Many people work hard for their favorite airdrops in exchange for a good chunk of tokens. Some manage to find the perfect bottom entries on tokens that pump really hard, but guess what? All this hard work disappears when a crypto rug is pulled!
In this article, we will discuss the types of rug pulls in crypto, how to stay safe from them, and the overall impact of rug pulls in the crypto world.
What is a carpet pull in crypto?
What happens if you are standing on a rug and someone suddenly pulls on it? You’re falling, aren’t you? That’s exactly what a crypto carpet is!
Typically, this happens when the people who created the cryptocurrency token, i.e. the developers, leave the crypto project and run off with the investor’s money. This results in the token price taking a nosedive and leaving investors with tokens without value.
Normally there are signs before a cryptocurrency rug pull is about to happen, but before that it is important to learn where and how exactly a rug pull takes place.
Where and how do carpet pulling happen?
Normally, a classic ‘back pull’ occurs on decentralized exchanges and NFT projects due to lack of regulation and pseudonymity of crypto developers. This is because anyone can create a token, provide liquidity to it and launch it on decentralized exchanges such as Uniswap, Pancakeswap and some degen platforms such as pump.fun.
What is happening now is that scammers are hiding behind fake identities because there is no KYC and launching a token on decentralized platforms. They then market it on social media platforms such as X, Facebook, Instagram, Telegram, Discord and others.
Normally, scammers launch meme coins because new investors can easily get trapped in them. Of course, all this is done with the help of fake partnerships with influencers and promises of high returns. Unfortunately, the rags-to-riches dream is ultimately shattered when the shady developers abruptly shut down the project and run away with the money, leaving investors hopeless with no hope of recovery in the unregulated market space of cryptocurrencies.
Types of crypto carpets
The typical appeal of crypto is what we described above, because it involves launching, marketing and ultimately closing the project, leaving investors with nothing. Ultimately, it all comes down to two categories: a project can perform a hard or soft carpet pull. Let’s take a look at the main differences between them.
Hard pull versus soft pull
A hard pull requires a lot of effort and some technical knowledge of how a smart contract works. This is because a hard pull requires writing and entering malicious code into a project’s smart contract, preventing users from revoking their tokens. The StableMagnet carpet is a classic example of hard pulling, as the project’s developers hid a backdoor in their smart contract that allowed them to perform this hack.
On the other hand, a soft pull is simply a way for project developers to sell their token holdings in batches without publicly announcing it. This way, the token does not fall immediately, but in stages, and then becomes completely worthless. The Animoon NFT project is a good example of a soft appeal where developers got away with $6.3 million.
Examples of notable carpet pulls
Collecting crypto tokens is not a small event because when it happens, especially on a big project, everyone in the crypto community starts talking about it. Here we will list some of the most notable developments in the cryptocurrency world so far in 2024 (at the time of writing):
Thodex (2021)
Thodex was a Turkish cryptocurrency exchange responsible for stealing more than $2 billion from its users. An excuse for maintenance was made up by the founder, who then ran away with the money.
Squid Game Token (2021)
The Netflix series known as Squid Game was the main catalyst behind the popularity of this token as it shot to $2800 in a short period of time. However, this huge price increase was short-lived as the anonymous project developers drained all liquidity from the project and the price fell to almost zero in no time.
LUNA (2022)
The crypto bear market brought a lot of bad news, but accepting the DeFi token’s LUNA demise was the hardest part. Although the allegations against the owners of the LUNA project have not been proven, this crypto project is responsible for an estimated loss of $40 billion to the cryptocurrency market.
Fintoch (2023)
Last year, the promise of high returns lured many users to Fintoch, which later disappeared with $31 million. All of this was done primarily through fraudulent marketing and endorsements, further demonstrating that all that glitters is not gold.
The impact of carpet on cryptocurrency adoption
A run into crypto will not only impact the investors who lost their money, it will forever be a dark spot in the crypto world.
