How to Avoid Rug Pulls: Lessons from Luna Rug Pull

How to Avoid Rug Pulls: Lessons from Luna Rug Pull

Terra LUNA rug pull was a major cryptocurrency swindle. Read the article to learn how it happened and how to avoid it.

On March 12, 2021, the Terra LUNA project announced that it would be shutting down and would be initiating a rug pull. However, some argue that it was not a rug pull but rather a “bad design”, and a complicated project made of cards with nothing to support the technology.

In this blog post, we will explore the Terra LUNA rug pull and what it means for the cryptocurrency industry. We will also provide some tips on how to avoid being scammed by similar projects in the future.

Terra (LUNA): What, How, When?

Terra is a decentralised payment network that rebuilds the traditional payment stack using blockchain. To facilitate programmable payments and open financial infrastructure, Luna is used as the reserve currency to ensure stability for a basket of fiat-pegged stablecoins.

By the end of 2020, the network had over 2 million subscribers who had together spent almost $300 billion.

Terra is a Proof of Stake (PoS) network that needs miners to stake Luna to mine transactions. If all else is equal, a validator with more Luna has a greater chance of generating the next Terra block.

Luna holders and stakeholders, on the other hand, are exposed to the asset’s price risks by providing network security and validation. This is because the Terra protocol allows Terra stablecoins to be easily exchanged for Luna at their predetermined exchange rate in order to keep the peg. When demand is high and prices are above the peg, it will sell stablecoins for Luna. When demand is low and prices are below the pegged price, it has the opposite effect. In this way, validators absorb the network’s short-term volatility.

Validators are compensated in several ways, including:

  • staking rewards,
  • gas fees,
  • taxes,
  • and seigniorage rewards.

Staking rewards are calculated based on the size of a validator’s stake and are intended to encourage increased transaction volume. Gas fees and taxes are similar in that a small fee is imposed on all Terra transactions and distributed to validators on a pro-rata basis. Finally, validators who take part in the Luna exchange rate oracle process earn seigniorage.

These incentives are intended to generate stable and evergreen mining demand across all economic conditions. When rewards increase, the protocol reduces network fees and seigniorage payments, and vice versa.

However, the crash LUNA is currently trading at $0.00016183 and the volumes are at the lower side according to CoinMarketCap.

chart of terra luna to usd

How do Investors Profit from Luna?

  1. Stake Luna: Users can stake Luna tokens to help confirm Terra transactions and earn block rewards.
  1. Price Stability: The Luna token is used by the Terra network to buy and burn other stablecoins in order to maintain price stability.
  1. Incentives for Validators: Validators on the Terra network are rewarded with Luna tokens for their work in verifying transactions and maintaining the blockchain.

Luna Crypto Rug Pull

Terra LUNA, a supposed stablecoin backed by the “full faith and credit” of the South Korean government, has turned out to be a rug pull. The project’s website and social media accounts have disappeared, and the team appears to have absconded with over $6 million worth of investor funds.

This is a cautionary tale for anyone thinking of investing in cryptocurrency. Always do your due diligence before sending your hard-earned money to an anonymous team of developers. In this case, it appears that the Terra LUNA project was nothing more than a scam designed to line the pockets of its creators.

What is Rug Pull and How Does it Work?

When a crypto project “rug pulls,” it means that the team behind the project has absconded with the funds raised through the sale of their native tokens. This is usually done by dumping all of the project’s tokens on the open market, causing the price to crash and leaving investors holding the bag.

Rug pulling is a serious problem in the cryptocurrency space, as it takes advantage of investors’ trust and can result in massive financial losses. Unfortunately, there is no surefire way to prevent rug pulls from happening, but there are some red flags that you can look out for when considering investing in a new project.

Some warning signs that a project may be planning to rug pull include lack of transparency, unrealistic promises, sudden changes in direction or strategy, and insider selling of tokens. If you see any of these red flags, it’s important to do your own due diligence before investing any money.

Ultimately, the best way to protect yourself from rug pulls is to only invest what you can afford to lose and to diversify your portfolio across multiple projects. By taking these precautions, you can minimize your risk and maximize your chances of success in the cryptocurrency space.

Types of Rug-Pulls

Rug Pull can be differentiated based on how it has been executed. There are three ways in which Rug pulls can be carried out!

icon of Siphoning of Liquidity, icon of Restricting Selling Orders, icon of excessive dumping

1.    Siphoning of Liquidity

This occurs when developers are able to withdraw funds from the liquidity pool, which contains the new asset as well as another more established asset such as ETH or BNB.

A smart contract holds the liquidity pool, and a malicious developer can programme a “back door” into a smart contract to steal funds from investors. The developer can sell the funds once they have been extracted.

When the funds are transferred there is a crunch of liquidity in the market, thus squeezing the asset’s volume.

2.    Restricting Selling Orders

This happens when a fraudulent developer creates a smart contract that allows only them to sell the token they created and brought to market.

In other words, investors will be unable to profit when the price of this new token skyrockets. Only the developer is capable. This can be done by adding limitations to the selling order of the investors. This is the most basic and often used technique by developers.

