How to avoid a rug pull in crypto?

1. How to identify and avoid rug pull

Rug pull is a fraud manipulation method that doesn’t use phishing, hacking, and other hidden methods. This manipulation takes place publicly and that makes it more difficult to identify than other scams. Rug pull exploits one of the weaknesses of crypto assets: the power of viral information, FOMO (fear of missing out), and the crypto community’s ability to readily influence one another.

There are several clear signs that investors can watch out for to protect themselves from rug pulls such as the liquidity not being locked and no external audit having been conducted.

The following are six signs users should watch out for to protect their assets from crypto rug pulls.

Unknown or anonymous developers

Investors should consider the credibility of the people behind new crypto projects. Are the developers and promoters known in the crypto community? What is their track record? If the development team has been doxxed but isn’t well known, do they still appear legitimate and able to deliver on their promises?

Investors should be skeptical of new and easily faked social media accounts and profiles. The quality of the project’s white paper, website, and other media should offer clues about the project’s overall legitimacy.

Anonymous project developers could be a red flag. While it’s true that the world’s original and largest cryptocurrency was developed by Satoshi Nakamoto, who remains anonymous to this day, times are changing.

No liquidity locked

One of the easiest ways to distinguish a scam coin from a legitimate cryptocurrency is to check if the currency is liquidity locked. With no liquidity lock on the token supply in place, nothing stops the project creators from running off with the entirety of the liquidity.

Liquidity is secured through time-locked smart contracts, ideally lasting three to five years from the token’s initial offering. While developers can custom-script their own time locks, third-party lockers can provide greater peace of mind.

Investors should also check the percentage of the liquidity pool that has been locked. A lock is only helpful in proportion to the amount of the liquidity pool it secures. Known as total value locked (TVL), this figure should be between 80% and 100%.

Limits on sell orders

A bad actor can code a token to restrict the selling ability of certain investors and not others. These selling restrictions are hallmark signs of a scam project.

Since selling restrictions are buried in code, it can be difficult to identify whether there is fraudulent activity. One of the ways to test this is to purchase a tiny amount of the new coin and then immediately attempt to sell it. If there are problems offloading what was just purchased, the project is likely to be a scam.

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