What is Rug Pulls?
it’s a type of crypto scam in DeFI space where developers abandon a project and take their investors’ money. Rug pulls usually happen in the decentralized finance (DeFi) ecosystem, especially on decentralized exchanges (DEXs), where malicious individuals create a token and list it on a DEX, then start offering exchange by pairing with leading cryptocurrency Ethereum.
Developers of token/project usually create a temporary hype around Telegram, Twitter and other social media platforms even before the project is live and initially, they also inject a substantial amount of liquidity into their pools to boost investor confidence.
When the project is live for a few hours or days, liquidity pools can run into tens of millions or even hundreds of millions of dollars. This is where a scammer strikes in and “pulls” all liquidity away from the DEXs pocketing the entire amount. The rug pull is then complete, Driving the token’s price to zero.
Thodex, AnubisDAO, Uranium FinanceDeFi100, Meerkat Finance, SnodogDAO are a few biggest rug pull scams of the year 2021 & many more are there.
How does smart contract audit prevent Rug Pulls?
Rug pulls thrive on DEXs because these types of exchanges allow users to list tokens for free and without audit, unlike in centralized cryptocurrency exchanges where the request to list a token goes through the several stages of verification & validation before CEXs approves the token to be listed. Furthermore, creating tokens on open source blockchain protocols like Ethereum is easy and free. Malicious actors use these two factors to their advantage.
A smart contract security audit is an accurate and thorough analysis of application smart contracts. The main aim of such an audit is to detect and eliminate smart contract vulnerabilities as well as check the reliability of the contracts’ interactions between each other. A high level of security and code quality are the main requirements for developing a good smart contract. Auditing a smart contract also ensures that any intention of developers to withdraw funds from the liquidity pools is identified and addressed. These developers with intention to steal money usually don’t lock these pools, audit helps protect the liquidity pools.
It is recommended not to invest in a token/project from the DeFi or DEX which hasn’t done any audit for its code. Smart contract audit gives investors/users a confidence to invest into these projects. Remember that the audit done by only qualified agency or team other than the developers themselves of project/token is recommended.