Unlike older markets that have been in business for decades, the cryptocurrency market has barely seen a decade behind it. This means that major investors and institutions are still skeptical about cryptocurrencies and such events using robust crypto tokens only lead to stricter entry rules, meaning less liquidity for the crypto market as a whole.
Ultimately, however, this negative impact from regulation is short-lived as regulations become more user-friendly and stricter for the entire industry, as such crypto carpets become a rare occurrence.
How do you recognize a carpet puller?
While it can be difficult for anyone to spot a carpet puller, following the tips below can save you from the majority of carpet pullers in the cryptocurrency world.
Token Delivery: Take a closer look at the project’s token offering. If one or a handful of wallets has the majority of the supply, avoid that project.
Unrealistic promises: High returns are a sign of early scams, not just in crypto, but in any financial market.
Security Audits: Almost every crypto project is audited by a third party, so make sure the crypto project you want to invest in is properly audited by a reputable company.
Team info: Anonymous developers with no online information are a big red flag, and while some successful meme coins have anonymous owners, the majority of tokens with anonymous owners end up being scams.
How can I avoid carpet pulling?
Spotting a carpet puller is the first half of the picture, but how can you avoid them? Here are some practical steps you can take:
Use blockchain explorers
Evaluate the token’s smart contract and transaction history using applications such as Etherscan or BscScan. Developers may be able to modify transactions or create an infinite number of tokens via contracts with ‘mint’ or ‘owner control’ functions, so keep an eye on these parameters and avoid those tokens.
Look for projects with explicit use cases
Renowned projects often offer original technological solutions or tackle pressing real-world problems. Avoid tokens that have no other use than manipulating prices as they can easily run their users.
Conduct extensive research
Research the project in detail and pay attention to the roadmap, whitepaper, and purpose of the token. Uncertain objectives or a lack of thorough documentation are often indicators of a hoax.
Read user reviews on sites like Telegram, Twitter and Reddit. A robust, active and cheerful community is often a sign of success.
Stay informed about scam patterns
Stay informed about typical cryptocurrency scams and their strategies. Websites like CoinGecko and CoinMarketcap offer tools to help you spot fraudulent schemes.
Resist FOMO driven by hype
Avoid making investments based solely on celebrity endorsements or social media excitement. Influencers and bots are often used by scammers to create excitement about their businesses.
Regulation and supervision
Rugpulls have drawn attention to the urgent need for regulatory oversight to protect investors and maintain confidence in the Bitcoin marketplaces. To reduce the anonymity that scammers abuse, numerous governments are enacting laws such as mandatory Know Your Customer (KYC) procedures and Anti-Money Laundering (AML) standards. While it is still difficult to apply these rules to DeFi, they are specifically enforced on centralized platforms.
International initiatives aim to create cross-border regulations to combat cryptocurrency fraud, such as those led by the Financial Action Task Force (FATF). However, enforcement is still a major problem, especially in DeFi ecosystems. A safer environment for cryptocurrency adoption is being created through improved investor education and open audit procedures, which are evolving as complementary tactics to regulatory activities.
What is a carpet pull?
A back pull occurs when the developers of a crypto project withdraw all liquidity from the project and run away with the investor’s money. Normally, investors are not given enough time to react to a back pull, so it is advisable to do research before investing in a crypto project. If something in the crypto world seems too good to be true, it probably is.
How do crypto carpets work?
Crypto back is pulling work by removing liquidity, manipulating token prices and not allowing investors to withdraw their investments from the crypto project. It is advisable to do your research before investing in a token as both centralized and decentralized exchange tokens can be robust in the volatile world of cryptocurrencies.
Is Crypto Back Pulling Illegal?
Yes, carpet pulling is a form of fraud and is illegal everywhere. However, it becomes difficult for law enforcement agencies to track the fraudulent developers due to their anonymity from the start. It is therefore advised to only invest in reputable crypto projects whose founders also have a good track record
