3 - 4 minute read
Cryptocurrency scams are becoming increasingly common, with more than 350 fraudulent tokens released daily, according to a report from blockchain security firm Solidus Labs. This represents a 41% increase from the previous year. The report, titled the “Rug Pull Report,” also found that token scams have affected nearly two million investors, which is twice the number of those who lost money in the FTX collapse.
On-chain data from Solidus Labs’ smart contract scanning tool showed 117,629 scam tokens from January to December 2022. This follows the company’s report from 2021 that found 83,368 scam tokens. Despite the cooling of the crypto market, scams continue to rise, highlighting the risks for retail investors entering the cryptocurrency space.
Prevalence of Scams on Different Blockchain Networks
Solidus Labs’ report also revealed the relative prevalence of scam tokens on various blockchain networks. The scams were most prevalent on the BNB chain, likely due to low barriers to entry in the form of low gas fees. The report found that 12% of all tokens on the BNB chain are scams. Ethereum, the largest smart-contract network, also had a significant number of scams, with 8% of all Ethereum tokens having rug-pull code.
These scams have affected a greater number of investors than some of the biggest collapses in the crypto industry. It is estimated that over one million users lost money due to the FTX collapse, while only 40,000 people lost money in the Terra-Luna collapse and 600,000 held money in Celsius.
Why Most Rug Pulls Evade Detection
Solidus Labs identified a few key reasons why most rug pulls evade detection. One reason is that the theft occurs exclusively on-chain for most rug pulls, making it harder for authorities to access the funds. In addition, the illicit profits of the scammer are denominated in cryptocurrency, not fiat currency. Scammers can also market their “honeypots” without registering a website, making it less likely for authorities to track them down.
Types of Rug Pulls
Rug pulls are a type of exit scam in which the creators of a project defraud investors. Solidus Labs distinguishes between “hard” and “soft” rug pulls. Hard rug pulls involve the placement of malicious code in the project’s smart contract, allowing the scammers to drain funds from investors before disappearing. These can include “honeypots,” where the smart contract does not allow holders to sell, as well as hidden mints and hidden fee modifiers. Soft rug pulls are more subtle and involve misleading marketing tactics, such as false claims and fake partnerships, to attract more investors.
Protecting Yourself from Scams
To protect yourself from scams, it is important to do thorough research on any cryptocurrency project before investing. This includes checking the credentials of the team, reviewing the code and smart contracts, and verifying any partnerships or roadmaps. It is also a good idea to diversify your investments and only invest what you can afford to lose. Finally, be wary of projects with unrealistic promises or a sudden surge in popularity, as these can be red flags for a potential scam.