BY TUSHAR GARG
We all know that online scams have been around since the creation of the internet. Likewise, crypto-related scams have been around since the invention of Bitcoin. Though there are many kinds of scams in the crypto industry, the award for the most disastrous scam would have to be given to “Rug Pull.”
Understanding ‘Rug Pull’
The name comes from the phrase to pull the rug out from under (someone), meaning to withdraw support unexpectedly.
A Rug pull is a malicious maneuver in the crypto industry where crypto developers abandon a project and run away with investors’ funds. Rug pulls mainly happen in the Decentralized finance (Defi) ecosystem, especially on Decentralized Exchanges (DEX). DEX is a type of crypto exchange that is not run by any centralized company. Hence, users can trade their cryptocurrencies without any restriction or verification.
Malicious Developers create a token on a smart contract-based blockchain like Ethereum and get the token listed on a DEX.
Further, pair the token with a leading cryptocurrency like Ethereum. Developers promote the token and announce it to become the ‘next big thing’ and invite investors to swap their Ethereum holding for the newly created token. Many investors get trapped due to the hype and potential of making a great profit.
The catch is that the developers generally hold a large chunk of a coin’s total supply and sell their entire holdings in the DEX and swap their worthless token for Ethereum. This causes the price to drop and loss to all the investors of the coin. Developers can sell their Ethereum for fiat currencies and the nature of crypto makes them almost impossible to trace.
Squid game token
A new crypto token inspired by the popular South Korean tv show ‘Squid Game’ made rapid strides in the markets. But soon turned out to be one of the biggest scams in the crypto industry.
The ‘squid game’ token was not affiliated with Netflix in any way.
Smart blockchain used- Binance smart chain
Decentralized exchange used- Pancake swap
What exactly happened-
The token was made to conduct an online game containing the six games displayed on the tv show. 456 squid tokens were required to participate in the game. 10% of the entrance fees were to be given to the developers and the rest was awarded to the winner. However, the loophole was that the token could only be redeemed/sold after winning the game and swapping the Squid token for marble (another token created by the developers) first and then into Binance coin or any other valuable crypto.
This meant that the token only had buyers and no sellers, which caused the price to increase at a crazy rate. Due to this massive price rise, more and more people invested huge amounts of money in the token, all this was accompanied by news articles published by CNBC and other outlets telling about the massive returns that the token is generating daily. Starting from 1 cent per token in the last week of October, it reached around 2861$ on 1st November before crashing down to fractions of a cent. Due to restrictions on selling the token, even the early investors could not cash out their profits.
The creators of the token cashed out the token by swapping a major chunk of their holding for the Binance coin and draining the liquidity on the exchange. Binance coins could be further converted to fiat currencies. Making this one of the most valuable Rug pulls in which it is estimated that the developers made at least $3 million.
Was identifying this scam difficult?
There were many ways to identify this scam.
1. The website had many grammatical errors, and the team of developers shown on the site was fake. Moreover, the website was just a couple of weeks old.
2. It reached a market cap of $2.1 trillion, which made it more valuable than the entire crypto market put together. Anyone could have guessed that it was in no way close to bypassing bitcoin or Ethereum.
3. Reports of the early investors about the problems arising during the selling of token was ignored by many.
4. The token was not available for trading on any centralized exchanges like Coinbase, Gemini, or Coindcx.
5. Social handles didn’t allow anyone to comment on the posts and the website claimed that the project was supported by Elon musk, but there was no tweet mentioning the token from Elon musk.
6. Many people identified the scam before the price drop, mentioning a large amount of holding of developers and 456 squid game tokens @ 2800$ meant that over a million dollars were required just to participate in the game.
What is the present situation of the squid token?
The token can be freely traded in the exchanges at present. The token price is still less than half a cent as of January 2022 and is still really volatile. One thing I must point out is that the holders of the token have made a new community of the ‘Squid Game token’ and the market cap of the token is currently around $35 million and ranks around 3000 in the entire crypto market.
Though the case is still under investigation by Binance (exchange) and it claims to have blacklisted the developer addresses, but still the bad actors could not have been found due to anonymity given by cryptocurrencies.
Conclusion
We should always do our research and never invest on basis of others’ opinions. Also, we should never blindly follow the herd and don’t let our emotions make the decision for us.
The entire event showcase that the level of ease that crypto provides also has huge downsides to it.
Thank you for reading patiently!
ABOUT THE AUTHOR
Tushar Garg is currently a first year student pursuing Bcom hons at Kirori Mal college, University of Delhi. His areas of interest are crypto, stocks and anything related to finance in general. He likes to play chess, badminton and tennis. He would like to choose business as a career choice.
Disclaimer: The views expressed in this article are the author’s own and do not necessarily reflect the views of the organization.
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