- Crypto and its risks: the “Rug-Pull” and how to protect yourself from it …
Just now·5 min read
Last March, a case caused a stir in the crypto world. The DeFi TurtleDex protocol team vanished with millions in crypto, leaving many owners in dire straits. This event, much more frequent than you might think, contributes to investor mistrust and above all, reveals a real danger in the world of cryptocurrency: being cheated. Yet this team had been audited VERY recently by a specialized site (https://twitter.com/DefiStalker/status/1372842800744521733).
How is it possible ? What confidence can we have in these audits and in the tokens which are multiplying?
To understand what happened, you have to take a little interest in how swap platforms work. When creating a token, the creators deposit a certain amount of the token and currency. In return, they get a specific token called a “liquidity token” (LT) representing the sums they have deposited.
Thanks to this influx of tokens, the swap platform will be able to sell and buy tokens from different users. For each transaction, a sum is paid to the LT owners. These owners are therefore the guarantors of the proper token functioning and of its reliability, and above all, of your investments.
One of the dreaded maneuvers is called “Rug Pull”.
We speak of “Rug Pull” in the event of a sudden withdrawal of “liquidity tokens”. The platforms users concerned then find themselves with tokens of no more value, suddenly, and lose all their investment and potential gains. This is what the DeFi TurtleDex protocol team did. Others did so with even greater flair by associating this sudden withdrawal with the issuance of tokens just before the operation (mint).
After this summary explanation, but which has the merit of informing you of one of the possible risks of the system, we will study how to protect yourself from a “Rug-Pull” and, how a well-intentioned team, in charge of a token development, can give guarantees to investors.
There are several classic ways for a project to prove that “Rug-Pull” risk is minor. Here are the two main ones:
- Deposit the “liquidity tokens” in a site like CryptEx which is responsible for keeping a certain number of tokens for a defined period of time, thus preventing any “Rug Pull” during this time.
Send the “liquidity tokens” to a dead address. However, this method has the downside for the development team of losing LT.
But how can you be sure that this has been done? How to know all the possible loopholes? It takes time and skills that not everyone has. It is in this service offering that the HEMERA COIN project is positioned.
We have chosen to speak here of the “Rug-Pull” because it is easy to understand and practical to illustrate our approach resulting from our experience in the fields of dependability.
In this area, the objective is to identify the critical events (fatal risks, risk of critical errors, etc.) then, with the use of formal methods and sometimes of AI, to ensure that the software developed avoid these situations. The feared events are defined using criteria. We then see if the software meets the right criteria.
To use our example, the dreaded event is the “RugPull” i.e. the owners of the LTs remove them all at once. An example of a criterion that LTs must therefore respect is: “The liquidity tokens are not all at the same address”.
To use our example, the dreaded event is “RugPull”, which means LT owners remove them all at the same time. An example of a criterion that LTs must therefore meet is: “The liquidity tokens are not all at the same address”.
Our analysis will therefore be based on the rating and ranking of different tokens using tools and methodologies developed internally. The service offered and the criteria communicated will depend on the membership level. Each feared event will be listed and controlled using various criteria.
By way of example, here are some of the criteria that we are considering to warn you of a “Rug-Pull” risk and their access conditions :
BASIC Access Level
The liquidity tokens are not at the same address.
PRO Access Level
The liquidity tokens are on a protected site such as Cryptex, the timelock is long and the contract has been verified by our teams.
PREMIUM Access Level
Based on the "Rug-Pulled"token transactions, we will seek to detect a particular pattern via AI. We will prematurely detect impending "Rug-Pull" behavior and change financial rating accordingly.
From a personal point of view, we do not believe in the solution of depositing liquidity tokens on a dead address. The income loss related to liquidity tokens possession can impact project developers motivation and is detrimental to the economy of the affected blockchain, with coins and tokens burned with each transaction. The criterion associated with having burned, the liquidity tokens will therefore not have the same weighting as those presented above (the “Rug-Pull” is a high investor risk in the short term, but the fact of burning the liquidity will be considered as an average project risk in return).
In this short article, we wanted to draw your attention to the risks associated with technology and the answers we are going to provide. However, keep your common sense so that your experience in the crypto world remains fun. Yes, we can make money. Yes, we can lose some. No Zero risk. So, be disciplined as well on the amounts invested (invest only your superfluous money, what you have left once the rent has been paid, the vital things settled, the money in the event of a hard blow sides etc …) that where you invest your money. Here is a link to a reddit article that reminds you of the basic rules, a real complete guide:
Above all, educate yourself and rely on reliable tools and analysis to minimize risk. Because if zero risk does not exist, getting closer to is possible.
Good road to success, hoping to participate in your victory by supporting you with our methodology and our tools towards the achievement of your objectives.
Hemera Coin Développent Team— https://www.hemeracoin.com/
- Date of publication:
- Tue, 05/04/2021 - 14:28
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