3.    Excessive Dumping

When a large amount of cryptocurrency is sold all at once, this is referred to as dumping. This can occur across a single cryptocurrency, an entire sector such as DeFi, Gaming, or Metaverse, an entire ecosystem such as Ethereum, or all cryptocurrencies at the same time.

The dump usually results in sharp price drops, causing more investors and traders to sell, and reinforcing the selling pressure. This happens when the developer sells their share of the new token, which is usually more than 40% of the total supply of the token, once its price has risen.

This is also known as a “pump and dump” scheme.

Top 4 Crypto Rug Pull in History

Rug pulls are typically carried out by cruel scammers who create hype around their coins before abandoning the project and sprinting away with the money.

These cryptocurrencies are typically created on reputable utility blockchains such as Ethereum or Binance Chain. This is because investors who exchanged their ETH for the listed token enable the token creators to quickly withdraw and liquidate the ETH.

Here are the top 4 Rug Pulls in the history of crypto!

1.    One Coin

OneCoin was started at the end of 2014, and its marketing materials said it would be the next big cryptocurrency and a “Better Bitcoin.” OneCoin did become very popular; at the time Ms. Ruja Ignatova, its market capitalization was more than 60% of that of Bitcoin.

Ruja Ignatova, however, vanished without a trace in 2017 and hasn’t been located since. Konstantin Ignatov, her brother, admitted culpability and took the fall for the $4 billion fraud scam. It was later uncovered that the coin was built on a SQL server and that there was never even a blockchain to support it.

OneCoin also functioned as a ponzi scheme that paid investors to convince their relatives and friends to make investments as well. It is alleged that the OneCoin scam defrauded users of $4 to $15 billion.

2.    Thodex Turkish Exchange

It was similar to other rug pulls, nevertheless more brutal and big. Thode founders disappeared overnight, taking over $2 billion worth of cryptocurrency with them. Their CEO is currently on the run, and there are warrants out for his arrest. Needless to say, this has caused a lot of financial damage to a lot of people.

What’s even more frustrating is that this could have all been avoided if only people had done their due diligence. There were warning signs all over the place that Thodex was not to be trusted, but people ignored them because they were making good money off the investment.

3.    Anubis DAO

Anubis DAO, which went live on October 28 of 2021, quickly found significant success and raised approximately $60 million using its own cryptocurrency ANKH. Anubis DAO was promoted as a fork of the reputable and decentralised reserve currency Olympus DAO. However, the liquidity pool’s funds were transferred out and vanished within twenty hours after introduction.

When Brian Nguyen, an investor, was seduced by the dog-themed cryptocurrency that reminded him of the popular projects dogecoin and Shiba inu, he admitted to losing $460,000.

Even though the main developer, who goes by the moniker “Beerus,” claimed to have been the victim of a phishing scam at the time, many people are still hesitant to label it as a scam while authorities continue their investigation. This is the case even though the authorities are still looking into it.

Investors paid $60 million in ETH into the token sale despite the lack of a website.

Token buyers were intended to be able to deposit additional Ethereum (ETH) and receive more Anubis tokens (ANKH) for another day.

However, the pool’s liquidity (which allows investors to buy and sell the tokens) was cut off at 11:58 UTC, over 20 hours into the sale. All of the $60,000,000 in ETH that had been contributed to the token sale up to that point was transferred to a new address.

The fact that the liquidity was taken out at all is concerning, but the fact that it was taken out before the sale concluded is much more concerning, as it suggests either a rug pull (where the team disappears with the money) or that the money was stolen by another party in some kind of exploit.

4.    DeFi100

DeFi100 has run off with $32 million, according to a tweet from the CryptoWhale Twitter account in May 2021. The news spread rapidly, which led to panic among investors.

The DeFi100 website was used to access the platform, however, all efforts were ineffective because there was only the crude message —

the screen of a twit of mr. whale and defi100

It was deemed to be a $32 million hoax as the official DeFi100 currency website was shut down for displaying that inappropriate message and there was no official statement from the DeFi100 team. But after a while, the team at DeFi100 reacted, casting doubt on the likelihood of a scam or a ruse.

However, according to their Twitter channel, it was an attack and they have launched their website again.

Consequences of Terra LUNA Сrash

On Stable Coin

Stablecoin selloffs during this episode were caused by twitchy investors scared by UST losses. CELO fell to $0.96, then rose to $0.99. When Tether lost its peg, $3 billion was withdrawn.

Stablecoins have two implications. First, collateralisation will gain popularity as a stablecoin backing strategy. As pressure mounted, even UST moved in this direction. LFG bought bitcoin as collateral. This episode will lead to future independent asset collateralisation.

Risk-loving investors interested in algorithmic stablecoins may use their governance rights to push for more resilient recovery mechanisms.

Second, the government will pay more attention. The US Treasury Secretary wants rules in place by the end of the year. In 2021, the President’s Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency published a report with suggestions for how stablecoins should be regulated. Authorities were worried that stablecoins could weaken the financial system as a whole and threaten the safety of the market and investors.

