How to Avoid ‘Rug Pulls,’ the Latest Cryptocurrency Scam


A new type of scam has emerged in the hype-filled world of cryptocurrency: the “rug pull.”

The scam, which gets its name from the expression “pulling the rug out,” involves a developer attracting investors to a new cryptocurrency project, then pulling out before the project is built, leaving investors with a worthless currency. It’s part of a long history of investment schemes.

“This isn’t a crypto-only phenomenon. This is a people phenomenon. Crypto is just the latest way to do it,” says Adam Blumberg, a Houston-based certified financial planner who specializes in digital assets. But cryptocurrencies have particular risks due to loose regulations for fundraising and their emphasis on decentralization.

Cryptocurrency projects often use “smart contracts” agreements that are governed by computer software, not the legal system. This setup can be a benefit when it reduces transaction costs, but it also leaves little recourse if things don’t work out.

Rug pulls have been particularly common in decentralized finance, or DeFi, projects that aim to disrupt services such as banking and insurance. NFTs, or non-fungible tokens, that provide digital ownership of art and other content, have also been involved in rug pulls.

Investors can protect themselves by choosing established cryptocurrency projects, making sure the code of any new project has been reviewed and verifying the developers’ identities.

Rug pull, a new type of scam, has emerged in the hype-filled world of cryptocurrency. (pixabay)

Pick Established Products

Rug pulls are most common with new projects that haven’t gotten the same scrutiny as more established cryptocurrencies.

Bitcoin has its risks, but countless people worldwide have used it and reviewed its inner workings, which are readily available online.

Newer projects don’t have such a track record, which means there may be vulnerabilities that make it possible for their organizers to siphon value away from investors and keep it for themselves.

If you’re struggling to break through the hype, one way to find established projects is to look at centralized exchanges such as Binance, Coinbase, and FTX. While the presence of a cryptocurrency on a large exchange is by no means a guarantee of its quality or investment potential, these businesses often will review assets before listing them for sale.

The trade-off of investing primarily in more established assets: While cryptocurrency, in general, has seen periods of rapid price appreciation, the highest rewards may come from new projects where the risk is also higher. These are often listed on “decentralized exchanges,” which don’t rely on any centralized authority that would prevent unproven projects from joining.

Rex Hygate, founder of DeFiSafety, a company that reviews projects in the field, says scammers can prey on the fear of missing out that’s generated by rare but true stories of mind-blowing returns.

“It is seductive. People have made a lot of money. That is a fact,” Hygate says. “The hope is real, albeit small, (and) therefore criminal organizations in an organized and regular manner are making these rug pulls.”

Know the Code

The fate of any investment in cryptocurrency or blockchain projects rests on the integrity of the project’s computer code. You may not be a computer programmer, but you should at least understand how a product works before investing in it.

One way to evaluate a potential investment without going under the hood yourself is to see if it’s been audited by a professional organization that is respected in the industry. Projects that have gotten good marks from auditors will often promote the results themselves.

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An engineering student takes part in a hacking challenge near Paris, France on March 16, 2013. (Thomas Samson/AFP via Getty Images)

Research the People

Some of the biggest red flags in the cryptocurrency world come down to human factors.

While it’s not unheard of for people to use pseudonyms in cryptocurrency, reputable developers often have websites and references that can establish their credentials.

But even if you do your homework, there’s no guarantee of success. For example, the founder of Rugdoc.io, a service that reviews new projects, says she wound up getting scammed herself on an NFT that was supposed to be a ticket for an event.

Diversification is as important in cryptocurrency as anywhere else in finance. Projects can fail due to technical glitches or business blunders, even without malicious intent.

“Assume whatever you’re investing in is going to have a problem,” says Leah, the Rugdoc.io founder, who asked that her full name not be used to protect her identity from scammers seeking retribution. “If you plan for failure, if it doesn’t fail you’re going to have a very good day. And if it fails, you’re probably not going to be ruined.”

By ANDY ROSEN of NerdWallet

The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.



