How to avoid scam projects and carpet pulling in the crypto market?

In 2021, the cryptocurrency sector will develop very strongly and will be widely used in the mainstream market. one report published by Grayscale Investments shows that more than a quarter of US investors surveyed (26%) own Bitcoin (BTC), up from 23% in 2020. So does financial services firm MagnifyMoney noticed, that that nearly two-thirds of Americans polled hope to receive cryptocurrency as a gift this year.

Despite the strong bull market, the number of scam projects related to digital assets is also increasing.

Posts The company’s Chainalysis blog, titled “Crypto Crime Report 2022,” revealed that fraud is a common form of crime in the crypto market. The article notes that over $7.7 billion worth of cryptocurrencies have been stolen from victims worldwide, an 81% increase from 2020.

Amount of Cryptocurrency Stolen by Scammers, 2017-2021 | Source: chain analysis

Fraud is the biggest threat

Kim Grauer, head of research at Chainalysis, said that while there are many different types of cryptocurrency-related crimes, fraud is the one that has “stolen” the most money from the market. She added that fraud is a major threat to building trust in the crypto ecosystem as it can discourage people from investing in digital assets.

Grauer went on to mention that DeFi-related scams are on the rise this year. With annual stolen funds across all DeFi protocols estimated at $5 billion. More interestingly, however, Chainalsyis has found that rug pull has helped boost sales for scammers this year. According to Grauer, Chainalysis defines a rug pull as a case where a developer suddenly abandons a project and runs away with the investors’ money.

“Rug pull has accelerated the number of scams the crypto space has seen this year. In addition to financial fraud, many rug pulls have exploited various vulnerabilities in the crypto space. In total, they took away $2.8 billion in crypto.”

Although rug pull is a relatively new type of crime, Grauer believes these cases will become commonplace in the burgeoning DeFi ecosystem. To make this clear, the Chainalysis blog post states:

“Rug pull has emerged as the fraud form of the DeFi ecosystem, accounting for 37% of total crypto fraud revenue in 2021, compared to just 1% in 2020.”

The Chainalysis blog post also includes examples of some of the biggest rug pulls of 2021. AnubisDAO, for example, was the second-biggest rug pull this year with over $58 million in stolen cryptos. According to the post, AnubisDAO launched on October 28, 2021 with the claim of offering a decentralized currency backed by multiple assets. However, the project has no website or white paper and all developers are anonymous. However, AnubisDAO still raised nearly $60 million overnight. However, 20 hours later, all collected funds disappeared from AnubisDAO’s liquidity pool.

As AnubisDAO demonstrates the possibility of a large-scale carpet move in the DeFi space, new cases are emerging almost daily. An Ethereum and DeFi investor once said that they fell victim to a rug pull on December 19, 2021. Anonymous sources shared that the project is called “up1.network” and noted that many early Ethereum investors were discussing Up1 on the Discord chat group.

“People I trusted mentioned the project, so I checked it out. I find it strange to see Up1 giving away the airdrop, but I think it might be linked to the DeFi token I have. Then I connected my MetaMask wallet and clicked “Get Airdrop” but got an error message. I did this three times which gave the project access to my account.”

Unfortunately, when Up1 gained access to his account, three $50,000 worth of DeFi tokens were immediately taken away. This investor revoked access after the Etherscan event to prevent more tokens from being stolen. Ethereum investors then checked DeFi platform Zerion, where they saw an indication that DeFi tokens had left their wallets. Zerion also gives them a wallet address where the funds were moved to, along with a message:

“0xc28a580acc42294787f44cffbaa788eaa4958056; You have granted Site3/Smart Contract unlimited access to your funds (check who you have granted access to and withdraw from here)”.

AnubisDAO and Up1 are both good examples of DeFi rug pull. The NFT market is no exception. Most recently, the Bored Ape Yacht Club community fell victim to a rug pull when some members decided to connect their wallets to a link on the group’s Discord channel to mint NFTs.

Even more surprisingly, rug-pull games are also targeting mainstream NFT projects. On October 28, 2021, the global beauty pageant – Miss Universe (Miss Universe) – sent the official tweet notification about their NFT launch on the Wax blockchain. Unfortunately, the folks who made this NFT are part of a rug-pull program.

NFT Photographer Jessica Yang said that when Miss Universe announced the launch of an NFT project, she did not question whether it was a scam because it is a beauty pageant. The price of each NFT is 0.06 Ethereum, or about $230. The artwork also includes a picture of the participant and their country.

Yang also mentioned that Paula Shugart, the president of the Miss Universe organization, had previously to explain:

“Miss Universe will be the first brand in the NFT space to speak about women, empower women, embrace technology and move forward.”

Given the brand’s reputation and appeal, Yang and many others have coined NFT and connected their wallets to the platform. However, Yang noted that Miss Universe deleted her official Instagram account the next day. Then she realized her money was completely gone.

“The only scam signal I spotted was on Discord where moderators kept trying to get people to buy Miss Universe NFT and promising they were going down the right path. Their roadmap promises monthly AMAs, signed print releases, and more. Even Steve Harvey did the project review.”

Do your own research

As the DeFi and NFT ecosystems continue to mature and evolve, these environments will become vulnerable to carpet-pulling scams until industrial solutions are developed. In the meantime, the best protection method is for users to do their own research.

Grauer shared that every DeFi project should have a code check to make investors feel safer. She said that many DeFi platforms that have been hacked do not have a code inspection feature. The Chainalysis blog post also points out that rug pull is trending in the DeFi space as it is very cheap and easy to create new tokens on the Ethereum blockchain and easily list them on decentralized exchanges (DEXs) without the the code needs to be checked.

In addition to reviewing the code, the anonymous Ethereum investor shared that after a closer look at the Up1 website, he was able to see that it was fake. For example, the development team is completely anonymous, first names don’t have Twitter or LinkedIn profiles.

In addition to these precautions, wallet providers also need to improve user security:

“If there is a questionable website, wallets should look for it. I believe the technology is scalable, but it needs to be able to deal with these scams. Otherwise users will lose all their money.”

Following Up1’s rug pull event, the anonymous source contacted MetaMask and said they received a response stating that the site is being flagged as a warning.

While a definite solution to the problem has yet to be developed, Grauer noted that unlike fiat-related crimes, crypto payments can be traced back to their source. She further revealed that several crypto platforms are starting to take measures to protect users from scams.

For example, crypto exchange Luno has partnered with Chainalysis in 2020 to fight a scam targeting South African crypto users. Eva Crouwel, Luno’s head of financial crimes, said one of the requirements of the regulatory framework is to be able to monitor and take action on suspected money laundering transactions, terrorism, sanctions or any other form of illegal activity. She pointed out that on-chain transactions would need to be monitored, and tools for user interface and record management would need to be designed and developed.

To protect against scams, Crouwel advises crypto investors to stay away from offers that sound too good to be true.

“Let’s start with as much appreciation as possible. Check the company/token’s social media profiles for other users’ experiences. You should also look at your leadership team’s profiles and review their industry connections and professional background to ensure they have a clear, transparent story.”

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