Overview

Every revolutionary technology is first picked up by some kind of scammer or hustler. This was true with the Internet, and it’s true for Web3 technologies like blockchain. These are open-minded individuals with a loose set of morals who are looking to make a quick buck any way they can. Web3 technology has a lot of potential to change society for the better—to make our social system more transparent and equitable. But as mentioned before, we’re going to see a lot of people trying to make money off a hot technology instead of creating products that actually add value to society. The simple reason behind this is that making stuff that matters is hard, while taking advantage of someone’s technical naivete is pretty darn easy these days.

Web3 scams are just that. A bunch of scammers are trying to make quick money by capitalizing on the rising popularity of blockchain and people’s ignorance. The industry is plagued by tons of scams, and the bad-faith trickery displayed by some of our industry leaders doesn't help its image either. However, as the old adage goes, "self preservation is better than any cure." We can’t fix every bad actor out there in the industry, but what we can do is become better at spotting scammers and staying away from them. This article will help you understand one of the newer versions of scams in the industry: rug pulls. We will explain what this scam is, what some of the signs of a rug pull are, and give advice on how to stay safe out there. So let’s get started.

What are rug pulls?

Rug pulls are a type of crypto scam in which fraudsters attract a lot of retail investors to their project through social manipulation, sell them fake promises, and then run off with the investor’s money. This type of scam is quite prevalent in the decentralized finance world where scammers literally code a rug pull into the smart contract of a decentralized application. The way this typically works is that a scammer or a team of scammers launches a project, promotes it on social media, builds a community quickly with their targeted marketing, gets people to invest in their scam with promises of huge returns, runs off with the project’s funds, abandons it, or sells the treasury in the open market.

Different types of rug pulls

These scams can take various forms, but there are three primary types to watch out for:

Liquidity pool rug pulls:  Liquidity pools are an essential component of many decentralized exchanges and crypto lending platforms. They allow anyone to contribute crypto to a smart contract-based pool, thereby increasing the total value locked on the platform.

However, liquidity pools are also a favorite tool of crypto scammers. If the pool's developers fail to include transparent locking mechanisms in their code, they can transfer the protocol's funds into their wallets and disappear, leaving investors empty-handed.

Limiting sale orders:  This type of rug pull involves malicious coders who pre-program their cryptocurrency to only sell on their command. While anyone can buy these tampered tokens on decentralized exchanges, they cannot sell them. The token's code includes commands that ensure only the scammers can decide when to liquidate these digital assets.

Once enough investors buy into this manipulated cryptocurrency, scammers exercise their selling privileges and cash out, leaving buyers with worthless tokens. This rug-pulling strategy is often called a "limiting sell order" scam.

Pump-and-dump schemes: "Pump and dump" schemes are a well-known type of scam in the stock market, but they have also become synonymous with crypto rug pulls. These scams don't require as much technical expertise as the previous two types.

In a pump and dump scheme, scammers create or target a small-cap altcoin already in circulation. They then hype up the crypto on social media to attract buyers, causing its price to increase. Once the scammers are satisfied, they dump all their tokens onto the market, causing the price to plummet and leaving retail investors holding worthless assets.

The Slow Pull: The Slow Pull is a lesser-known type of crypto scam due to its insidious nature. The Slow Pull starts off as a totally believable, legitimate project that has a super dedicated team working on a product or service that is sure to go to the moon. However, along the way, the core developers slowly take chunks out of the project’s treasury for "operational" expenses. Slowly but surely, the project goes bankrupt as there’s no floating capital remaining and no tangible product or service available that the developers can use to raise money from outside.

Real Rug Pulls from Web3

Now let’s show some real-life examples of rug pulls from the crypto world.

Frosties:  A collection of 8888 ice cream-themed NFTs that were "cool, delectable, and unique" was announced on January 6, 2022, to much fanfare. The project quickly garnered a huge community with promises of a metaverse game and a staking mechanism. The developers managed to sell their ice cream-themed doodles for $1.1 million in the span of an hour. However, little did the holders know that the developers had no intention of further developing the project. Soon after the sale, the anonymous founders moved all the funds to their own crypto wallets, shut down the website, and closed the Discord server. Leaving the community members with just an extremely overpriced ice-cream JPEG. Don’t worry though, law enforcement eventually found the perpetrators behind the project, and they are now facing 20 years in prison.

