In this article, we will discuss such scams or rug-pulls happening on the Binance Smart Chain, making investors lose millions of dollars daily.
The crypto markets have paid off huge in the last year and a half, and Defi gives a new significance to crypto investing. With no government interference, automated market makers are building robust systems to help users make P2P transactions, and it is also leading to the creation of multiple categories of cryptocurrencies. We never thought that a meme coin would reach $68 Billion in market cap, but it did and continues to rise, all thanks to Elon Musk’s endorsement.
All this popularity and excitement around crypto is going to play a considerable role in making it mainstream. Still, it is also essential to raise awareness around cryptocurrencies not having any fundamental security behind them. Developers and hackers worldwide are taking advantage of a decentralized exchange to build Defi projects with no real use-cases and take all the money from the liquidity pool. There have been many incidents where token owners disappeared with millions of dollars, leaving all investors in agony.
What are rug-pulls?
A rug pull is a scam practiced by unethical crypto developers and promoters. After the launch of their Digital Tokens, they generate a huge hype around their coin and create a sense of FOMO for investors to make huge deposits. Once they have enough liquidity, they “pull the rug” from under the investor’s feet and cash out all their money. These exit scams are increasing, especially on Binance Smart Chain, leading innocent retail investors to lose in thousands if not millions. As these exchanges offer regulation-free trading flow, any individual can now create a token and raise hype around it to make investors think they can 10x-100x their capital.
How common are these scams on Binance Smart Chain?
Binance is the biggest exchange in terms of trade volume, but it is also responsible for most exit scams. In 2020, it was proved that smart chain contracts on Binance led to 99% of significant fraud volume. The number of Defi projects and money in the market increased significantly from last year, so we will see a variety of rug pulls in the later months of 2021.
A quick fact for you- ransomware-associated projects have almost tripled in value in one single year. This means that users are becoming more and more vulnerable while token owners take home the money. In the first three months of this year, we have seen multiple projects listed on Binance disappear with millions of dollars in the liquidity pool.
How can you identify such “rug-pulls” ?
Exit scams cannot be predicted in any way possible, as every project might seem legit initially with proper fundamentals. However, you can analyze the token by understanding its underlying purpose and documentation standards. Here are some red flags you need to check before you make an investment decision:
Lack of Team Experience
In most cases, such scams are associated with founders and members of the development team. The virtual world makes it harder to understand how authentic and credible these members are. Hence, it is important to understand what kind of experience they have in creating Defi projects and any digital asset. Also, please note that social media presence can be bought for a price, and it must not be used to quality any ICO promoter.
Guaranteed 10x-100x Returns
When you say something too good to be true, it probably is not. The same applies to many Defi projects promising investors 1000% returns to their investment. Even Vitalik Buterin, the founder of Ethereum, expressed his opinion by calling such projects- “Ponzi schemes.” If you see a promoter offering daily returns of 1%, then you must ask yourself- how is that possible without any promising features or roadmap? Once you start digging deep into such schemes, you will find there is no backing to those claims, and they will abruptly go down one day.
Incomprehensive Whitepaper
One of the biggest red flags to investors should be an ambiguous written white paper. The documentation is vital for the token to survive in the market, and if it is written in a manner that raises a lot of questions about its fundamental concepts, it should not be considered at all.
Paid Promotions
Social media platforms like Twitter and Telegram are heavily used to spread the word on a Company’s ICO offering. Some token owners are deploying influencers to increase reach online and bring more users to the platform. All media coverage is leading to more investments, which increases the amount stored in the liquidity pool. So, investing in a token just because it is popular on many platforms is the correct approach. One should always find facts to back those claims displayed on various ads.
5 Major Rug Pulls on Binance Smart Chain
Now we shall see some of the biggest exit scams in recent history and understand how developers can change smart contracts on a Binance chain. If you find any token sharing similarities to these Defi projects, make sure to check recent news updates regarding the company’s progress in developing the platform.
