Rug Pull: Definition, Meaning and Examples
A single lucrative opportunity that can be the cause of huge loss is a rug pull, apart from the opportunities in the world of cryptocurrency. One of the most common scams that rocks the whole crypto space can be described as a project’s cryptocurrency developers deceiving investors that they are working on a project and then vanishing with the money. Here we will explain, how these rug pulls operate, and how can an average person avoid being conned.
What Is a Rug Pull?
A Boulder or rug pull is a scam in the cryptocurrency and decentralized finance (DeFi) space where a developer pulls out all the liquidity from a project rendering it useless. With the use of these words juxtaposition draws to mind a softer feeling while not in a particularly pleasing or positive manner, it essentially describes an action in which a rug is rapidly removed from beneath someone’s foot making it impossible for them to maintain their balance.
With the use of PROMISED X or high returns, developers use these to lower token launch or project launches, where they are expected to put in cash. With such extreme promotions, developers are able to garner huge cash flow but this also means that the people putting money into this in the hope of getting tokens are rendered with worthless currencies. Consider yourself protected from falling as a result of knowing what makes you secure, especially against new or announced low profile projects.
The Negative Effects of Rug Pulls in the Crypto Space
The crux of the multitude of fraudulent schemes crypto is rug pulls. These along with other schemes like phishing and ICO’s result in dissatisfaction for the customers and result in loss in trust of the entire ecosystem of the crypto space. Which in turn leads to there being a large loss of money in the entire investor pool.
The Mechanics Behind Rug Pulls
These rug pulls are tied with projects that include coins, tokens and NFTs and are usually swept in with famous cryptocurrencies like ETH. These scammers tend to convince the public into investing in the scheme by making false promises along with advertising it through an influencer or celebrity. Once the investors have been duped and the value of the project increased sufficiently the scammers tend to withdraw the funds and leave the project in ruins.
You can further class rug pulls into two categories:
- Hard Pulls
When the development team is SOS, they remove all liquidity from the token meaning the value of the token bursts opens into free fall thus rendering the token to be worthless.
- Soft Pulls: To mitigate their losses, developers utilize soft pulls in which they over time withdraw smaller sums of money from the project. They might claim to still be working on the project by updating users or posting on their social media pages, however in the end, they leave everyone behind along with the funds that were invested into the project.
How to Recognize and Avoid Rug Pulls
Rug pulls can be a pain to endure however in the event that you do remain cautious there are several ways you can avoid threatening situations:
Warning Signs:
- Anonymous Teams: Only those working on legitimate projects can be expect to have their teams be fully open with the public, especially their credentials.
- Unrealistic Returns: Any promises that are made that are outlandish and high in terms of returns with no risk involved in doing so should be looked at carefully.
- Lack of Audits: In order for a project to be deemed safe, it must go through audits, audits help uncover hidden risks that other do not see.
- Centralized Liquidity Control: Higher risk is posed on projects that have developers who have access to the liquidity pools now and in the future.
- Misleading Whitepapers: Scams and fraud may happen during any phase of a project, the documents detailing the project are no exceptions to this rule, this is why clear and concise whitepapers are essential.
Preventative Measures:
- Conduct Thorough Research: Investigate the team, community, and project background. Avoid projects with a vague structure or claims that cannot be substantiated.
- Check Liquidity Pools: Always check that a project possessed a reasonable and consistent liquidity pool.
- Use Reputable Platforms: Use well-known exchanges with significant security measures to purchase.
- Monitor Community Activity: Always consider an active, engaged community as a positive sign.
- Diversify Investments: Do not put all your eggs in one basket.
Rug Pull Notable Examples
For over the years, there has been numerous rug pulls that have happened over the years that have entered into high ranks marking a warning for everyone in the crypto space to be vigilant:
- OneCoin:
This was among the largest and most infamous in the list of scams in the crypto market and the promise by OneCoin was to develop a cryptocurrency and it did so. But it never created any real cryptocurrency nor a block chain. It sky rocketed investors investment to billions of dollars through network marketing before its creators absconded with the money.
- Squid Game Token:
This was launched in 2021 alongside a Netflix series and gained significant popularity alongside the show. But there was severe criticism of it later because the valve was raised excessively and the liquidity was withdrawn by the government. Due to there being a sell function that was blocked it resulted in millions of dollars worth of losses.
- Thodex:
The Turkish cryptocurrency exchange Thodex ceased trading abruptly in 2021.
Previously, it had been enticing the investors with its rate of return and competitive pricing. The site bilked more than 400,000 people, causing a loss of more than 2 billion dolars.
These cases illustrate the varied strategies that scammers employ and bring to fore the need for being extra careful while handling or working on new or unknown tasks.
Conclusion: Keep an Eye Out, and Identify the Telltale Signs
The possibility of rug pull should be taken into consideration as it constitutes a serious risk in the world of cryptocurrency and it leads to negative or loss of investment in its confidence aspect. In this case, however, the only way you can safeguard yourself is by being alert and interpreting the signs of a possible scam. In addition, when doing extensive background checks, working with reputable sites, and spreading your equity over several levels, the chances of being completely ripped off in a rug pull can be drastically lessened. But most importantly, to be able to safely maneuver in the crypto environment, one must remain aware and alert.
