Cryptocurrency

What Is a Rug Pull – How Does Rug Pull Operate

Have you ever stumbled upon an alluring cryptocurrency project that promised unearthly rewards only to discover afterward that it was a fraud? Only in 2021, DeFi scams and thefts totaled about $10 billion, an increase of 81% from 2020. Although several scams frequently occur within the bitcoin world, rug pulls are undoubtedly the most well-known – Over 35% of all cryptocurrency fraud profits came via rug pulls. The following information can help you keep informed and reduce risks.

What Is a Rug Pull?

In the crypto industry, the act of crypto developers abandoning a project and escaping with investors’ money is known as a rug pull. Rug pulls are frequent in the decentralized finance (DeFi) space, especially on decentralized exchanges (DEXs), when malicious individuals create a coin, list it on a DEX, and afterward pair it to a well-known coin like Ethereum. Rug pulls thrive on DEXs as these platforms, in contrast to centralized digital currencies, let users offer tokens for free and without oversight.

How Does Rug Pull Operate?

Rug pulls are frequently carried out via backdoors that have been purposefully included in the smart contracts of the project, enabling developers to drain and modify staked or otherwise locked tokens. Rug pulls function similarly to pump-and-dump schemes in that they both rely on false information, shilling, and the fear of losing out to succeed.

Rug pulls occur when insiders combine their token with another token, like Bitcoin (BTC) or Ethereum, and make off with the majority of user cash (ETH). Large developer pre-mines, which are frequently concealed from investors or passed off as a project vault, developer fund, or eventual burn, are another frequent method.

What Are the Types of Rugs Pull?

A rug pull fraud may be broadly categorized into three different schemes; these are:

  • Liquidity Stealing: It is a scam in which a developer creates a liquidity pool with minted tokens and digital currency.
  • Limiting Sell Orders: In this, the investors themselves buy a cryptocurrency and allow only a certain wallet to buy tokens.
  • Dumping: The developer often merely dumps a sizable portion of the project’s tokens on the open market, driving the price drastically down.

How To Spot Rug Pull?

Since there are no centralized oversight or reporting requirements for the actions that occur in this area, rug pulls typically occur in the decentralized finance (DeFi) network. Therefore, even while the potential earnings from DeFi might be quite alluring, particularly in a setting where many other investments have poor yields, it is crucial to be aware of the warning signs of fraud.

The rug pull can be spotted based on:

  • Liquidity
  • Skyrocketing prices
  • Naming tactics
  • Marketing tactics
  • Background research

What Are the Major Crypto Rug Pulls?

A rug pull happens when a developer gathers funding but leaves the project unfinished, leaving investors with a worthless asset. The popular crypto rug pulls are:

  • OneCoin
  • Thodex
  • AnubisDAO
  • Meerkat Finance
  • Iron Finance

How To Protect Yourself from Getting ‘Rugged’?

To protect yourself, from being rugged, the following ways should be followed:

  • Before investing in a project, research the potential for a rug pull.
  • Avert projects that make bold claims of quick profits.
  • Avoid funding initiatives if the team is unnamed.
  • Invest in initiatives having a history of success over time.
  • Avoid doing ventures with expensive expenses.
  • Invest in initiatives that have a precise, well-defined plan.
  • Invest in initiatives that have undergone an external audit.

Conclusion

DeFi has lost hundreds of millions of dollars due to rug pulls, which put its existence in jeopardy. The emergence of these criminal activities has several negative effects on the sector’s expansion. Their recurrence has turned away some potential investors, and there are now a lot more government controls in this area. Watch out for any warning signs, such as a dubious founding team, a weak white paper that fails to convey the project’s spirit, and pushy marketing techniques.

About the author

Talha