TL;DR: 5600% increase in rug pull frauds among crypto scams from 2020 to 2021, according to Chainalysis. We have to prevent rug pulls in crypto projects and DAOs, inject confidence in new users to boost the growth of the blockchain industry.
What is Rug Pull?
(If you know what is Rug Pull, skip to next paragraph)
In short, crypto rug pull is a type of theft where crypto developers abandon their own projects and run away with investors’ funds. It could happen on any kind of blockchain projects including DeFi projects, token selling, NFT artworks, etc..
Rug pull happens in the crypto world due to loose regulations on project operations, unlike traditional companies with strict laws and regulations. Nonetheless, the world embraces the development of decentralization and web3. Rather than going back to the traditional world, we seek solutions to rug pulls.
How serious are Rug Pulls right now?
In 2021 alone, cryptocurrency investors lost US$2.8 billion to rug pulls (according to Chainalysis), which accounted for 37% of all cryptocurrency scams revenue compared to just 1% in 2020. Some prominent cases would be Squid Game coin that scammed an estimated US$3.38 million and AnubisDAO for US$58 million. Below are the Top 15 rug pulls by cryptocurrency value stolen.
Rug Pull is not just about money
The damages brought by rug pulls:
1. Time and money wasted
Blockchain and crypto world is beating with the clock everyday with high speed developments happening around the world. The time and money deployed to this specific segment is so crucial to determine the future of the internet and Web 3.0. On one hand, rug pull makes investors suffer financially which we can assume no one wishes to happen. On the other hand, the opportunity cost of investors that they could have invested in other projects that bring positive developments to the ecosystem.
2. Created a barrier for new crypto users
“Crypto scams are everywhere.” “This project is rug pull.” Statements we usually hear when we talk to non-crypto users. Although the statement might be overly biassed to us, the traditional media focused on projecting crypto scams that occurred, leading to a general perception of an untrustworthy asset class. The increasing amount of crypto rug pull just intensifies the situation, which further deters new crypto users or institutions from participating in crypto and blockchain activities.
3. Slowing down mass adoption of blockchain
This is a result of setting barriers for new crypto users or taking the faith on blockchain away from rug pull victims. Generally in blockchain and crypto communities, we are bullish about the future of blockchain technology covering different aspects of life, thus creating projects to push this vision forward. However, new users are worried if the project is rug pull.
Currently, different projects have to put extra cost in convincing users and investors that they are not scammers. No matter if it’s creating extra educational content or other methods to boost confidence, there’s a cost added to the sector. Resulting in slowing down the mass adoption of blockchain technology.
Current solutions are not truly trustless!
Rug pull prevention in the blockchain communities are flawful. The following methods are used to check if a project is rug pull or crypto scam:
Do Your Own Research. Investors and participants should do background checks of the project themselves, doing due diligence to understand if a project is rug pull or not. The research should include project liquidity, project team, community and engagement, etc.
Assets raised or gathered for the project will store in a multi-sig wallet that requires few parties’ confirmation to move the assets.
3. Smart Contract Audit
Project smart contract will be audited by third parties to ensure no malicious codes that favour the team to rug pull.
The project team member is verified by a third party KYC service.
However, these methods are still based on human trust which is flawful. As you can imagine, DYOR is a self-driven actions that less informed users are at risk; mult-sig would only required a few people’s consensus to rug pull; the lack of standard in smart contract auditing; Atom Protocol, a DeFi project on Avalanche, rug pulled despite the team did KYC All in all, only a trustless system can stop rug pull at its root.
A Trustless DAO Wallet by ADAM
ADAM Vault acts as a governance layer to control the outflow of shared assets, in an investment DAO, a project DAO, a DeFi DAO and other communities that might not be DAO. Acting as a rug pull prevention mechanism.
ADAM Vault is dedicated to building solid DAO member protections. On ADAM Vault, the in and out transactions of DAO treasury assets are controlled with Budget along voting.
By default, no outflow transactions are allowed in the Vault. Only when DAO Members vote and approve a Budget, the executor can then do restricted outflow transactions.
With this mechanism, a trustless ecosystem is then built to prevent rug pull by DAOs or other crypto projects. Crypto scammers are not able to steal money from the treasury without members’ approval. A rug pull prevention system is then built to stop the consequences of the crypto scam mentioned above. Easing investors and new joiners worries on whether a project is rug pull.
In sum, ADAM stops rug pull by creating a trustless environment for DAOs.