A rug pull is a type of crypto scam that occurs when a team pumps their project’s token before disappearing with the funds, leaving their investors with a valueless asset.
Rug pulls happen when fraudulent developers create a new crypto token, pump up the price & then pull as much value out of them as possible before abandoning them as their price drops to zero. Rug pulls are a type of exit scam and a decentralized finance (DeFi) exploit.
Before learning how to spot a rug pull in crypto and why crypto rug pulls happen, it helps to understand the three different types of rug pulls.
Three types of Rug pull
Token creators withdraw all the coins from the liquidity pool.
Limiting Sell Order
A malicious code to defraud investors. Here, the developer codes the tokens so that they’re the only party that is able to sell them
Dumping occurs when developers quickly sell off their own large supply of tokens.
Hard Pulls vs Soft Pulls
Hard Rug Pulls
When project developers code malicious backdoors into their token. Malicious backdoors are hidden exploits that have been coded into the project’s smart contract by the developers.
Soft Rug Pulls
When the token developers dumping their crypto assets quickly. Doing so leaves a severely devalued token in the hands of the remaining crypto investors. While dumping is unethical, it may not be a criminal act in the same way that hard pulls are.
Rug pulls are illegal?
Hard rug pulls are illegal. Soft rug pulls are unethical, but not always illegal.
For example, if a crypto project promises to donate funds but chooses to keep the money instead, that’s unethical but not illegal.
Either way, like most fraudulent activities in the crypto industry, both types can be challenging to track and prosecute.
Turkish cryptocurrency exchange, Thodex – The $2 billion dollar theft was one of the biggest crypto rug pulls of 2021. It is also one of the largest centralized finance (CeFi) exit scams in history.
How to avoid Rug pull?
Six signs to watch:
- Unknown or anonymous developers
- No liquidity locked
- Limit on sell orders
- Skyrocketing price movement with limited token holders
- Suspiciously high yields
- No external audit
Previously in 2021, an estimated $7.7 billion was stolen from investors in rug pull cryptocurrency scams.
Before investing, it’s worth taking the time to research new cryptos and to do one’s due diligence before investing in a new project.