In the third quarter of 2023, a significant number of crypto projects were involved in rug pulls, as revealed by research conducted by blockchain security firm Hacken. Surprisingly, out of the 78 rug pulls examined, only 12 projects had audit reports. This alarming finding highlights the lack of importance given to independent third-party audits in the crypto space.
The Role of Audits
An audit report provides a comprehensive review of a token and identifies any vulnerabilities or weaknesses within the project. It serves as a valuable tool for investors to assess the authenticity and reliability of a project. However, it is important to note that an audit report alone does not guarantee protection from rug pulls or malicious activities.
The Anatomy of Rug Pulls
Rug pulls are one of the simplest scams to prevent if investors pay attention to certain patterns. One such pattern is the presence or absence of an audit report. While an audit can provide validation for a project, it does not guarantee that the project will not engage in fraudulent activities in the future. Some projects undergo audits and publish reports, only to make malicious changes to their tokenomics and smart contract later on.
Among the rug-pulled projects examined by Hacken, some had actually undergone audits but received poor scores. However, users often overlooked these poor audit scores, falsely believing that the fact that the project was audited was enough assurance of its legitimacy. One notable example is Magnate Finance, a lending protocol based on Coinbase’s Base network. Despite an audit report stating the manipulability of the project’s token, users continued to participate in the protocol. As a result, over $5 million was stolen in one of the largest rug pulls of the quarter.
The case of Magnate Finance highlights the dangerous consequences of user ignorance when it comes to audit reports. Despite the warnings provided by the audit, token owners in the project continued to overlook the findings and unknowingly put themselves at risk. Similarly, users of the decentralized crypto staking platform DeFiLabs experienced a similar fate. An audit by CertiK revealed a centralization risk within the project’s contracts, but users failed to take heed. Ultimately, the platform rug-pulled, resulting in the disappearance of $1.4 million worth of users’ assets.
The Need for Greater Awareness
Hacken’s research emphasizes the need for greater awareness and scrutiny when it comes to audit reports in the crypto space. Investors should not solely rely on the mere presence of an audit report; instead, they should thoroughly analyze the report’s findings and consider the project’s credibility. It is crucial for users to educate themselves about the potential risks and vulnerabilities associated with different projects.
The absence or lack of importance given to audit reports in the crypto space has resulted in numerous rug pulls and significant financial losses for investors. It is essential for investors to understand that audits provide valuable insights and vulnerability assessments, but they are not foolproof protection against scams. By conducting thorough due diligence and critically analyzing audit reports, investors can safeguard themselves from falling victim to rug pulls and fraudulent activities prevalent in the crypto industry.