Still, in the 116th Congress, a bill that would have changed the Federal Deposit Insurance Act to include stablecoins in the definition of “deposit” in order to classify and regulate them failed to pass.

The Stablecoin Transparency of Reserves and Uniform Safe Transactions Act, which was just introduced, would let issuers choose to be regulated like banks or choose from other options. It does not, however, require federal deposit insurance.

The Stablecoin Innovation and Protection Act of 2022 would require nonbanks to keep complete value of their stablecoins in a separate account with an FDIC-insured institution. Another bill, the Stablecoin Transparency Act, would require stablecoin issuers to hold reserves in securities or non-digital currency and publish monthly reserve reports that are checked by a third party.

On Crypto

Their demise caused the market to become unstable. The cost of bitcoin dropped to $26,000, a 60% decline from its peak in November 2021, while the value of ether, the second-largest cryptocurrency, dropped by 30%. One of the biggest bitcoin exchanges, Coinbase, posted a Q1 loss of $430 million.

Although the market has stabilised a little since the end of May, several cryptocurrencies’ values are still noticeably depressed. If any more evidence were required, certain significant financial organisations, like the International Monetary Fund, have pointed to the most recent meltdown as evidence of the intrinsic fragility of this asset class.

It further hampered crypto adoption and created an environment of a more stringent regulatory framework.

How to Avoid Rug Pull?

Although, it is difficult to avoid rug pull you can follow the following steps to avoid Rug Pull.

  1. Always bet on serious projects: check if there is an audit, do researching of documents, try to find any proofs.
  2. Avoid get-rich-quick scams: there is nothing like getting rich quick, do your research before investing is something like that.
  3. Always remember to invest in small sums: reduce your exposure to protect yourself from huge losses.
  4. No liquidity locked: if there is little or no liquidity, the project can get vanish very easily. Also, if there is no liquidity you cannot sell your tokens quite easily.
  5. Selling order limitations: many past scams generally introduce selling order limits, which are embedded in code. You can check this by buying a small amount of the token and trying to sell it quickly. If you cannot sell it then stay away from it.
icon of researching, icon of a person with money, icon af a hand with dollar, icon of a dollar coin with a key, icon of a graph

Take Away: The Lesson

The collapse of the Terra Ecosystem might potentially delay the recovery of the bigger bitcoin market. Despite obstacles, the bitcoin ecosystem is continuing to grow and learn. Failures like UST’s can teach the industry valuable lessons that could lead to the creation of more secure and reliable cryptocurrency projects in the future.

Here are the 3 lessons we can take from Terra LUNA rug pull:

  1. Too Big to Fail is a Myth

Even while big projects like Terra Luna are among the top 10 or top 15 in terms of market cap in the cryptocurrency space, they still run the risk of failing. I’ll give you one more illustration. The top altcoins in 2013—nearly ten years ago—are listed below.

  • Bitcoin
  • Litecoin
  • Peercoin
  • Namecoin
  • Feathercoin
  • etc.

Other than Bitcoin and Litecoin, all of the other top currencies are no longer on the list. That demonstrates how unstable the cryptocurrency market is and how projects come and go. No such thing as a guarantee exists.

  1. Avoid Dependent on Crypto Exchanges

You can only truly depend on cryptocurrency exchanges like FTX or Binance when a crisis or crash occurs like this.

Really, these exchanges are centralised. In situations like this, a black swan. They will likely take action such as banning the withdrawal, postponing the withdrawal, or even slowing the withdrawal in order to contain the impact of this market drop.

They all have mechanisms to prevent money from leaving their exchange to prevent their platforms from crashing.

  1. All Stablecoins are “Not-So-Stable”

The major worry for investors who intend to hold stablecoin investments is volatility. Being aware of governance is equally important as being mindful of volatility. In contrast to other decentralised cryptocurrencies, a third party must control the reserve of underlying assets. Therefore, both volatility and governance are necessary for stablecoin stability.

Therefore, it is clear that not all stable coins are created equally.


FAQs

Was Luna crypto a rug pull?

As a result of the UST de-peg, a “death spiral” event involving LUNA occurred, resulting in the near-zero value of both currencies. A poor design or technical flaw may have contributed, however, even that is questionable. If we consider it a scam, it was the largest rug pull.

How to avoid rug pulls?

Well, it is very difficult to anticipate the rug pull event, however, investors must remember that any project offering huge rewards certainly comes with high risk. Additionally, one must check the underlining asset or technology which supports the project. Also, another thing you must remember is not to fall for the FOMO marketing techniques. 

Can you still buy Luna Crypto?

There are still ways to buy Terra Luna, you can buy Luna from various exchanges including Coinbase, KuCoin, Bittrex etc.

Are crypto rug pulls illegal?

Hard rug pulls are illegal. However, soft rug pulls are not necessarily banned. For instance, if a crypto project pledges to give funds but instead keeps the funds for itself, this is immoral but not illegal. Like the majority of fraudulent actions in the cryptocurrency business, both categories are difficult to detect and prosecute.

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