1 MeerKat Finance
This is a classic rug pull where the founding team claimed to have been hacked. The network lost close to 73,000 BNB coins, roughly worth more than $30 million, and the value of their token drained. Once the tokens got transferred from the original account to the hacker’s account, they even disabled their social media handles and website.
The smart chain provided by Binance appeared to have been compromised for some reason and the hackers took advantage of the situation to steal thousands of BNB coins. Even the exchange had no data to resolve a scam of such magtidue and they asked their community members to provide information, if that has any.
2 Yfdex.Finance
This is another Defi project on the Binance Smart chain that vanished with $20 million. The company had done aggressive marketing on multiple social media platforms to grab the attention of many investors. In just two days, they have managed to raise millions of dollars from Investor funds.
Yfdex also put a time limit of four hours to the pre-sale event, and this created a sense of urgency for investors to take the next step. Once the target got fulfilled, the founders pulled the plug, leaving thousands of investors in financial ruin. The thing to learn from this incident is that everything published on social media platforms is not entirely true. It is always recommended to cross-check their claims and find solid evidence.
3 Viking Swap
On March 21’, we saw developers from Viking Swap exit their positions in the market by taking all the assets present in the Viking Swap pool. When asked in the community groups, the moderator Enzee highlighted that the developers need their share of privacy. The stakers didn’t know about what’s going behind the scenes, which led them to sell off their share in the liquidity pool.
Though the developers didn’t manipulate the code, they still failed to deliver their promises. They took their fees and let the whole system tank. If the developers wanted to build a business model, they could have replaced the fee account with an automatic smart contract and verified. As they failed to do so, we can clearly understand they intended to build real use-cases.
4 Compounder Finance
This is another clone of Harvest and Yearn Finance built by anonymous developers. At first, everyone thought this was a legit farming protocol that can help users get rewards and stake their coins. In December of 2020, the developers drained multiple cryptocurrencies to their addresses. The founder of the lending protocol later understood that the developers inserted a back-door function to withdraw all funds related to the project.
They have wrapped $750,000 worth of Bitcoin, $4.8 million Ether, and $5 million dai. With more than $11 million lost in investor funds, many telegram groups are still investigating the entire case to fight against the unknown developers. One of them even raised a $50,000 bounty for information leading to his stolen funds.
The thing to take from this incident is that even if a smart chain system on Binance gets audited from Solidity finance, a reputable company, you still have to know the identity of the founding team. In this case, the exit function was only known to developers, and no one could find it in the audits, so smart contracts audits are not enough.
5 Turtledex
Here comes another Binance Smart Chain Project that raised $2.5 million from investors and dumped all of it for 9,000 BNB tokens. Because of this move, their original token price went to zero. Within hours, their social media accounts were inactive, and the protocols were deleted.
When users wanted Binance to intervene and solve their problems, it responded by saying, “ Please refer to their updates to find some solutions for this problem.” They not only ignored this issue but also insulted the investors to do their research. Users on Twitter are raising concerns about smart contract audits- “if developers can pull the plug at any time, what is the purpose of a smart contract audit.”
Final Thoughts
The goal for Binance-like platforms should be to create a Network free from rug pulls. One of the ways to protect investors’ funds would be to implement a Rootkit that provides a solid framework to eliminate rug pull scams. We may not see this in action anytime soon, but it is expected to make it to the big exchange once their runs are up and running.
In the end, it all comes down to the mindset of the investor and how they want to use their capital to make some gains. If you’re going to make quick cash, you will look for opportunities that give those high returns, and there is a high possibility that one of those will be a rug pull. So, without a clear business model and underlying purposes, you should not make any investment decision. If you are blindly trusting an unregulated environment, you will be gambling away your hard-earned money. If you still got questions about how exit scams work, drop in the comment box, and we will get back to you.
Born and brought up in India, Karthikeya Gutta is a crypto journalist and freelance contributor for ItsBlockchain. He covers various aspects of the industry with in-depth analysis and research. His passion towards blockchain and crypto ecosystem is mainly because he believes it can really change the world and help millions of people.
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