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Decentralized Finance 101—What It Is and Why It Matters


Blockchain is still a nascent technology, but it is perhaps the biggest disruption mechanism that the world of finance has had to deal with. Decentralized finance has gained popularity over the previous year, and not many people fully understand its promise and its pitfalls. Currently, traditional big banks and FinTech startups divide the world of finance. Many FinTech processes are pushing our world into the future, and DeFi is a potential game-changer for finance.

What is DeFi, and why can we change the way we think about financial processes?

Decentralized Finance—What it is

Our current financial systems work in a centralized model. A central authority governs the system and often determines who has and doesn’t have access to it. Centralization exists at every step. Governments decide which institutions get to take part in the system by controlling licensing procedures at the highest level.

Central banks fix lending rates and control interest rates in the economy. Banks and institutions decide who gets to open an account with them and strictly monitor transactions for fraud and other illegal activities. If you, the consumer, want to open a bank account, you need to prove who you are, where you live, and what your sources of income are at all times.

This model restricts access to people based on credit and geography. For example, a citizen of France can open a bank account in the United States, but this is an inconvenient choice.

DeFi aims to throw a wrench into these centralized mechanisms.

In its simplest form, DeFi is a peer to peer network built on a blockchain. It aims to eliminate the gated nature of traditional finance. Building applications with DeFi protocols have the potential to disrupt traditional finance. For example, peer to peer lending networks removes the role that a bank plays in the lending process. Cryptocurrency is also an example of the role DeFi can play in modern economies.

Infrastructure

Currently, most DeFi apps are built on the Ethereum blockchain. According to Consensys, there is over $7 billion worth of smart contracts on the blockchain. Such a large volume means the number of use cases for individuals and companies is increasing daily.

Traditional finance systems use gatekeepers to evaluate the legitimacy of transactions. While these gatekeepers reduce the degree of democracy in a system, they play a valuable role in providing confidence that the system will work. For example, when you borrow deposit money in a bank, you have every reason to believe it will be there when you need it.

The entire blockchain validates a smart contract. This builds confidence in the DeFi network. These contracts are immutable, which eliminates the need for a gatekeeper. For example, if you want to borrow money, you can enter a smart contract with a wide network of peers on the blockchain. Loans are legitimized by the network and cannot be “lost” or “misplaced.” The transaction doesn’t need gatekeepers to validate it.

DeFi isn’t so much a technology as it is a new paradigm for how we think about financial transactions. Cryptocurrency, which is the most popular form of DeFi, seeks to rethink money. DeFi goes beyond that. It allows more resources to be monetized and very definition of asset changes. For example, blockchain can enable pharmaceutical manufacturers to monetize their data.

Thanks to the private nature of blockchain networks, security isn’t an issue. Greater trust is the result, and individuals and companies can rethink the ways they can make money. There are other benefits of DeFi, apart from this.

A visual representation of digital currency sinking in water. (Dan Kitwood/Getty Images)

The Benefits of DeFi

Aside from many use cases that DeFi applies to, there are technical benefits that it consists of. Here they are in no particular order:

Immutability

Blockchain data is tamper-proof. As a result, clear audit trails and security are easy to establish. It eliminates the need for security intermediaries and processes that slow the pace of transactions.

Interoperability

DeFi protocols are currently built into Ethereum’s stack, and this means applications integrate easily with each other. It’s easy to improve protocols by building new layers on top of existing ones. All protocols on a network can learn from one another and evolve continuously.

Permissionless

Since DeFi is built on blockchain, anyone with an internet connection and a crypto wallet can access services on the network. Previously underserved sections of society can access innovative products.

Greater Control

DeFi protocols allow users to maintain custody over their assets. They don’t need to rely on third-party actors to maintain security. As a result, the monetization of assets and innovation increases.

Transparency

DeFi protocols are built using open source code that allows anyone to view it, audit it, and improve it. Transactions are verified with the entire network as part of security protocols.

Customization

Smart contracts can be programmed to suit any deal’s terms, and this flexibility allows for the creation of new assets and deal structures.

All of these benefits mean there are many use cases that DeFi can potentially apply to.

