Crypto Rug Pull

What is a Crypto Rug Pull?

A cryptocurrency fraud known as a “rug pull,” which derives its name from the phrase “pulling the rug out,” occurs when a developer recruits investors but abandons the project before it is finished, leaving investors with a worthless commodity.

Rug pulls occur frequently in the Decentralized finance (DeFi) realm but are nearly unheard of on controlled exchanges. DeFi ventures that seek to upend established financial institutions like banking and insurance sometimes engage in rug pulls. Rug pulls have also been associated with NFTs, or non-fungible tokens, which grant digital ownership of paintings and other assets.

Developers create a new coin and list it on a decentralised exchange to carry out their hoax. Through organic content and paid material on prominent accounts, they generate talk about the token on social media.

The developer team flees with Ethereum, leaving the unwary investor with worthless tokens (or BNB, SOL, AVAX). These frauds prosper on DEXes because they let any developer list a token for free without any scrutiny; the onus of proof rests with the token purchaser. In general, centralised exchanges take tremendous precautions to safeguard their customer base.

What types of rug pulls are most typical?

Every rug pull involves criminals stealing cryptocurrency from unwary investors. In the world of cryptocurrency, there are three basic sorts of rug pulling:  liquidity snatching, and sell order sizing, and pumping- dumping,

Liquidity snatching

Many decentralised exchanges (DEXs) and crypto financing platforms depend on liquidity pools. Anybody can add cryptocurrency to these pools with smart contracts to increase the total value locked (TVL) on a Web3 protocol.

Despite the fact that crypto liquidity pools have a lot of advantages, scammers frequently use them. Developers can withdraw the monies from the protocol into their wallets and give up on the project if they forget to incorporate transparent locking mechanisms in their code.

Restricting buy orders

Unsavory programmers can pre-program cryptocurrencies to only sell when they tell it to. On DEXs, these tampered tokens are available for purchase by anybody, but they cannot be sold. To ensure that only they have control over when to sell these digital assets, developers can add commands into the code of their token.

Scammers can use their sell rights and cash out once enough ordinary investors have invested in this cryptocurrency with malicious malware. This rug pull tactic, also known as a “limited sell order” scam, prevents token buyers from selling their tokens.Such tricks are exemplified by the Squid Token scam.

Pump and dump strategy 

Scammers who “pump and dump” can create their own altcoins, but they frequently go for already-existing small-cap tokens. The con artists might begin promoting their chosen cryptocurrency on social media once they have amassed a sizeable sum of it. Due to the modest market capitalization of these cryptocurrencies, it doesn’t take many buyers to drastically increase the price.

Dumping occurs when developers sell off a sizable portion of their own tokens all at once. The coin’s value decreases as a result, leaving the remaining investors with worthless tokens. Dumping generally occurs after active social media marketing. The ensuing surge and sell-off are referred to as a “pump-and-dump scheme.”

How do you prevent a crypto rug pull?

It’s crucial to conduct extensive study before dealing with overly touted crypto projects to prevent becoming “rugged.” Here are some suggestions to prevent rug pulls:

Use only Trusted dApps:

Consider sticking with top-tier dApps like Uniswap or Aave rather than looking for up-and-coming crypto projects. It is more likely that projects with a strong community, a lengthy history, and a good reputation will provide genuine tokens and awards.

No money is locked:

Nothing prevents the project’s developers from taking all the liquidity if there is no liquidity lock on the token supply.

Rise of price of token or coin:

Significant price increases for new DeFi coins are frequent indicators of the “pump” before the “dump.”

Run a small-cap token test on a reliable decentralized exchange (DEX): 

Buy a little amount of this cryptocurrency and try to sell it on a reputable DEX like Uniswap if you have any suspicions that you won’t be able to sell a token. This cryptocurrency is certainly a limiting sell fraud if you can’t swap it.

Reliable information and genuine token addresses:

Instead than relying on social media, check out new projects on reputable coin aggregator websites like CoinMarketCap and CoinGecko. On these respected sources, you can obtain reliable information and genuine token addresses.

Unusually high yields:

It’s probably a Ponzi scheme if a new coin’s yields seem suspiciously high but it doesn’t turn out to be a rug pull. Although it’s not always a sign of fraud when tokens offer an annual percentage yield (APY) in the triple digits, these large returns typically come with an equally high risk.

Can Crypto recover after a rug pull?

Due to the variety of rug pulls, it is frequently impossible to recover. It is more difficult to retrieve money if a rug pull was carried out by an unidentified crew, but if the promoter is apprehended, they might be able to return their gains. If the project is still viable in the market, tokens may recover in cases of token dumping. However, the most typical result of a cryptocurrency rug pull is that investors never get their money back.