Rug Pull. What is it and why should you be concerned

Published May 25, 2022, 1:08 PM

by MB Technews

Cryptocurrency has grown from just being a niche topic spoken in awe among internet communities to being a conversation piece among non-technical folks. Terms like HODL (Hold On for Dear Life) and WAGMI (We are All Gonna Make It) have gained popularity and mirror the positivity of crypto investors.

However, the term RUG PULL is arguably the most commonly referenced crypto term and it became popular for all the wrong reasons.

Rug pulls happen when a cryptocurrency founder develops, markets, and sells the project to investors. After receiving funding, the founders will abandon the project and pocket the funds. 

Is it criminal? Yep. Can they be made liable? Well, it’s not that easy.

First, they can deny that they have the funds and instead say that it was all spent on development costs.

Second, most founders do not reveal their identity to all investors and it’s common for core members of the project to use pseudo-names and avatars. Basically, you’re giving your money to masked individuals and trusting that they deliver their promises.

Third, although the digital transactions are all recorded in the blockchain, it is very difficult to link a crypto account to an actual person. Anyone with an email and internet access can create a crypto wallet thus the inherent difficulty in identifying account owners.

Let’s look at a fairly recent and infamous rug pull that rocked the crypto community. The Squid Game token, which was supposedly tied to the popular Netflix series, is one of the well-publicized rug pulls in history. 

This token dropped in value from $2,500 to mere cents in November 2021 in a matter of seconds. The actual moment when the value of the Squid Game Token dropped to zero, a Twitch streamer named “The_Dent” was live-streaming it, producing one of the biggest and funniest (unless you’re an investor) rug pulls ever.

The project promised that an anti-dumping method would be built within the code, securing the $SQUID token from being dumped for profit. Token holders could only sell if they also hold another token called $MARBLE (yep, they played marbles in that scene, right?). 

Despite this “safety feature” the unknown creators made off with $3.3 million with little to no repercussions.

Not surprisingly, these projects have painted all crypto projects in a bad light.

However, many crypto projects are trustworthy and have applied the lessons learned from past failed projects. They now see the importance of external audits to review their blockchain contracts to identify any vulnerabilities. Locking liquidity assets to ensure fund protection is now a standard practice that goes hand-in-hand with a well-prepared road map. Today’s investors are now wary of projects with anonymous core members, preferring that the core members are fully “doxxed” or publicly known.

James Afante

Promising projects like Astro XP, a locally owned and established crypto racing and RPG game, revisit the paths created by both successful and unsuccessful projects. Astro XP Founder and CEO James Afante knows that the playbook for crypto and NFT gaming projects is still being written. But there are breadcrumbs to follow and crucial learnings from hundreds of projects. All of them have served as guideposts for his team to follow and it is this writer’s hope that other founders are also keen on finding and using them.