Dragoma: This is one of the hard pulls. In August 2022, the developers announced Dragoma, a Web3 adventure game that will incorporate NFTs and its native token DMA within the game to make the economy more callous. After completing a successful token and NFT sale, the developers turned down the website and closed off their Discord server—the familiar pattern. They were able to siphon off $3.5 million from their community within days of announcing the project.

CryptoZoo: CryptoZoo is another well-known rug pull. The NFT "game" was launched by popular YouTuber Logan Paul, who claimed that it would be a fun game that could also earn players money. However, an investigation carried out by internet sleuth Coffeezilla later revealed that from the beginning, CryptoZoo was a ploy to make huge amounts of money. Although Logan Paul himself did not scam people directly, the team that he hired was the one that did so. As a result, people who invested in the project due to Logan Paul's endorsement lost their investment.

Squid Token Scandal - You got a give it to the Web3 scammers that they do not leave a single opportunity on the table. When the South Korean Netflix series Squid Game got really popular, an anonymous group of developers (scammers) launched the SQUIDtoken. Naive fans thought the project was related to the series as the scammers used some of the same media tropes as the TV series. They also claimed that their token will be used in an upcoming crypto game that will also be based on the hit show. All of this hype skyrocketed the price of the SQUID token, and the scammers were able to steal nearly $3.5 million from this schtick. Soon after the project website went down, Discord servers closed, and the funds were moved to different wallet exchanges.

Tips to Avoid Getting Rugged in Web3 Gaming

1. Do your research

• Research the project: Before investing your time and money into a Web3 game, it is important to thoroughly research the project. This includes understanding the game's concept, gameplay mechanics, and the underlying technology that powers the game. This will help you make an informed decision about whether or not the game is worth your time and money.
  
• Check the team's background and reputation: You should also research the team behind the game. Check their background and experience in the industry, and look for any red flags that may indicate that the team is not trustworthy. You can check the team's reputation by searching for them on social media, forums, and other online platforms.
• Stay away from celebrity endorsements. We have not seen a single celebrity-endorsed Web3 project do well in the long run. These are generally pump-and-dump albums that are promoted using trustworthy celebrities. Don’t get scammed; the game is rigged, and you’re bound to lose money if you invest in these.
  

2. Evaluate the game mechanics

• Understand the game's rules: Make sure you fully understand the game's rules before playing it. This will help you avoid making costly mistakes that could result in the loss of your assets. If you're unsure about something, don't hesitate to ask questions and seek clarification from the game's developers or community.
  
• Assess the game's tokenomics: Tokenomics refers to the way in which a game's tokens are distributed and used within the game's ecosystem. You should evaluate the game's tokenomics to ensure that they are fair and that they align with your investment goals. Look for details such as token distribution, inflation rates, and any mechanisms that govern the token's value.
  
• Check if the game has a "whale tax": A "whale tax" is a mechanism used by some Web3 games to discourage large players from dominating the game's ecosystem. This is usually done by imposing a tax on players who hold a certain amount of the game's tokens. The tax restricts the big players from suddenly dumping their tokens or taking over the governance of the game.

3. Monitor the game's community

• Join the game's social media channels: Joining the game's official social media channels can help you stay up-to-date on the latest news and updates related to the game. It also provides an opportunity to interact with other players and members of the game's community.
  
• Check the game's Discord and Telegram groups: Many Web3 games have their own Discord and Telegram groups where players can interact with each other and with the game's developers. These groups can be a valuable source of information and can help you stay informed about the game's ecosystem.

In Closing 

We hope that you’re likely never getting rugged after reading this piece. If you enjoyed this piece or found it helpful make sure to check out our other articles on Web3 gaming. See ya in the next one!