Rug Pull is a term that describes when developers suddenly abandon a project and run away with investors’ money. So what is a Rug Pull? How to stay safe from Rug Pull? The following article will explain the above questions as well as explain in detail about Rug Pull.
What Is a Rug Pull?
Rug Pull is a form of cryptocurrency scam, which typically occurs when a group pumps their project tokens, which disappear with investors’ funds. So you or other investors will own a worthless asset.
The term Rug Pull is derived from the idiom “to pull the rug out” from someone, which refers to a person intentionally pulling the rug from under their feet to affect someone else standing on it. Similarly, in the crypto market, rug pulling is similar to a project suddenly withdrawing liquidity, causing investors to “suffer”.
To make it easier to understand, imagine that a team of developers creates a project tied to a new cryptocurrency token, they do everything they can to make this coin increase in price sharply, and then withdraw it all. money out of the market, causing the coin value to drop significantly, even reaching zero. In short, Rug Pull is a common type of fraud in the decentralized finance market (DeFi).
Why do Rug Pulls Happen?
These fraudulent activities are not a recent development; rather, they represent a continuation of a longstanding history of deceptive investment schemes.
In fact, these scams are not exclusive to the realm of cryptocurrencies but rather constitute a broader societal issue. Cryptocurrency merely serves as the latest conduit for such malfeasance. The specific risks associated with cryptocurrencies stem from the lenient regulatory environment for fundraising and the strong emphasis on decentralization.
Cryptocurrency projects frequently employ “smart contracts,” which are contractual agreements governed by computer code rather than traditional legal frameworks. While this approach may offer advantages in reducing transaction costs, it concurrently introduces challenges in tracing or recovering funds in the event of unfavorable outcomes.
This structural setup, coupled with the fervor surrounding nascent projects promising substantial returns and the relative anonymity inherent in the crypto space, creates an environment wherein unscrupulous developers can exploit investors through schemes such as rug pulls.
Types of Rug Pulls
Rug Pull can be divided into the following 3 types:
Usually, scammers will offer dizzyingly high APY levels to attract investors to put liquidity into the Pool. With the Pool’s characteristic being that it has not been locked, the value continues to increase abnormally, until the Rug Pull’s monetary target is reached. At that time, the scammers will withdraw all existing assets in the Pool and disappear “without a trace”.
Disable the ability to sell tokens
With the trick of using fraudulent code, investors can only buy, not sell. That means new Rug Pulls have the right to sell coins to users. Right now, when the price of the coin is pumped up, many traders try to sell the coins but are disabled.
Developer withdraws cash
With this form, malicious developers will create a “ghost” project. Meaning they make themselves a large portion of the tokens or buy them on the market at extremely cheap prices. They then made promising promises to investors about the project’s development potential. As a result, traders rushed to buy worthless coins. As for the developer, they will withdraw cash from their shares.
What Does a Rug Pull Scheme Look Like?
The way a Rug Pull happens usually comes from someone taking a huge amount of money from a project’s Liquidity pool, causing the token price to suddenly drop due to a large amount of liquidity being lost.
First, the scam team will issue a token, NFT, or an asset in the form of a smart contract, etc. put those tokens into a Liquidity Pool, and provide liquidity by adding another amount of valuable tokens. (such as BTC, ETH, BNB,…) or stablecoins to create initial value for scam tokens.
The next step is to push the price, create FOMO, and communicate to entice others to buy tokens, causing the token to increase in price rapidly. The token price of x100 x200 makes even more FOMO people rush to buy. causes prices to increase even more.
At this point, the team only needs a few simple steps to withdraw all liquidity of the scam project. Depending on the withdrawal operation, it can be divided into 2 types of Rug Pull: Fast Rug Pull – token price drops close to 0 immediately and Slow Rug Pull – token price gradually drops over a long period of time.
The explanation for the team being able to Rug Pull a project often lies in the fact that from the beginning the team creates Smart contracts and installs them into the command lines, in order to facilitate sudden capital withdrawal or make investors only buy but cannot sell. Another way is to hold the majority of tokens in your hand to have voting rights, thereby being able to pump and drain the project’s liquidity freely.
Hard Pulls vs Soft Pulls
Rug pulls come in two flavors: hard and soft. Hard pulls involve developers sneaking malicious code into their token, essentially creating hidden traps in the project’s smart contract. This is a clear intent to commit fraud from the start. Liquidity stealing, another form of hard pull, is when developers take away the project’s funds.
On the softer side, soft rug pulls happen when token developers rapidly sell off their crypto assets. This leaves the remaining investors holding a significantly less valuable token. Dumping assets like this is considered unethical, though it might not carry the same level of legal consequences as hard pulls.
List of Notable Rug Pull Scams
OneCoin is essentially a massive Ponzi scheme that is considered the largest cryptocurrency scam to date – stealing an estimated $25 billion from investors. While authorities cracked down on OneCoin and arrested its leaders in 2017, several of its founders disappeared and the scam is still ongoing. And the worst thing is that this Ponzi scheme never even had cryptocurrency in the first place.
In another multi-level, marketing-based Ponzi scheme, BitConnect stole an estimated $2 billion. The scam project claims to have an unparalleled trading algorithm to attract investors. Furthermore, when the project crashed in January 2018, its founders launched BitConnectX, a second ICO rug pull.
The BitClub network went down as the largest cryptocurrency mining Ponzi scheme to date, using fraudulent backers and push marketing tactics to attract capital. The value proposition was that investors would receive guaranteed profits from their Bitcoin mining efforts, but footage of their mining rigs was proven to be stolen from another company. The founders of this scam collected approximately $722 million from investors in December 2019.
The Squid Game token is a recent high-profile rug pull, capitalizing on the hype surrounding the popular Netflix series “Squid Game.” The price of the SQUID token has increased over 230,000% in less than two weeks and the ability of investors to sell the token has been disabled. On November 1, 2021, the developers collected an estimated US$3.4 million from investors, as the token dropped from US$2,861 to US$0.01 in just five minutes.
How to Stay Safe from Rug Pulls?
To safely invest in crypto without getting caught in the Rug Pull, you can do the following steps:
- Check the project’s development team information, the information needs to be complete and have a website or personal information representing the project. If you are more careful, you can contact the places where that representative used to work to double-check.
- Check the activity level of the project’s social networking sites.
- Carefully examine the Tokenomic of the project
- Check the source code, Audit certification, and activities on Github of the project.
- Look at reputable review sites that comment on the project, but you need to keep a neutral viewpoint to avoid the situation where review sites deliberately say good things about the project while ignoring the bad points.
- Check on-chain transactions to look for unusual signs in transactions.
As the blockchain industry is growing bigger, rug pulling is becoming more popular in crypto and DeFi as well as NFT, GameFi projects. You need to research carefully and look for clear signs to avoid them.