What is Rug Pull?

In the cryptocurrency world, a rug pull is a malicious act, or a scam, where crypto developers quit a project and exit with the investor’s capital. Typically, rug pulls take place when fraudulent developers issue a new crypto token, pair it with a leading cryptocurrency like Ethereum, then increase the price and try to attain as much value out of them as possible prior to abandoning them at the same time the price goes to zero.

These can also be seen as a sort of decentralized finance (DeFi) explicit or an exit scam.

To be more specific, when a large number of uninformed investors exchange their ETH for the specified token, the developers remove everything from the liquidity pool, causing the coin's price to fall to zero. Furthermore, to go the additional mile, fraudulent developers might build excitement on social media sites like Twitter and Telegram, infusing a significant amount of liquidity into their pool in order to encourage investor interest.

There are three main types of rug pulls:

• Liquidity stealing;
• Limiting sell orders;
• Dumping.

Liquidity stealing takes place when token producers take tokens from the liquidity pool, they eliminate all of the worth pumped into the currency by investors, pushing its price to zero.

Limiting sell orders, on the other hand, is a deceptive method used by unscrupulous developers to mislead investors. Therefore, these developers program the tokens so that they are the only ones who can sell them. The Squid Token scam is an excellent example of this type of rug pull.

When developers immediately sell off their own enormous number of tokens, this is known as dumping. As a result, the coin's price falls, and the investors that remained are left with useless tokens. In regards to that, dumping frequently takes place after a lot of social media marketing. This leads to a price increase and the sell-off is referred to as a Pump-and-Dump Scheme.

Moreover, differently from centralized exchanges, DEXs let users place tokens for free without any inspection, so it is known that rug pulls function best on DEXs. Likewise, token creation on open-source blockchain technologies, such as Ethereum, is simple and free. Malicious actors make use of these two elements for their own benefit.

Keep in mind, though, that decentralized exchanges, such as Uniswap, algorithmically decide the prices of tokens in a pool based on the balances accessible at that moment. Hence, to protect yourself from falling victim to a rug pull, make sure to check the liquidity in the pool as a first step.

Besides, you should also check if there is a lock on the token’s pool because the majority of respectable initiatives are known to lock in pooled liquidity for a set amount of time.