Crypto & NFT Scams: Rug Pulls

Crypto and NFT investors beware: Cyber criminals are on the rise draining the money from crypto investors after abandoning a project and running away with the investor’s funds. 

Earlier this year, in March of 2022, NFT Project “Frosties” founders, Ethan Nguyen (“Frostie”) and Andre Llacuna (“heyandre”) were charged by the U.S. Department of Justice with conspiracy to commit wire fraud and conspiracy to commit money laundering. 

Victims of Frosties 'Rug Pull' Are Making Their Own NFT Line
US prosecutors have charged two men with money laundering and fraud with their NFT project, ‘Frosties’

Nguyen and Llacuna, both 20 years old, created a “cool, delectable, and unique” collection of 8,888 NFTs, promising investors rewards, tokens, raffles and a “special fund to ensure the Frosties’  longevity.” Unfortunately, they did quite the opposite, abandoning the project in an attempt to disappear with roughly $1.1 million, something we call a “rug pull.” 

Investors’ funds were transferred out to different cryptocurrency wallets, vanishing alongside the project’s Twitter profile with a briefly displayed message,”I’m sorry.” leaving hopeful investors with nothing of their own.

Scammers Are Stealing Verified Twitter Accounts For A Fake Azuki NFT  Airdrop. - CoinCu News
Azuki NFT project in hot waters from allegation of rug pulling.

In recent news, the owner of NFT Azuki collection, was just under fire for allegations of rug pulling when he announced his past three NFT projects as failures in a recent blog post. 

Cryptoscams are nothing new and have been around as early as 2017. With the sudden popularity of token trades and crypto investors, the increase in rug pulls has forced lawmakerrs, regulators, and members of the crypto and NFT communities to be extra cautious and aware when it comes to new projects and creators. 

How do rug pulls work?

Rug pulls are cryptofrauds where crypto developers abandon a project after release and run away with investors’ funds’ buy support. They typically occur in a decentralized finance (DeFi) ecosystem where token creators are able to create and list tokens for free without audit, or official inspection of the creator’s account. 

Fraudulent token creators will ramp up a project giving investors the promising idea of making money and rewards. Once they gather enough activity, this will generate a value for the token in the market encouraging investors to rush and buy in as prices skyrocket. Once the trading volume reaches a high level, this is when rug pulls take place. Developers will then withdraw all of the paired cryptocurrency and disappear draining all the funds of their Investors.

Devastating to many, lethal to others. 

Different Types of Rug Pulls

There are two main types of rug pulls, both occurring on DeFi. Here’s what you need to know about them:

Hard rug pulls

Hard rug pulls occur when the project’s developer(s) use coding to trick and defraud investors. Which is, by the way, very illegal. In this case, the project’s smart contract contains hidden terms in its code, almost invisible upon initial review, to decieve investors with the dishonest attempt to steal their funds. 

An example of this is the Squid Game Token. Likewise to its name, the Squid Game token, took advantage of its liquidity pool as its developers issued the coins but withheld the majority of its supply allowing them to transfer the value of the coins into a different wallet which they then stole away. 

Soft rug pulls

Meanwhile, soft rug pulls aren’t as clear cut. Although they are not illegal, soft rug pulls are considered to be highly unethical. They are harder to identify and are referred to as dumping an asset. This means that the project’s developer(s) dump their own tokens on investors and slowly run down the price with no chance of increase. In doing so, they devalue the token and exploit the profit created from investors buying into their tokens. This is with the intent to steal from the start of launching their project, making it highly unethical. 

Now this is some shady, shady business. 

Risky business

Now that we’re more aware of the scams that come with investing into crypto and NFT currency, it’s important to understand the risks that come hand in hand. NFTs are debatably the fastest way to make internet money. It’s fun, risky, and can be extremely rewarding. But at the core of it all, it’s important to take the extra measures in looking into the developers, their ethics, and of course, the roadmap of where they’re headed. After all, investing into the unknown could cost you everything.