TL;DR: Rug pull frauds have increased by 5600% between 2020 and 2021. Rug pulls are impeding the development of the blockchain sector as a whole, since they not only result in cash losses for investors but also erode new users’ confidence.
What is Rug Pull?
(If you know what is Rug Pull, skip to next paragraph)
In a nutshell, crypto rug pull is a sort of theft where cryptocurrency developers run away with investor’s money after abandoning their own projects. It is happening on different kinds of blockchain projects like DeFi projects, token selling, NFT artworks, etc..
In contrast to traditional businesses that are subject to tight laws and regulations, rug pull occurs in the cryptocurrency sector due to the currently loose regulations. Nevertheless, the emergence of decentralisation and web3 is definitely being welcomed by the world. We look for ways to deal with rug pulls rather than returning to the old ways.
How serious are Rug Pulls right now?
According to Chainalysis, rug pulls cost cryptocurrency investors US$2.8 billion in 2021 alone. This represents 37% of all cryptocurrency scams revenue compared to just 1% in 2020. Examples include the US$3.38 million alleged Squid Game Coin scam and the US$58 million AnubisDAO scam. The top 15 bitcoin thefts by value are shown below.
Rug Pulls are not just about money.
The damages brought by rug pulls:
1. Time and money wasted
The blockchain and cryptocurrency industries are developing at a breakneck pace, with events taking place all around the world. The amount of effort and resources put toward this particular area will greatly influence how the internet and Web 3.0 develop in the future. On the one hand, rug pulling causes financial hardship for investors, which we can presume nobody wants to happen. The potential cost of investors, on the other side, is the money they could have put into other initiatives that would have improved the ecosystem.
2. Created a barrier for new crypto users
“Crypto is rife with frauds and rug pulls”, That is a common statement we encounter while conversing with non-crypto people. Although the claim may seem too biased to us, the traditional media concentrated on portraying the fraudulent side of cryptocurrencies, creating a widespread impression of an unreliable asset class. The scenario only becomes worse as more crypto rug pulls are made, which further discourages new crypto users or institutions from engaging in blockchain-related operations.
3. Slowing down mass adoption of blockchain
This is the outcome of putting obstacles in the path of prospective cryptocurrency users or robbing victims of rug pulls of their faith in the blockchain. We in the blockchain and cryptocurrency communities are generally optimistic about the potential of blockchain technology to transform a variety of industries and we are developing projects to realize this goal. However, new users are worried if the project is rug pull.
Currently, such projects must incur additional costs to persuade consumers and investors that they are legitimate. There is a cost imposed to the industry, regardless of whether it involves producing more educational content or other strategies to increase confidence. causing a delay in the widespread use of blockchain technology.
Current solutions are not truly trustless!
The following techniques are now employed by blockchain communities as prevention to rug pulls:
Do Your Own Research. Investors and participants should independently investigate the project’s history, doing due diligence to understand if a project is rug pull. Project liquidity, project team, community and involvement, etc., should all be covered in the research.
The project’s funds will be stored in a multi-sig wallet that only needs the approval of a small number of persons to transfer the assets.
3. Smart Contract Audit
Third parties will audit the project smart contract to make sure there are no malicious codes that help the team pull a fast one.
A third-party KYC service verifies the project team member.
These strategies still rely on flawed human trust, which makes them flawed. As you might expect, DYOR is a self-driven action that puts uninformed users at risk; rug pulling with mult-sig only requires the agreement of a small number of people; a lack of standards in smart contract auditing; and rug pulling with Atom Protocol, a DeFi project on Avalanche despite the team having completed KYC. Overall, only a distrustless system can thwart rug pull from the source.
A Trustless DAO Wallet by ADAM
In an investment DAO, a project DAO, a DeFi DAO, as well as other communities that might not be DAO, ADAM Vault serves as a governance layer to regulate the outflow of shared assets. serving as a prevention mechanism against rug pulls.
The goal of ADAM Vault is to create effective DAO member protections. The in and out transactions of DAO treasury assets on ADAM Vault are regulated by Budget along voting.
In the Vault, no outflow transactions are typically permitted by default. The executor can only complete restricted outflow transactions when DAO Members vote and approve a budget.
A trustless environment is then created using this approach to stop DAOs and other crypto projects from rug pulling. Without the consent of the membership, crypto scammers are unable to take money from the treasury. The effects of the previously outlined crypto fraud are then stopped by ADAM Vault as a rug pull prevention system. Easing investors’ and newcomers’ concerns about project fraud.
In sum, ADAM stops rug pull by creating a trustless environment for DAOs.