a project is using bank.vote, you can be sure that the vesting schedule they initially laid out in their whitepaper (the vesting schedule which you agreed to when you bought their token) is the schedule they’ll be sticking to. There’ll be no possibility of changing it; once they plug into the bank, their token will immutably and irreversibly be distributed in line with the timeframes and quantities which were initially inputted.
markets.vote
markets.vote provides users with actionable market insights and asset discovery through innovative collective intelligence tools. With the rapid expansion and exponential growth in altcoins, DEXs, and DeFi in general, markets.vote allows users to cut through the noise and discover high-quality products, up-and-coming tokens, and early trading signals and opportunities. User governed consensus allows you to discern from shitcoins, scams, and gems - the info every degen has dreamed of since the dawn of crypto!
markets.vote provides users with actionable market insights and asset discovery through innovative collective intelligence tools. With the rapid expansion and exponential growth in altcoins, DEXs, and DeFi in general, markets.vote allows users to cut through the noise and discover high-quality products, up-and-coming tokens, and early trading signals and opportunities. User governed consensus allows you to discern from shitcoins, scams, and gems - the info every degen has dreamed of since the dawn of crypto!
Finally, why not join a DAO and learn first-hand from people who are building real stuff? Head over to the finance.vote community, join in on the fun and follow a community set out to make a difference. Go ahead, give it the rug test, and see how it does!