Beware of ‘soft rugs’ — a growing menace in decentralized finance

The decentralized finance ecosystem has been plagued by a variety of known scams and exploits for some time, with yet another coming in the form of what is known as a “soft rug”.

Those that have been dabbling in DeFi for some time will be familiar with the term “rug pull”. This generally refers to the abandoning of a project by insiders or developers who remove liquidity from pools or vaults on decentralized exchanges and disappear with the funds.

A related malfeasance to plague the emerging financial landscape is the “soft rug” which is where a project’s founders simply dump their own tokens and exit the venture instead of taking control of users’ assets.

In some cases, a soft rug is more insidious with developers going out of their way to build trust and a false sense of security at the same time as attempting to disguise the dumping of tokens. If done cleverly enough, users may not even know they’ve drawn the short straw.

There have been a couple of incidents in the DeFi scene over the past week where soft rug exit scams have been alleged.

The team from Polywhale, a Polygon-based yield farming project, announced that it would be ceasing work on the platform in a Reddit post on June 20. Two days later, it was discovered by token holders that the project’s treasury wallet had been emptied.

As reported by Cointelegraph, Polywhale Finance’s founders were accused of pulling a soft rug by selling their tokens during the latest crypto market price collapse. The project’s native token, KRILL, has collapsed to $0.17 from a high of $7 at the beginning of this month.

Related: Pulling the rug: DeFi investment hype fuels rise in crypto exit scams

The Defiant reported on another claimed soft rug involving Swipe, which developed Binance Smart Chain’s third-largest protocol, Venus.

On June 22, the founding team behind the BSC-based money market and stablecoin protocol announced that they were bailing from the project. Uniswap community member @MonetSupply accused the team of a soft rug on Tuesday.

However, members of the new Venus community denied the allegations, claiming that it was just a rumor and the Swipe team had handed in all of their tokens.

The incident has not prevented the Venus native XVS token from slumping 40% since the same time last week when it traded close to $34. According to CoinGecko, XVS is down 87% from its all-time high of $147 on May 10, changing hands for $19.28 at the time of writing.


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DeFi revival pushes Celo, Venus (XVS) and Fantom (FTM) price higher

A new report by CoinShares suggests Bitcoin (BTC) has garnered 97% of the total crypto inflows in 2021.

The recent correction in Bitcoin price does not seem to have deterred crypto investors as CoinShares data shows a record $1.3 billion in crypto product inflows over the past week. This suggests that investors are accumulating on the dips rather than attempting to chase higher prices.

Crypto market data daily view. Source: Coin360

Another space that has taken giant strides in the past few months has been the decentralized finance sector. While bond yields across the world are reeling near-zero levels, the attractive yield farming opportunities in DeFi and flash loans have attracted investors, boosting the total value locked to $26.1 billion on Jan. 25.

Unless the markets are gripped in panic, there are always certain sections that are in a bull phase. The tokens selected today have also outperformed the broader market in the short term.

Let’s investigate some of the fundamental reasons behind their bullish moves and pinpoint the critical levels to watch out for.