I feel:

"If you don’t understand the pros and cons of the cryptocurrency project you’re investing in or wanting to invest in, you can be defeated by surprise, market manipulation, smart contract bugs, or any other black swan event. You could end up losing your hard earned money. Therefore, it is recommended that you do your own research."

Recently, Decrypt reported a major Rug pull (running away with money) incident, they said:

TITAN's price drops to zero, prompting Iron Finance"run on"After the shock, all holders are called to withdraw from the fund pool. According to reports, this run of money may have hit billionaire DeFi investor Mark Cuban, and his wallet balance may also be reduced.

This run on issue is one of the associated risks that all DeFi investors need to consider. Therefore, today I would like to interpret Rug Pull for you, hoping that it can help you make more informed investment decisions in the future.

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What exactly is a Rug Pull?

This cryptocurrency world accommodates multiple projects based on blockchain, DeFi, DEX, DApps, etc., providing new tools for investment and development of retail investors. The dream of financial freedom has never been more realistic, this permissionless world of cryptocurrencies gives humanity new hope, new power to exercise and change their own destiny.

But all blockchain transparency also comes with unintended risks that could even shatter those dreams if you're not accountable for all the investments you make. There are always bad guys out there who want to make your life hell and their selfish intentions are to get rich quick, so they are not afraid to manipulate this highly unregulated cryptocurrency market to their advantage.

DeFi platforms are the most vulnerable to such malicious intent, and at the same time, being highly unregulated, they are vulnerable to such attacks. Therefore, as a retail investor, you may incur the risk of losing all the funds you have staked or pooled in these DeFi projects. This risk is"Rug Pull"。

so what is"Rug Pull"？

Rug pull is a kind of malicious manipulation in the cryptocurrency field. DeFi project owners may abandon the project and run away with investors' money, saying that there are some software problems that need to be fixed.

Rug pulls are common in the DeFi ecosystem, and decentralized exchanges (DEXes) are the biggest victims. Many new DeFi projects have their own native tokens. Developers pair them with popular tokens such as ETH, USDT, DAI, etc., and allow users to trade with the paired tokens to attract investors with higher returns. But as the number of investors increases, they will run away with the established ETH/DAI/USDC/USDT etc. that you pooled in their protocol.

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How to identify such projects and protect their funds?

Check the liquidity pool of a specific DeFi project:

An easy way to do this is to check what is the liquidity of a given pool attached to a given project. Higher liquidity is a sign of the strength of a DeFi project, but it does not solve all problems, one should also check the legacy of such a project and who is the supporter of this project.

For example, UniSwap, Bancor, AAVE, Compound have been around for 2-3+ years and have enough total value locked in their DeFi ecosystems, so instill some kind of trust in their investors.

Be sure to research the history of the founders:

Never blindly follow any news or fake news and plan to invest just because you can get higher returns when pooling or staking your coins. Be sure to do some digging into who the founders of the DeFi project you want to invest in are. Who is supporting these losers? Are there any past problem reports against them and other such dark history?

Check the Token lockup period against DeFi’s liquidity pool:

Liquidity pools are the foundation behind any DeFi project, because without sufficient liquidity, they cannot provide trading functions such as:

• Token exchange

• Automated Market Makers (AMMs)

• Cryptocurrency Lending and Borrowing

• Cryptocurrency Mining / Yield Farming etc.

All of the above services power the DeFi engine, and they need sufficient liquidity in the associated liquidity pools to function smoothly.

Therefore, it is necessary to find out what the platform’s lock-up period is for tokens entering the pool. Most reputable and trustworthy projects will lock the liquidity entering the pool for a period of time to protect the interests of investors.

Sudden fluctuations in Token prices: price surges

One thing that might seem speculative is a sudden explosion in the price of tokens in a given liquidity pool.

Therefore, if you notice a sudden increase in price from 0-100 times or 50 times in a given day, you need to be cautious about this speculative move, because this may be a trigger, the so-called "fear of missing out" " and a way to attract more investment into their projects.

Beware of high rewards:

There may be newly launched DeFi pools that may provide high returns for your collection of Tokens. They also want higher liquidity, so they might do that, but when any project starts offering unexpected 500% or 1000% returns, you need to be cautious, it's not normal for mature DeFi players .

Hence the famous saying:

"Not everything that shines is gold"

Here's what you should be aware of, and exercise extreme caution in making your decisions about.

Some big Rug Pulls from the DeFi world.

According to research by Messari, since 2019, more than $284 million has been lost due to DeFi hacks. The average amount stolen in these incidents was $11.9 million, the cryptocurrency research provider said.

Thodex：

In 2020, Thodex — a Turkish cryptocurrency exchange with about 400,000 users — was accused of running away with money. The Thodex website is down, they announced."they are temporarily closed",in order to solve"Unusual fluctuations in corporate accounts"。

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Meerkat Finance:

Theblockcrypto reported on one such incident of Meerkat Finance's embezzlement.

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Summarize:

There are a lot of these incidents being discovered and reported, so given the rise of runs, Rug pulls, and other scams, you need to be more responsible with your investment strategy. You need to educate yourself to avoid blindly investing in any new DeFi project.

These malicious hackers often use your quick success and fear of missing out to set you up. But if you are a strong minded and prudent investor, ask lots of questions and calculate investment risk. You can guard your assets and sleep peacefully.