Rug Pulls and Honey Pots 

If you’ve ever transacted in the decentralised finance (DeFi) area or followed the cryptocurrency developments there, you’ve likely heard phrases like “rug pull” or “honey pot.” 

It’s sad to know that the versatile DEFi world, along with the many benefits it offers, is also a place for scammers and fraudsters to make some of their income. 

The decentralised system is a tool used by scammers to take money from unsuspecting investors. The terms “rug pulls” and “honey pots,” which are the two most prevalent frauds, will be elucidated in this blog article.

Rug Pulls

A rug pull is a type of cryptocurrency fraud where the team behind the project programmatically inflates the value of their project token and fizzles out with the funds of the investors. A rug pull leaves these investors with a worthless asset that cannot be exchanged because it’s at a worthless price. 

A project is most likely a rug pull if the project’s owner is in custody of a large portion of the tokens. They wait for the buy order to keep increasing, and then they sell off all the tokens once the price of that token reaches a particular amount that pays off for them. 

A rug pull can also occur if a project pulls liquidity from the liquidity pool, making it difficult for the investors to sell their tokens and access their funds.  Rug pulls are immoral even if they aren’t always obviously illegal. The project owners outwit investors by implementing a dishonest strategy using their funds.

Honey Pots 

A honeypot scam tricks traders and investors by pulling them into a fake contract. In this scam, the project developers fool investors by making the project look like it’s growing in value. As more people invest, the price goes up. 

While investors can buy the asset using almost any wallet, they won’t be able to withdraw their money when it’s time to profit due to hidden errors. In truth, the developers have added a special code to the smart contract that blocks investors from selling their assets. Only the developers, using a fake wallet, can sell the crypto, making the chart look normal.

How to Identify a Rug Pull or Honeypot 

• You are at high risk of a rug pull or Honeypot if the credibility of the developers is very low or is in question. Usually, the digital copyright of the developers is suspicious, and they use unrecognizable accounts to push the project.
• Everyone wants a breakthrough of a lifetime, but very rarely are they true to themselves. If you’re aiming for huge profits on your investment, be prepared for the possibility of losing it all. The best advice is simple: never invest more than you can afford to lose.

• A small number of token holders is a strong sign that the project could be a rug pull or honeypot scam. Often, these holders own a large portion of the tokens, allowing them to easily manipulate the system and cash out for a big profit when the time comes.
• If the token is listed on just one exchange, then this will certainly require that you do a lot of investigation into the social media following and community that is backing the project. Usually, a more organic and responsive community will indicate that it is probably a legitimate project.
• Although you want to be sure that there is a good social media following, you also want to be sure that it’s not pumped social media hype, and that bots are not the ones giving it an inorganic social media trend.

Other Examples of DEFI Scams 

Pump and Dump

This is a stock market trend that has been practised for long. Certain market movers raise the price of a low-value asset and then sell off when the price tips higher. 

This has also been adopted in recent evolution, called meme coins. These coins are inflated through marketing or social media buzz, and a FOMO (fear of missing out) sets investors into panic buying, and then as the price pumps, the pump creators offset their tokens, leaving the holders with tokens at a loss. 

To identify a pump and dump, there are two things to take note of:

• Emotional management: don’t let the fear of missing out on a huge profit ruin your financial plans. It’s okay to miss out on one or two because you were doing diligent research, and even if you have to invest at all costs, you should consider investing just a few dollars or a hundred in it.

• Check the mission of that token: Usually, a token that is not coming to contribute to the whole ecosystem might just be a pump and dump. With the rise of meme coins, there is a high chance the entertaining buzz of that token will carry you away. Do your diligent research to ascertain its authenticity.

Wallet Dusting 

Wallet dusting is a more advanced scamming strategy targeted at hot wallets (wallets like Metamaks, TrustWallet, or Phantom). The scammer sends many unrecognizable tokens into wallets all over with the aim that those who have held wallets for a long time will be able to accept this transaction. As the token holders begin to trade these tokens, the scammers begin to trace transactions on the blockchain to the wallets you hold other tokens. After identifying the wallet, they can begin to send phishing attacks to gain control of the wallet.

Phishing

Phishing is not a new scam strategy over the internet. It’s a traditional strategy used by malicious internet users to get information from that user and control the assets in that wallet. 

This could be done by phishing emails or pop-ups on website addresses. A false email sent to your address acting as your exchange platform or wallet host only has a single intention: to rip off your tokens. Except for a centralised exchange where you have your email linked to the account, a decentralized exchange cannot send a direct email to your account because they do not have access to the information of the user, and neither does the wallet have any personal information that can be linked to its users.

Final Note

As the day-to-day transactions grow huger and higher, and the decentralized finance world begins to cap at multiple tens and hundreds of billions, scammers are continually developing strategies to rip people off their hard-earned money. Users must become more diligent in their research before jumping on any crypto opportunities on the internet.