Entrepreneurs in the blockchain technology space need to start focusing on consumers if they want to turn the movement into a true revolution. (NicoElNino/Shutterstock)
A graphic rendering of the blockchain technology. (Nico El Nino/Shutterstock)

DeFi Applications

Compared to the traditional financial systems currently in place, DeFi is an inherently resilient system of finance. Here are a few examples of how DeFi protocols can be used.

Asset Management

Complete ownership of data changes the way users think about their assets. Users can currently use DeFi apps to lend and earn interest on their crypto holdings using wallets and apps such as MetaMask and Gnosis Safe.

Compliance

Unlike traditional finance that depends on KYC (Know Your Customer), DeFi apps work based on KYT (Know Your Transaction). This changes the way anti-money laundering teams think about transaction privacy and verification. Getting rid of the identity-centric nature of finance is potentially possible.

DAOs

DAO stands for Decentralized Autonomous Organization. These protocols enhance user experience on the blockchain and allow them to access more financial applications. For example, Compound is an interest-earning protocol on Ethereum’s network. Maker another example of such a protocol.

Derivatives Contracts

Complex derivatives contracts are currently traded over the counter and rely on extensive human intervention. Everything from the rules of the agreement to performance measurement needs a strict definition. Defining these terms is simple but codifying them and automating their enforcement is touch. Smart contracts bring a new dimension to the picture, thanks to their customizable nature. Trading complex derivatives between parties is a lot easier and can be done without an intermediary.

Insurance

As the nature of assets changes, insurance changes as well. Providers such as Nexus Mutual offer innovative products such as smart contract insurance that protect parties from unintended smart contract code use.

Lending

Lending is what most DeFi apps are currently focused on. DAOs such as Compound match lenders with borrowers and allow easy access to crypto tokens. Lenders can earn interest on their holdings as previously described. Compound also powers DeFi margin trading, and traders can borrow funds to trade tokens. Automating brokerage functions is easy. There’s no need for an intermediary to provide margin services.

Payments

P2P payments have the potential to bring financial security to people no matter where they are on the planet. This removes the geographical barrier to finance that is currently present in traditional systems.

Volatility

One of the knocks against cryptocurrency is its volatility. DeFi protocols allow developers to create so-called Stablecoins, which derive their value from a basket of cryptocurrencies. This reduces volatility and allows users to earn steady returns on their investment.

Tokenization

Experts believe this is an area that will witness major developments soon. Tokenization occurs when an asset is digitized and managed on a blockchain. Everything from real estate to stocks can be potentially tokenized, and this opens a world of opportunities to investors.

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A construction worker walks past bitcoin mining at Bitfarms in Saint Hyacinthe, Quebec, on March 19, 2018. (LARS HAGBERG/AFP via Getty Images)

The Limitations of DeFi

Despite its promise, there are certain challenges that DeFi faces. Blockchain is still a nascent technology, so this state of things is understandable.

Learning Curve

Financial transactions aren’t currently as “open” as DeFi developers would have us believe. This is because the average DeFi product isn’t designed for the average person. The UI (user interface) and UX (user experience) of a DeFi app are incomprehensible for the average user, and there isn’t any effort from developers to smooth the learning curve. To use a DeFi app properly and even understand its use, a person needs to be an active user of cryptocurrency.

DeFi protocols claim that anyone with an internet connection can access its benefits, but this isn’t true. A lack of identity and government policy is what limits access to finance.

Identity verification is what drives KYC rules and underpins everything to do with AML (anti money laundering) procedures. It’s hard to imagine that an institution dealing with billions of dollars will be comfortable entering transactions with unknown parties, no matter how secure the transaction might be.

This hesitation extends to regular users as well. For example, a user might receive a transfer of funds from someone else on the network. To translate their cryptocurrency into fiat money, they need to prove who sent them the money. DeFi makes this impossible to do, and this prevents widespread adoption.

A person might have a stable internet connection, but if their government decides to ban cryptocurrency ownership and severely limits conversion to fiat currency, DeFi can’t do much for them. DeFi evangelists usually point to the eventual widespread adoption of cryptocurrency as being the solution. However, the lack of KYC protocols hampers widespread crypto adoption.

