The growth of the crypto space in the past few years has remained remarkable despite common problems. Cryptocurrencies like Bitcoin have become mainstream and remain a utility asset even outside the crypto space. Unfortunately, the crypto ecosystem has not disappeared from vices, most of which have slowed global adoption. While price volatility appears to be the most important issue in the crypto space, the case is on the rise apus-apus they were alarmed. Crypto fraud is the most unfortunate event in the ecosystem, hindering the global adoption of cryptocurrencies. Over the years, the perpetrators of these acts have increased in number, using a variety of methods of execution. From hacking, fake crypto investments, ICO fraud, and fake crypto wallets, these perpetrators continue to undermine the growth of the crypto space. However, one of the most common scams today is to pull the crypto carpet, typical with new projects.
What is a Carpet Pull?
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Pulling the carpet is a scam pulled by cybercriminals, luring investors to carry funds into projects and lose money. These cyber criminals disguised as crypto developers usually promote new projects or tokens to attract investors for themselves. Typically, the development team pumps the price of project tokens to lure investors into pulling the carpet. The price will drop to zero after the investor makes the fund, with the investor losing large funds. This scam is one of the most popular in the crypto ecosystem, as investors have lost billions of dollars. According to Chainalysis, 37% of cryptocurrency scam revenue in 2021 ($ 2.8 billion) is lost to carpet pull fraud. Unfortunately, this is a huge jump from a 1% loss in 2020, as strong evidence of these scammers.
How Carpet Pull Scams Work
Pull the carpet is the easiest to execute, so they remain the most popular scam in the crypto ecosystem. First, the disguised scammer will move to Ethereum or an alternative blockchain to create a new token. These tokens will also list on decentralized exchanges (DEXes) or peer-to-peer markets for crypto traders. Most of the time, these tokens are without code audit for external participants to evaluate.
Code audits are essential for intelligent contracts to establish code for errors, bugs, and quality standards set by the organization. Without a proper one, these developers can quickly introduce bugs to eliminate this scam successfully. Unfortunately, smart contract networks like Ethereum allow developers to build such projects without a proper code audit. This is why investors may find it difficult to know technically about the project. Unfortunately, the prospect of quick returns will also disturb the minds of investors.
Carpet Pull Execution Form (Hard Vs. Soft)
Typically, scammers can resort to carpet pull fraud in two forms – hard and soft pull. Draw hard carpets including malicious coding backdoors into project code by developers. These malicious codes into the smart contract of the project are primarily planned. Unfortunately, it is not known which investors will provide funding for the project later. The purpose of this malicious backdoor by the developers is to commit fraud from the beginning. Or, pulling a soft rug involves the project developer disposing of the asset quickly after getting a sufficient investment. If that happens, the majority of project investors have devalued tokens in their portfolios. Strangely, pulling this rug is not considered a crime but it is unethical. Unfortunately, regardless of when it occurs, it usually leads to losses for most project investors.
Types of Pull Carpets
The three most common types of carpet pulling in the crypto space are liquidity theft, restricting sale orders, and dumping.
Liquidity Stealing
This is a dangerous carpet pull scam that will consequently cause investors to lose money quickly. This happens when the project creator (token) withdraws all coins from the liquidity pool. One of the consequences of this action is that the value of the token will drop to zero. Unfortunately, investors will also lose all of the funds invested in the project when it happens. Pulling this rug is very common in the DeFi space and continues to limit the growth of the growing financial space.
Restrictions Sell Orders
This is a hard carpet pull and a subtle way for evil developers to deceive investors. This happens when the developer of a token program so that it can only be sold. Project developers are waiting for retail investors to buy new crypto using the paired currency to execute. Immediately they saw a fairly positive price action, they dumped the position and left the token useless. Many projects have attracted such scams in the past, the most famous being the Squid Token scam. The project, which was inspired by Netflix’s original- Squid Games, generated about 45,000% a few days after its launch. Unfortunately, investors are not allowed to sell assets.
Dumping
This soft carpet pull fraud is not considered a crime but it is unethical. This includes project developers who have a large supply of tokens and sell them when the price rises. The effect is that project investors will get useless tokens when they spend. Unfortunately, heavy promotion on social media caused the pull of this carpet. However, there is a lot of debate about pulling this rug, because many don’t consider it a crime. While opinions remain divided, major investors lose large funds while spending, with some profits. The result of the spike and sell-off is known as the Pump-and-Dump Scheme.
