Crypto scammers are flooding decentralized exchanges such as Uniswap with rug pulls.
Such scams vary from the intricate to the outright lazy, but many are successful. This hints at either the greed of the crypto market or the gullibility of the newbie crypto-er, or both.
Exit scams finally began to take off in 2018, and in the cryptocurrency environment, they are now prevalent.
What is an escape scam exactly? Exit scams are when dishonest promoters of cryptocurrencies take flight with money from buyers before or during a coin’s initial listing on a crypto exchange. When a cryptocurrency exchange unexpectedly fails, an exit scam will also arise, potentially taking all of the cryptocurrencies held on the site.
Common Red Flags
According to Investopedia, common red flags for crypto exit scams include the following:
1. Team Credibility: The biggest challenge with the virtual world is accountability and ownership. Before investing your hard-earned money in ICOs that may look very promising, an investor must verify the credentials of the crypto team. Keep in mind that you can purchase likes, tweets, and followers on the various social media platforms to build fake online credibility. Therefore, you should do a basic check on ICO promoters and on the backers of cryptocurrency projects, and the kind of connections/followers they have.
2. Extravagant Return Projections: Is it too good to be true? Then it probably isn’t. For instance, BitConnect promised a steady 1% daily return, which would have transformed an initial investment of $1,000 into a return of more than $50 million within 3 years! Ethereum founder Vitalik Buterin rightfully called it a Ponzi scheme.
In January 2018, BitConnect abruptly shut down its lending and exchange services after experiencing a meteoric rise and burgeoning client base since its ICO in December 2016. The marketcap of BitConnect, which exceeded $2.7 billion in December 2017, suddenly tanked to $17 million by March 2018.
3. Documentation Standards: The white paper is a key document that details how a cryptocurrency project is designed and developed, how it evolved, and how it will generate business. Incomprehensible, unclear and ambiguously written white papers are a big red flag to investors about a potential exit scam.
4. Non-existent Working Model: Does the cryptocurrency project have a bare-bones working model? If it is a concept-only, non-existent product, then it probably won’t work. It is true that some new-age technology may need to be designed completely from scratch, but promoters who want to raise millions of dollars should prove their project is worth investing in. To be safe, investors should avoid dubious offerings from obscure individuals.
5. Heavily Promoted Offerings: Big promotions may be another sign of an exit scam. It is common to see full-page ads of new ICOs by lesser-known founders in the print media in populous nations like India. Confido also reportedly paid bloggers to spread the word on the various online forums.
Since the cryptocurrency world is decentralized and completely uncontrolled, exit scams are popular and challenging to avoid.
The current DeFi pattern of exit scamming “rug pulls” is no different from the ICO mania of the last crypto bull run and a few common scams have popped up.
1. Anonymous Teams with Fake Everything
Oftentimes, a quick LinkedIn search can lead intrepid crypto-ers to figure out that a crypto project has a fake team. Other times, the project will be much more difficult to investigate. When in doubt, users should closely consider if it would be a good idea to follow a project with an anonymous team.
Many times, “fake crypto teams” will use stock photos as team portraits with vague names like “Tony” or “Developer X”. Some particularly unscrupulous projects might even list real people as team members despite never having been associated with them.
Fraud alert: I am not a developer at goxtrade dot com and probably their entire business is a lie.
Nice to see women as head of Dev & Security, though, those diversity events are paying off in a great fake recruiting pipeline. I would have gone for POC in reg affairs but hey pic.twitter.com/BMMZSUppGT
— Amber ☘️ (@AmberBaldet) May 17, 2019
2. Liquidity Scams or “Rug Pulls”
Especially with regards to DeFi projects, “rug pulls” have become commonplace. In a ‘rug-pull,’ otherwise referred to as a token’s sudden removal of liquidity, token issuers take pooled liquidity that would have given users rewards and take it for themselves. This has become increasingly common among Uniswap projects, often with absurd amounts of liquidity being pulled by unscrupulous developers.
Someone was shilling "TRUAMPLE" yesterday, and 3 hours later the developers pulled the rug, stealing 1800 ETH.
Be careful guys. Rug pulls are getting more and more frequent.
— Boxmining (@boxmining) August 26, 2020
3. Copy/Paste “Forked” Coins of Established Projects
“Forked” scams often clone the white paper of a promising ICO and re-introduce it using a similar name. As much of crypto code out there is open-source, there is nothing stopping a developer from copying code one-to-one and deploying the second version of a project.
Often, these types of scams are completely obvious. It may be obvious that they are only trying to cash in on the original project’s name and add little or no value to the cryptosphere. This does not stop the average crypto degen from attempting to “ride the hype” of the original token.
4. Classic Pump and Dumps
“Pump and dump” is another technique employed by scammers.
In order to sell the cheaply purchased cryptocurrency at a higher price, Pump and Dump (P&D) is a popular scheme used in cryptocurrency trading that involves inflating the price of an owned cryptocurrency via misleading statements.
The price of a worthless coin, typically a penny coin with a low market cap, is falsely increased in a pump and dump scheme by well-planned advertisement.
In order to get the message out that a meaningless commodity is really a hot purchase that investors don’t want to lose out on, inaccurate claims, deceptive statements, a vast amount of social media messages, co-signs, and other types of nefarious activities are used (the pump).
As a result of the well-planned pump, the price of the useless token rises exponentially. When investors get news about the useless token and see the price increasingly growing, more investors start purchasing the coin i.e. “buy the top”.
5. Phishing and URL Scams
There are a surprising amount of websites set up to imitate initial start-up firms that are valid. If there is not a tiny security lock icon near the URL bar and there is no “https” in the web address, think twice.
Even if the website appears the same as the one you believe you are visiting, you might find yourself being guided to another payment portal. For instance, you click on a link that seems like a legitimate site, but instead of a letter ‘o’, attackers have produced a fake URL with a zero in it.
For instance, the portal would not carry you to the investment in cryptocurrencies that you have already studied. Type the exact URL into your tab carefully to prevent this. If possible, double-check it.
Many of these phishing websites can access your Ethereum wallet if you make the terrible decision to enter in your private key onto a website you do not fully trust.
6. Pre-Mine Scams
In basic words, a premine applies to where a subset of the tokens are made accessible to a select community before being made publicly usable for a crypto project. This may be a required vehicle at times to reward developers and early investors.
However there is cause for caution if the percentage of total tokens supplied during the lifespan of the project allocated for a premine is disproportionately distributed to developers.