One of the biggest concern when investing in DeFi is the fear of getting rug pulled. In case you are new to DeFi, a rug pull simply means token developers pulling out liquidity of a token, leaving holders with worthless tokens.
If you have seen the video of a streamer who witnessed the Squid Game token rug pull, that will already serve as a perfect example. If you haven’t, you can watch it here > https://www.youtube.com/watch?v=CpR2kMxy7O8.
This is just one of several examples of rug pulls that have happend since DeFi became a thing. You may then wonder: why so many rug pulls in DeFi?
Why there are many rug pulls in DeFi
Since DeFi protocols are decentralized, and smart contracts can be easily created by anyone, some bad actors have taken advantage of this to create tokens. It can take just a few minutes to create one, if you are pointed in the right direction. Its that easy!
These tokens can be listed for free and without the need for approval on Dexes like Pancakeswap or Uniswap.
With some hype and paid marketing, awareness is created. Interest is built and people buy these tokens. Next, the developers pull out the liquidity. Some happen after a presale is completed. Some a day or two after launch on a Dex. And in some cases, just few minutes after launch.
Because its so easy to create tokens today in a decentralized network, bad actors take advantage and cause many rug pulls. Its a wild west in DeFi.
How To Protect Yourself From Getting Rug Pulled
Because DeFi is still so young, you cannot be 100% protected at this time. But you can greatly mitigate the risks. Those who can read smart contracts have a high advantage. But for most of us who can’t, what should we do:
- Check Liquidity:If the liquidity is dip, then its likely fine. However, you want to check for how long lp tokens are locked for. If they are locked for just a few weeks or months, that tells you the team has no business about long term success of the project
- Token top holders:Some projects lock liquidity for years or even forever. Likely just a small percent of the tokens. What they do is send a bulk of tokens to other wallets. If the top 20 wallets holds more than 20% of the entire tokens, and these wallets are not locked, that’s a sign of a rug pull waiting to happen. You can call this a soft rug
- Check credibility:Surely, a good project will get the backing of some of the ‘good guys’ in crypto. So, look through their followers on Twitter. How many of your favourite influencers follows this project? How many persons are tweeting about them? What are people saying about this project? This will give you an idea as to what you are about to dabble into.
You can successfully use DeFi protocols, irrespective of the fact that there are many rug pulls in DeFi. You just need to be careful enough and know what you are doing. It is for reasons like this that Scallop was created. A platform set to be the most regulated chain in the world. You can read more on how they aim to achieve this feat, along with their goal of marrying together DeFi and TradFi on their website here >>> https://scallopchain.com
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