The crypto market has been making strides, with its market capitalization recently hitting $3.89 trillion. However, alongside its success, decentralized finance (DeFi) has seen a dramatic surge in rug pull scams, revealing the dark side of innovation and opportunity. These incidents have evolved, becoming increasingly sophisticated and harder to detect, raising significant concerns for investors.
The alarming rise of rug pulls in DeFi
A rug pull is a type of cryptocurrency scam where developers abruptly withdraw liquidity or abandon a project after attracting investments. This often leaves investors with worthless tokens as the price plummets to zero. Rug pulls are common in DeFi and frequently involve fraudulent token launches or manipulated markets.
On 14 November 2024 alone, 31 rug pull incidents were recorded, culminating in $15 million in losses for that month. Although many of these scams involved losses below $100,000 per the report, the rising frequency and complexity of these frauds pose a growing threat to DeFi’s integrity.
Allen Zhang, CTO of cybersecurity firm GoPlus, revealed that “honeypot token scams” dominate the rug pull space, with over 5,688 tokens identified since November. These scams use multi-wallet control strategies, creating the illusion of legitimate distribution while scammers retain control. For the uninitiated, honeypot token scam is a scheme where scammers create tokens designed to attract investors but prevent them from selling. While the token may appear functional and promising, the smart contract contains code that allows only the scammers to sell, trapping investors’ funds.
Michael Heinrich, co-founder of Web3 infrastructure provider 0G Labs, noted how scammers now employ professional marketing tactics. He explained, “We’re seeing meticulously crafted narratives designed to lure unsuspecting investors,” highlighting that the absence of Know Your Customer (KYC) regulations makes it difficult to trace these malicious actors.
Faidat Abdullahi, Co-Founder of Covenda AI, a cybersecurity firm, emphasizes the need for cryptocurrency platforms to prioritise cybersecurity now more than ever. According to Ms Abdullahi, “Cyber attackers exploit not just technological vulnerabilities but also a lack of user awareness to pull off rug-pull scams and other crypto-related frauds.” She points out that “the decentralized and largely unregulated nature of crypto makes it an even more attractive target”.
This is why “Platforms must implement strong and robust cybersecurity measures and ensure comprehensive user education to not just protect their users and safeguard their investments but also strengthen the credibility of the entire cryptocurrency ecosystem,” advises Ms Abdullahi.
Read also: The Future of DeFi: 2024 Trends and What’s Coming in 2025
Evolving crypto scam strategies: Bots, memecoins, and social media manipulation
Modern rug pulls have shifted from simple scams to complex schemes involving automated bots, fake launches, and front-running attacks. A prime example is the launch of the Peanut (PNUT) memecoin. Despite surging 161x within a week of its November launch, scammers capitalized on the hype, creating fraudulent copies and walking away with over $103,000.
Front-running attacks, which refers to the use of automated bots to monitor pending transactions in a blockchain’s mempool (a waiting area for unconfirmed transactions), have become central to rug pull scams. Steven Walbroehl, CTO of Web3 security firm Halborn, explained how bots exploit new token launches. These bots quickly identify listings, execute buy orders ahead of legitimate investors, and artificially inflate token prices. This creates a hype and demand cycle that entices unsuspecting traders, only for the rug to be pulled later.
Another rising strategy is the manipulation of “fair launches” on platforms like Pump.fun, a Solana-based marketplace. According to Heinrich, over 90% of wallets on Pump.fun are interconnected, enabling developers to inject tokens, drive up prices using bots, and liquidate holdings for profit. In one case, a 13-year-old exploited this strategy to earn $30,000.
Social media and influencer marketing also play a key role in rug pull scams. Fake endorsements, fabricated success stories, and fear-of-missing-out (FOMO) campaigns are now standard tools used to manipulate investor behavior. Scammers repeat these tactics across multiple projects, refining their strategies to remain ahead of detection efforts.
Ms Abdullahi advises that in order to prevent their crypto platforms being unduly used by scammers to defraud unsuspecting crypto users, “Platforms must implement strong and robust cybersecurity measures and ensure comprehensive user education to not just protect their users and safeguard their investments but also strengthen the credibility of the entire cryptocurrency ecosystem”.
Read also: Davido Coin and Davido’s Crypto Trail: A Pattern of Pump and Dump?
Recognizing red flags: How to spot a rug pull
To combat rug pulls, crypto market participants must remain vigilant and look for common warning signs, including:
1. Token concentration: Crypto scammers often create an illusion of decentralized ownership by distributing tokens across multiple wallets they control. Projects with centralized token supplies carry higher risks, as scammers can liquidate holdings quickly. Notably, analysis tools like Etherscan and Token Sniffer can help identify projects dominated by a few wallets.
2. Low liquidity: Tokens with minimal liquidity are more susceptible to rug pulls, as scammers can manipulate prices more easily.
3. Unverified smart contracts: Fake ERC-20 tokens can deceive crypto investors by showing manipulated supply or user balances. While technical tools can flag these issues, many retail investors may struggle to identify them.
4. Fake associations: Fraudulent projects often associate themselves with trusted brands to gain credibility. Steven Walbroehl pointed to the “Lego rug pull” incident, where scammers falsely linked their project to the Lego brand to lure investors.
5. Crypto education: Market participants must prioritize gaining adequate crypto education as gaining the right knowledge can help in reducing risks. While it’s impossible to eliminate all threats, tools and community awareness can dramatically reduce the likelihood of falling victim to rug pulls.
Read also: How to Analyze DeFi Projects
Conclusion
Rug pulls are an unfortunate by-product of DeFi’s rapid growth, with scammers continuously refining their strategies to exploit investors. From front-running bots to fake narratives and manipulated token launches, these schemes highlight the need for enhanced security measures and investor awareness.
Therefore, to engage in the DeFi space more safely, market participants must become good at recognizing warning signs and leveraging tools to assess token or project legitimacy. Moreover, education and a collective effort to build a safer industry will be key to protecting investors and preserving trust in the crypto ecosystem.
Read also: Shitcoins and Scam Coins: Understanding their similarities and differences
Ndianabasi Tom A Petroleum Engineering degree holder, Ndianabasi’s interest since 2018 has been studying the ever-growing field of blockchain and cryptocurrency, keenly evaluating the innovation, exploration, and expansion of this field locally and globally. The founder of Nitadel a media platform, Ndianabasi has been a Writer at Crypto Asset Buyer (CAB) since 2021. When he is not drilling resources in the blockchain and cryptocurrency field, Ndianabasi is singing, reading, watching crime movies, or playing football.
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