How to Avoid Drawing Crypto Carpets
The collapse of Thodex, a Turkish-based crypto exchange, remains one of the biggest carpet pull scams in history. The theft of $ 2 billion in 2021 is one of the biggest exit scams from centralized finance (CeFi) in history. However, finding a crypto carpet pull scam is not easy, but it can be done with the following steps;
Zero Liquidity Locked
An easy way to distinguish scam tokens from legitimate ones is to check that the asset is locked into liquidity. With no liquidity key in the token supply, project creators can run with all the liquidity at any time. Typically, time-locked smart contracts, ranging from 3-5 years from ICO tokens, help secure liquidity. However, developers can use bespoke time locks in some cases, which may not be a bad choice. However, it is most interesting for investors to know that the key to liquidity is through a third party. Investors should also check the percentage of locked -in liquidity, which is not less than 80%.
Anonymous Developer
The type of project developer is a factor that investors consider, as generally anonymous project owners can be scammers. Surprisingly, Bitcoin founder- Satoshi Nakomoto, remains anonymous, and the project is also the largest in the crypto ecosystem. However, in today’s world, unsuspecting developers should be a red flag for investors. Investors should be able to find out who founded the project, track record, other existing projects (if any), and so on. This will give you more insight into what the fund does.
Restrictions on Sell Orders
If a project developer limits a sale order, the project has a high probability of becoming a carpet pull. Investors may provide little funding for the project to reduce risk, especially during start -up. The problem with the sale order limit may not be related to the scam, but there are high possibilities. However, If there is a problem offloading new purchases, the project is likely to scam.
Suspicious Cloudy Price Movement
If the price of a new token goes up quickly, there’s a high chance it’s a pump and dump plan. Or, it could be a Ponzi scheme run by some token holders. Investors who are skeptical about coin price movements can use a tracker to check the amount they have in tokens. A small number of holders may show open tokens for price manipulation. This scenario could also mean that some whales can dump positions and heavy and direct damage at the value of the coin. However, with a proper background check, investors can find this out quickly.
Lack of External Audit
It is now standard practice for new cryptocurrencies to undergo a formal code audit process through a reputable third party. Audits apply to decentralized cryptocurrencies, where standard audits for DeFi projects are required. This external audit will give investors confidence in the project and can reveal anomalies in the project to the public. Unfortunately, most projects lack current integrity and can deceive investors once an audit has been conducted. Investors should further verify the claim through a third party to confirm there is nothing harmful in the code.
NFT Jobs In Carpet Pulling?
Earlier in January, the launch of the Azuki collection took the NFT community by storm. Azuki features a series of avatars with different looks with the same parts as The World Ends With You and Thrasher. Once launched, the NFT project created momentum to threaten top projects like the Bosen Ape Yacht Club (BAYC). Unfortunately, the job stopped this month when Zagabond, the founder, announced via Twitter that he had abandoned three previous jobs. The announcement created a lot of fuss in the crypto community and eventually bumped Azuki’s price from 19 ETH to 10 ETH. Unfortunately, most of the reaction focused on how Zagabond left CryptoPhunks, Tendies, and CryptoZunks, earning $ 3 million in profits in two months. Left by Zagabond this is like a carpet pull and is the first carpet pull in the NFT ecosystem.
However, in Zagabond’s defense, he said that everything promised in the project was carried out. However, investors feel free to consider him or her funds before disposing of the project. Some Twitter users also accused Zagabond of pulling the carpet, with crypto analyst ZachXBT citing some negligence. ZachXBT sees a lot of issues with community involvement and ownership transfer in how Zagabond handled previous projects. However, in another lengthy post and after denying allegations of carpet pulling, Zagabond apologized to investors who lost money on the project. The founder of the pseudonym has now promised to compensate for all losses. He also now clarified that he will transfer ownership of the project to his right hand. All of this Twitter crypto space is happy with the news.
Conclusion
In the future, NFT investors will expect carpet pull scams to stay away from the thriving collection space. This will be important for growth, public perception, and acceptance. The NFT ecosystem continues to grow strongly, particularly attracting non-crypto audiences. This is why market capitalization continues to rise in the midst of new projects. Furthermore, future determinants will depend on less negative media appeal. However, with the exception of gas costs, the NFT ecosystem remains upright today.
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