Lack of KYC Protocols

The fit for institutions isn’t entirely clear either. Large financial institutions indeed have better use cases for DeFi, but currently, the speed of network transactions is an issue. Besides, there’s still the problem of the lack of identity protocols. DeFi evangelists claim that identity protocols are what they’re trying to disrupt, but it’s hard to see how KYT can ever replace KYC from a practical standpoint.

Finally, DeFi hasn’t yet cleared the large-scale regulatory hurdles that centralized finance has. As a result, crypto power users are the only people who use it. Correcting or reversing account level errors is impossible due to the lack of a central authority. For example, if you entered an incorrect amount in a transaction, you can call your bank and correct it. Such a scenario is impossible with current DeFi protocols.

Crypto
A photo shows some cryptocurrencies. (Pixabay)

What the Future Holds

Despite these limitations, there’s no doubt that DeFi offers a fascinating path that finance can take in the future. The biggest hurdle that DeFi protocols need to clear is the lack of identity requirements. The existing financial system is extremely centralized. However, there are just as many issues raised by complete decentralization.

For example, it’s no secret that cryptocurrencies attract certain bad actors, damaging their reputation. The blockchain has also acquired a less than positive reputation thanks to this phenomenon. It’s hard to imagine a reputed financial institution, with huge compliance and AML infrastructure, suddenly deciding to trust KYT norms and abandon the need to ascertain identities.

Digital identity development is what developers need to focus on to ensure widespread DeFi adoption. Developers are making progress in this regard. We’ll have to see how the blockchain community reacts to these changes.

Yes or No?

There are massive potential advantages and disadvantages associated with DeFi. We must remember that this is still a nascent technology, and it’s unfair to write it off after comparing it to centuries-old infrastructure and protocols.

Centralized finance has issues that DeFi can solve. Instead of looking to overhaul the system completely, perhaps greater collaboration holds more promise. As of now, we’ll have to see which path DeFi takes.

By Vivek Shankar

The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.



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DeFi, Yield Farming, and Ponzi Scheme?


In today’s local interest rate environment, many investors have come across DeFi staking or cryptocurrency yield farming promising interest rates earned in the high single digits, double-digits, and even triple-digits.

Compared to the paltry interest rate earned in most mainstream asset classes, conventional wisdom would suggest those rates are too good to be true. 

What is DeFi?

DeFi, or decentralized finance, has become a new catchphrase to describe an industry within finance that relies on distributed ledger technology such as those used by cryptocurrencies.

DeFi is very broad, but it has become synonymous with a popular money-making method called yield-farming and staking. Those two terms describe different things, but both promise high interest rates on cryptocurrencies.

Staking is easier to describe. Early coins such as Bitcoin relied on a system called “proof of work” to validate transactions, a process that involved solving algorithms and using a tremendous amount of energy, which you no doubt have read about in the media. Later digital currencies are using a system called “proof of stake,” where holders of the coins delegate their tokens to a pool where validators work to confirm transactions and create new blocks.

And in turn, the validators earn a reward for their work.

Over the last few years, many of these validator “companies” cropped up and promised investors high interest rate rewards for the cryptocurrencies they deposit with the validator companies. 

Investors who “stake” their digital assets with these companies are promised great returns—from 5 percent to 25 percent, and sometimes even more—and these returns are marketed as “passive income” on the digital currencies they “deposit” at these institutions, similar to interest earned on savings accounts. 

This is where the narrative doesn’t always hold up and investors need to do their research. Some of these platform companies do validate crypto transactions and earn tokens for their efforts. Some of these companies take your deposits and lend them out to hedge funds and other institutions that may borrow the tokens in order to short them, in turn paying interest to the platform.

But do their business models support such high interest rates to be paid to the customers? It’s unclear what the spread or margins are on their activities. And if these companies go out of business or if the regulators such as the SEC shut down their businesses, how will investors be repaid?

There is great risk in earning these promised returns, yet often their marketing slogans make these products appear very similar to interest earned on savings accounts. Their websites even compare their interest rates (very high) to prevailing interest rates on bank deposits (very low). Of course, none of the crypto assets deposited are insured by the Federal Deposit Insurance Corporation. So customers’ deposits are purely in the hands of these platform companies with little to no recourse should something go wrong.

