What Is A Rug Pull?

Snorlax

Nov 18, 2022•3 min read

In the cryptocurrency business, a "rug pull" occurs when a development team abruptly abandons a project and sells or eliminates all of its liquidity. The name is derived from the expression "take the rug out from under someone," which means to abruptly remove support.

Rug pulls flourish on DEXs because, unlike centralized cryptocurrency exchanges, these types of exchanges enable individuals to offer tokens for free and without audit. Furthermore, token creation on open-source blockchain protocols such as Ethereum is simple and free. Malicious actors make use of these two elements.

Rug pulls are most commonly associated with Decentralized Finance (DeFi) projects that supply liquidity to Decentralized Exchanges. DeFi tokens issued by new projects are typically not listed on Centralized Exchanges (CEXs), making a DEX the only source of liquidity. In an IDO, investors buy the coin, and the proceeds are generally locked for a set length of time to ensure liquidity.

What Does Being Rug Pulled Mean?

The definition of being "rug pulled" is as follows: the developers behind a project would heavily promote the launch of their new project, usually through crypto influencers, and typically make bold promises of 100X returns or more, aimed at "investors" looking for quick riches.

The creators would then launch their token and build a pool on decentralized exchanges like as Uniswap or Pancakeswap, where anybody may do so. When a large number of naive investors exchange their ETH for the listed token, the authors remove everything from the liquidity pool, causing the coin's price to fall to zero.

How to stay safe from rug pulls?

1️. Prioritize established projects

Many new enterprises lack a track record to demonstrate their validity or safety. While investing in an NFT project like Bored Ape Yacht Club is not without risk, the initiative has built confidence in its community over time. Some scams (but not all) will lazily copy features from other popular projects, indicating that the project lacks originality and long-term value for investors.

Furthermore, centralized marketplaces such as Binance or Coinbase (COIN) have certain standards in place and only list legal and safe assets, though their listings are not an indicator of quality or potential for gains.

2. Projects of research and their creators

While it may be tempting to jump into a hyped-up project right away, there's a reason why "do your own research" is a common refrain in the crypto space. Before determining whether to invest, it is critical to properly investigate the project, its personnel, and the blockchain's characteristics.

While the founders of NFT or DeFi ventures frequently remain anonymous, this technique may also shield them from being held liable if the project's launch goes awry. Many genuine DeFi projects will also audit their smart contracts to verify there are no defects in their code, which is a positive indicator for investors. However, this process can be costly and time-consuming, and audits do not guarantee that a project will not be tampered with later on.

Furthermore, it is beneficial to search through a project's website, Discord channel, roadmap, white paper, and associated materials for anything that appears suspicious.

3. Be wary of projects that promise huge profits

Because DeFi scammers require liquidity to fund their scheme, any project that promises sky-high returns should be carefully considered. Staking rewards and yield farming are two common features in DeFi ecosystems that scammers may try to take advantage of or make false promises about.

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