Blockchain technology brought together the security of cryptography and the accessibility of the Internet and promised to revolutionize the way the world conducts financial transactions. Central banks and other intermediaries such as banks would not be necessary, and the information would be stored securely, preventing other users from adding, deleting or modifying it.
Still, the crypto space is riddled with scams that stole more than $7.7 billion from investors in 2021. Of that, more than $2.8 billion was wiped out by malicious entities through so-called “pull the rug” schemes. ” or “pump and pull”. and developers.
Carpet flips are typically characterized by an unconscionable increase in the price of a crypto token and occur when the token developer artificially inflates the token price, only to later abandon the project and run away with investor funds.
These pump-and-dump schemes accounted for just 1% of all crypto scams by value in 2020. That share increased to 36% in 2021, reflecting a rapidly growing problem for crypto investors around the world.
Crypto tokens serve as a transaction medium for blockchain projects with specific use cases, such as decentralized finance (DeFi), gaming, media, and entertainment. These tokens have a defined delivery mechanism and are created in specific scenarios, e.g. B. when validators of the underlying blockchain participate in the consensus mechanism.
However, in some cases, developers can write the token code with certain bugs, allowing them to steal funds without investors having any control over them.
Hard mat pulls involve project developers running away with the money raised to further develop the project, and are usually done during or immediately after the initial token launch phase.
In contrast, soft flips occur when developers literally dump tokens onto crypto exchanges, causing the price of the token to plummet. While not strictly illegal, soft mat pulls are a clear indication of the developer’s malicious intent and are generally much easier to detect than hard mat pulls.
The SnowDogDAO project was one of those species where developers switched to a custom market-making platform called SnowDog AMM to do a buyout exercise and remove the native SDOG token before most investors reacted to the crash. prices.
Investors should look for projects that make big promises, as the likelihood of some kind of pump and dump scheme taking place is much higher when investors flock to buy the underlying token without worrying about the project’s market fundamentals.
While all pump-and-dump schemes leave investors with either no token or a highly devalued token, there are three main types of such schemes: dumping, sell order limiting, and outright cash theft.
Projects that have attracted a lot of investor interest in a short period of time are more likely to be abandoned if the token developers themselves sell all their holdings at the peak of investor demand. Investors can spot these types of projects by the excessive amount of social media promotions or extra rewards that seem too good to be true.
Similarly, for Defi projects that have locked up a lot of value in liquidity pools where investors stake their tokens in hopes of higher-than-average returns on their investment, liquidity theft has become the primary method of withdrawing. investor funds without their knowledge.
Since these funds are directly tied to the value of the token, the theft of liquidity will cascade down the price of the token, eventually driving it down to zero when investors attempt to sell or withdraw their tokens.
A much more advanced type is where developers limit the number of tokens token holders can sell or the rate at which they can sell them. Typically deployed as an anti-dumping device, these tokens can reach dramatic heights in short periods of time as investors’ ability to sell their holdings is limited. This creates an artificial gap between supply and demand, giving developers an advantage when it comes to liquidating tokens at will.
A classic example of this type of attraction occurred when the infamous Squid Game token launched last November, with the SQUID token reaching nearly $3,000 within days of its launch. However, since investors were unable to sell any of the purchased tokens due to the built-in anti-dumping feature, the project developers dumped their tokens at the height of the mania and apparently got away without doing anything illegal.
While investors can’t do much once they invest in a pump and dump token, they can avoid being duped by paying attention to the warning signs.
Promises of exceptional returns, projects developed by an anonymous company, limits on sell orders, and one-way price movements are some of the obvious signs of a crypto scam. For savvy investors who will go so far as to read the token whitepaper, things like project developers being blocked or illiquidity are another telltale sign of an upcoming move on the table and can be easily deciphered.
However, more complex mechanisms, such as writing the token code in favor of the developer, can be quite difficult for less experienced investors to detect and can only be avoided by verifying the developer’s credentials.
Crypto investors should guard against pump-and-dump schemes by conducting detailed research on a project’s “tokenomics” and avoiding tokens from developers with no background or experience in a blockchain project.