A different strategy—yield farming—is even riskier. 

This involves depositing your cryptocurrency (say, bitcoin or ether) with a startup platform and instead of earning interest in kind (i.e. interest in the form of bitcoin or ether), your earnings accrue in the form of a completely new token created by said platform.

And often, this platform has no discernible operating activities such as lending coins or validating proof of stake. Its only purpose is minting more of the newly created tokens. 

In a recent Bloomberg Odd Lots podcast, billionaire FTX CEO Sam Bankman-Fried described this business model as someone creating a new box and declaring the box has value and then promoting the box attracting investors to this box, thereby creating more artificial value.

“Describe it this way … that in like five minutes with an internet connection, you could create such a box and such a token, and that it should be worth like $180 or something market cap for that effort that you put into it. In the world that we’re in, if you do this, everyone’s gonna be like, ‘Ooh, box token. Maybe it’s cool. If you buy in box token,’ that’s gonna appear on Twitter and it’ll have a $20 million market cap,” he said.

“Maybe there haven’t been $20 million dollars that have flowed into it yet… but I acknowledge that it’s not totally clear that this thing should have a market cap, but empirically I claim it would have a market cap.”

In other words, the platform has value because of marketing and people claiming that it has value. And when it is promoted and there is marketing behind it, and more people send money into this platform, the hype around it generates a high market capitalization because people clamor for it. And therefore the newly minted token—whatever it may be called—also has “value” ascribed to it, and the box owner can continue to mint new tokens. Over time, the tokens gain some acceptance and can be traded on crypto exchanges, attracting even more attention and people send even more cryptocurrencies into the box in exchange for this new token.

Conceptually, this sounds awfully like a Ponzi scheme. The utility of this new box or platform is unclear, but its value—and the value associated with its tokens or currencies—is derived from hype and the marketing behind it. As more people buy into it, the more valuable it becomes. 

Of course, it’s also rather easy for the creators of this new box or platform to create a utility. Write up a white paper or business plan or a solution to a potential problem and you have some good window-dressing for the box.

We’re not concluding that all such yield farming protocols are scams or Ponzi schemes. Some may ultimately have utility and a business purpose. But investors looking into such opportunities should keep in mind the old adage that if something sounds too good to be true, it usually is.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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Fan Yu is an expert in finance and economics and has contributed analyses on China’s economy since 2015.



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DeFi Theft and Fraud Losses Reach $10.5 Billion in 2021, Mostly on Ethereum


According to a report from London-based firm Elliptic, about $10.5 billion worth of user funds has been stolen in cases of fraud and theft on DeFi products.

DeFi platforms have become increasingly popular in recent years, but the platforms are not regulated. The “total value locked” (TVL), a measure of the liquidity of DeFi services, increased by a factor of nearly 500, from $500 million in November 2019 to just over $247 billion today.

The overall losses caused by DeFi theft and fraud have totaled $12 billion so far in 2021. In addition, the report suggests that in the past two years, $2 billion has been stolen directly from decentralized applications.

An additional $10 billion in losses are due to declining token value because of fraud or theft, which results in decreased consumer confidence in the products.

The vast majority of losses from the last two years, $8.6 billion, have come from products on the Ethereum blockchain.

“The DeFi ecosystem is an incredibly exciting and fast-moving space, with financial services innovation happening at light speed,” said Tom Robinson, chief scientist at Elliptic.

“Many are startups with relatively immature cybersecurity, and the irreversible nature of crypto transactions makes it very challenging to recover these funds. Unfortunately, this has made them tempting targets for attackers ranging from lone hackers to nation-states.”

Earlier in 2021, DeFi platform Poly Network lost more than $600 million in what was, at the time, the biggest cryptocurrency theft of all time. Poly Network later announced that all the funds except $33 million worth of the digital coin Tether have been transferred back.

By Bibhu Pattnaik 

© 2021 The Epoch Times. The Epoch Times does not provide investment advice. All rights reserved.


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