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What Is Rug pull?

Rug pull refers to a recently coined crypto industry scam. One common meaning for this term is “pulling the rug out from under you. It occurs when a developer uses false promises about a cryptocurrency’s future value to entice investors and then disappears without completing the project.

Decentralized finance ventures that aim to disrupt established businesses like banking and insurance are prone to rug-pulling. They are a new addition to the NFT projects. The SQUID game token rug pull (2021) saw a price surge of 23 million percent in just one week, while the Thodex fraud (2021) saw the CEO take off with $2 billion in user funds without letting anybody else have access to them. If you want to protect yourself from being a victim of a cryptocurrency scam, make sure you only buy and sell digital currency on a reputable and well-regulated exchange.

Types of Rug Pulls

• The term “liquidity stealing” refers to the practice through which token creators siphon off all of the currency from the liquidity pool; because of this, the value of the money is practically wiped out, and its price falls to zero.

• Tokens can only be sold by the developers, who have programmed the tokens such that no one else can sell them. The next step for the developers is to sit back and watch as ordinary people use the paired currencies to purchase their brand-new cryptocurrency. When the price starts moving in their favor, they sell their holdings and leave behind a worthless token.
• “Dumping” describes the practice whereby developers sell off their massive token holdings very quickly. This leads to a drop in price and leaves investors holding worthless tokens.

Methods for Identifying Rug Pulling:

Investing time into learning about the people behind the project is essential. To determine a cryptocurrency’s true worth and acquire all the relevant data, it is important to look at the people behind the project rather than just the code. Having developers remain anonymous is a red flag. A cryptocurrency project’s white paper can be used as evidence that it is legitimate if it includes all relevant information and is written following applicable laws and regulations.

• One of the simplest methods to tell a legitimate cryptocurrency from fraud is to see if it has any liquidity locks. If there is no liquidity lock, the project’s creators can increase the total number of tokens available.
• When coding a token for a harmful project, it’s possible to set limits on sale orders that restrict confident investors from selling while allowing others to do so. These sorts of sales restrictions are common in fraudulent endeavors.
• The rapid increase in token value with a comparatively limited number of investors: It’s important to exercise caution while dealing with sudden, large price fluctuations in a brand-new cryptocurrency. There is a higher likelihood of a scam if the token cannot be exchanged for anything of value.
• For new cryptocurrencies, it is expected that they will be subjected to a formal code audit by a credible third party. However, this has yet to happen. The audit must be verifiable by a third party. The on-chain activity of a crypto asset can be analyzed by looking at its transaction history in the blockchain. This includes the most recent trading volume, liquidity, and the number of DEXs approved as legal crypto asset exchanges.
• If the project is listed only on a few DEXs and has a very low trading volume, it is almost certainly a scam.
• Keep your cool, and don’t let FOMO get the best of you; con artists use this common tactic to get investors to pull the rug out from under them. One must compare existing information with the most recent asset market developments. Since most new coins will begin their existence slowly and modestly, you should be wary of coins that feature an abundance of advertisements.

How to Avoid Rug Pulls?

• Read and review the token’s smart contract audit.

• Check to see if the company exists and has a registered address.

• Check to see if the management and persons engaged are authentic and exist. For example, you may see if the team is on LinkedIn and Twitter and if the names match.

• If the earnings on a new coin appear to be suspiciously high and the coin does not turn out to be a rug pull, it is most likely a Ponzi scheme.

Conclusion

DeFi is an exciting movement that aims to democratize finance and make the most profitable opportunities available to everyone, wherever and without restrictions. However, this leaves it susceptible to fraudulent schemes. Keeping your vigilance and eyes open might help you have a safe and productive interaction. Investors can avoid these scams by researching extensively and looking for obvious signals. Before investing, always do your homework and only invest what you can afford to lose.

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