What is crypto mat pull? Its meaning and how to avoid carpet pulling

What is a crypto rug pull?

The rise of the cryptocurrency market has attracted more fraudsters looking to make a quick profit. Crypto Rug moves have grown to be common in Web3, despite the fact that some cryptocurrency scams use conventional fraud strategies such as Ponzi schemes. Rug scammers frequently use the latest techniques, such as malicious smart contract code, which catch many small investors off guard while developers make off with millions.

What is backtracking?

A withdrawal is a type of cryptocurrency scam in which fraudsters trick the public into securing funding before absconding with the investors’ digital tokens. The goal of back-end developers is to attract as many retail investors as possible. They regularly advertise their tokens on social media platforms. Developers transfer depositors’ cryptocurrency to their wallets or allow them to cash out on a cryptocurrency once enough people have bought into this scam project.

Withdrawals are a common phenomenon in Defi (decentralized finance) applications. Defi’s inherent decentralization and lack of regulation makes it easier for scammers to hide their identity and get away with a significant amount of cryptocurrency. However, not all fraudsters need to remain anonymous.

Withdrawals are quite common, judging by the impact of investment fraud. According to blockchain analytics company Chainalysis, fraudsters defrauded $2.8 billion, or $7 million per day, over the course of 2021. Crypto retreat has grown significantly over the past year.

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What different types of carpet covers are there?

Each backhaul involves criminals stealing cryptocurrency from unwary investors. However, there are three main tricks used by con artists:

1. Liquidity theft

Liquidity theft, also known as liquidity theft, is the sudden withdrawal of all the coins from the liquidity pool used to fund a project by its founder. When this happens, the token’s locked value is released, leaving investors with a useless asset that is useless for anything. The Defi area has the highest prevalence of this type of carpeting.

2. Limitation of sell orders

This is a more subtle way for dishonest founders to defraud investors. In this type of fraud, a developer creates a token with a smart contract that limits who else can sell them. As a result, investors are locked into an asset that cannot be traded. Also not able to sell the token to other peers. When enough investors have bought the token and the founder is sitting on a profit, they sell their tokens, leaving investors with worthless tokens they can’t do anything with.

3. Pump and dump

Dumping refers to the quick sale of a significant portion of a founder or crypto developer’s own tokens. Due to the demand for the coin essentially falling and the supply increasing, the price of the coin is drastically reduced. In a while, dishonest founders will pump the token to increase its value and appeal to investors by luring them with promises of huge returns. Risky investors will buy the tokens with marketing and promotion. The founder will sell the tokens when the price action is strong to take advantage of the fervor.

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How many types of carpet pulls

A rug can also be found in one of two different forms:

1. Hard carpet pulling

When a founder maliciously uses the project to defraud investors, it’s known as a “hard pullback.” This indicates that the smart contract contains elements that are hidden but intended to deceive investors, and the code clearly shows that the intention is to steal money. An example of a hard back is liquidity theft, where the code is written to lock investors into an asset with no real purpose or function.

2. Soft carpet cover

Soft carpet pulls describe the sudden sale of cryptocurrency assets by token developers. The remaining crypto investors are left with a token that is significantly devalued as a result. Dumping may not be a crime in the same sense as hard pulling is, despite the fact that it is unethical.

What are the ethical and legal implications of crypto rug pulling?

Liquidity theft and limiting sell orders are generally illegal. Both of these strategies suggest that developers designed their tokens or dApps to attract retail investors. Both of these scams are known as “hard backdrafts” because the fraud is “hardwired” into the code of a crypto project.

In contrast, “pump and dump” schemes are legally ambiguous. Although “pump and dump” carpet pulling is unethical, it is more difficult to prove illegal activity on the part of scammers. It is not necessarily illegal to buy a cryptocurrency on the open market and publish it online. This is especially true if the con artists behind a “pump and dump” scheme invested in a token they had nothing to do with. Some people refer to “pump and dump” schemes as “soft backtracking” because there is nothing in the project’s code that makes it susceptible to failure.

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How to Recognize a Crypto Back Trek

Crypto mats can be deceptive, but there are some red flags to look for when evaluating new tokens:

Unclear White Papers No Third Party Audit Anonymous Developers Excessive Social Media Marketing Unusual Price Movement

How to Avoid a Crypto Back Trek?

Investors can protect themselves against rug pulls by watching for some obvious warning signs, such as liquidity that is not locked in and the lack of an external audit.

1. Stick to established dApps

Consider sticking with top-tier dApps like Uniswap or Aave rather than looking for upcoming cryptocurrency projects. Projects with a strong community, a long history and a good reputation are more likely to offer real tokens and rewards.

2. Limits on sell orders

A malicious party could program a token to limit some investors’ ability to sell it, while leaving others unrestricted. These sales restrictions are indicators of a fraudulent project.

Determining whether there is fraudulent activity can be challenging because sales restrictions are hidden in the code. One way to check this is to buy a small amount of the new coin and then try to sell it immediately. The project is probably a scam if there are problems downloading what has just been purchased.

3. Test a small cap token on a trusted DEX

Buy a small amount of this cryptocurrency and try to sell it on a reliable DEX like Uniswap if you have any suspicions that you will not be able to sell a token. This cryptocurrency is probably a restrictive selling scam if you can’t exchange it.

4. Suspiciously high returns

Anything that seems too good to be true probably is. It’s probably a Ponzi scheme if a new coin’s returns look suspicious, but it doesn’t appear to be a scam. Although it is not always a sign of fraud when tokens offer an annual percentage return (APY) in the triple digits. However, these high returns usually come with an equally high risk.

5. No external audit

New cryptocurrencies now regularly go through a formal code audit process managed by a trusted third party. Tether (USDT), a centralized stablecoin whose team neglected to disclose that it has non-fiat-backed assets, is one infamous example. An audit is particularly relevant for decentralized currencies, where auditing is required by default for Defi projects.

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Crypto back draw examples

1. OneCoin

OneCoin, a company based in Bulgaria, is accused of being the front for a digital token Ponzi scheme. However, it defrauded more than three million of its participants between 2014 and 2016 of $4 billion. This represents the largest amount ever stolen in the history of cryptocurrency. After she disappeared in 2017, the person believed to be responsible for the theft was placed on the FBI’s Ten Most Wanted Fugitive List, according to the BBC. Onecoin was one of the famous examples of crypto-mattrek.

2. Africrypt

Africrypt, a South African digital token investment platform, was destroyed by a $3.6 billion attack in 2021. Raees and Ameer Cajee, the company’s founding brothers who fled to the UK, reportedly denied any involvement.

3. SQUID token mat draw

One of the most devastatingly restrictive sales rugs is the Squid Game rug. SQUID is a digital token launched by an unidentified group in response to demand for Netflix’s “Squid Game.” This token was allegedly intended for use in a play-to-earn game based on the Netflix series. The SQUID token peaked at nearly $3,000 per token when it was founded in late 2021 before tumbling to zero.

4. BitConnect

England-based now-defunct lending platform BitConnect assured investors of returns despite market turbulence. Instead, founder Satish Kumbhani is alleged to have compensated later investors with money from earlier investors, ultimately earning $2.4 billion in global profits. However, according to CNN, Kumbhani could spend up to 70 years in prison.

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