Rug Pulls and Audits: Unveiling Q3 2023 Insights
In the world of cryptocurrencies, the rug pull phenomenon poses significant risks to investors. While independent third-party audits can provide a level of validation for crypto projects, they do not always offer foolproof protection against sudden liquidity withdrawals.
Hacken’s Research Findings
Hacken, a blockchain security firm, conducted a comprehensive study that delved into the rug pulls witnessed during the third quarter of 2023. The results shed light on a concerning trend: a majority of these projects had not undergone audit reports.
The Q3 2023 Security Insights Report
The Q3 2023 Security Insights report by Hacken indicates that out of the 78 rug pulls analyzed during this period, a mere 12 projects had conducted and reported audits.
The Role of Audits in Mitigating Rug Pulls
An independent third-party audit serves as a comprehensive examination of a token’s ecosystem. It plays a pivotal role in identifying vulnerabilities and serves as a vital alert mechanism for potential investors. However, it is essential to recognize that an audit, while valuable, cannot always prevent the sudden removal of liquidity.
Hacken emphasizes that rug pulls are among the most straightforward scams to avoid. Investors can safeguard their interests by recognizing certain patterns, with the presence or absence of an audit being a key indicator.
Audit Doesn’t Always Equate to Security
Even when a project has undergone an audit and published a report, it does not automatically guarantee immunity from fraudulent activities. Malicious actors can manipulate tokenomics and smart contracts post-audit, resulting in defrauding unsuspecting users.
Challenging Audit Findings
Remarkably, some rug-pulled projects from the last quarter had indeed undergone audits but received poor ratings. Regrettably, users placed misplaced trust in the mere existence of audits. A notable case was that of Magnate Finance, a lending protocol on Coinbase’s Base network. Despite an audit report that raised concerns about the project’s deployer’s potential to manipulate the token, token owners continued participating in the protocol for almost three months. Ultimately, the deployer executed a substantial rug pull, amounting to over $5 million in stolen funds.
A Familiar Pattern
Hacken’s research uncovered a common modus operandi among malicious project developers. They typically follow a series of steps: creation of tokens, aggressive marketing, inflating token supplies as liquidity accumulates, executing rug pulls to siphon off funds, and leaving investors with essentially worthless assets.
DeFiLabs: A Case of Ignored Warnings
The experience of DeFiLabs, a decentralized crypto staking platform, mirrored that of Magnate Finance. In this case, a CertiK audit had pointed out centralization risks within the project’s contracts, but the warnings failed to raise concern among users. The project eventually executed a rug pull, disappearing with $1.4 million worth of users’ assets.
The research by Hacken underscores the need for heightened vigilance and due diligence in the cryptocurrency space. Audits, while valuable, should not be the sole basis for trust, and investors should remain cautious when engaging with crypto projects, irrespective of their audit status.