What Does Rug Pull Mean?

In the ever-evolving world of cryptocurrency, a "rug pull" is a type of scam where developers suddenly withdraw all funds from a project's liquidity pool, leaving investors with worthless assets. This malicious act often leads to significant financial losses for unsuspecting investors.

What is a Rug Pull Mean?

A rug pull is a planned scam in which a team raises funds by selling tokens to investors and the public before disappearing or shutting down their project quietly. This effectively steals everything the team has raised up until that point and leaves those who 'invested' (becoming victims) with valueless tokens.

Types of Rug Pulls

Hard Rug Pulls

Hard rug pulls involve developers coding malicious backdoors into their smart contracts. These backdoors allow the developers to rug funds on liquidity pool. A completely scam method, from the beginning and aimed to deceive investors when a large amount of investment capital is already buried in the project.

Soft Rug Pulls

Soft rug pulls occur when developers suddenly sell off their own large holdings of the project's token, causing a massive price drop. This is not always illegal, but it's very immoral and can destroy the returns of other investors. Soft rug pulls exploit market dynamics, thus crashing the value of a token.

Signs of a Potential Rug Pull

Anonymous or Unknown Developers

Any projects not backed by machine learning professionals or open sourced in the past could be dangerous. Having an anonymous team does not mean a project is automatically fraudulent, but projects that have transparent and well-known teams in the crypto community should be preferred.

Lack of Audits

All reputable projects have third-party audits of their code to guarantee that it is secure and dependable. The absence of such audits means there is a higher chance of fraudulent behavior. Another one is to prefer the projects that are audited by famous, independent firms from the investor's perspective.

No Locked Liquidity

One common defense mechanism against rug pulls is liquidity locks. This means that locking liquidity also prevents removing all funds by the developers at once. This lock usually lasts for a period (let's say 24 hours), which provides investors with some level of security. Be careful about any project that does not involve liquidity locks.

Suspiciously High Yields

Offers of extremely high yields can be enticing but are often too good to be true. An unexpected project, which promises an extremely high ROI,may be the beginning of a rug pull or maybe part in a Ponzi Scheme. Higher revenues usually mean greater risks.

Irregular Token Allocation

You must check the distribution of coins. This is one area where a lower concentration means increased price stability risk, as if only a few wallets hold the majority of tokens they can all dump at once and potentially crash the bags price. Tokens are normally less safe, when most of the tokens are concentrated.

Famous Rug Pull Cases

Squid Game Token (SQUID)

Squid Game token that took inspiration from the popular Netflix series surged in price before developers pulled off a rug. It took just days for the price of this token to go from mere cents two over $2,800 only for developers to be gone with $3.3 million and investors left holding tokens that were now worthless.

OneCoin

OneCoin is among the biggest cryptocurrency scams of perpetuity, to a loss that nearly totals up to $25 billion. Billed as an educational cryptocurrency that would provide good returns, it instead was nothing but a very large Ponzi scheme. Although many of the top OneCoin players face legal action, but have not yet been arrested.

Evolved Apes

At the time of its release, Evolved Apes was an NFT project that offered a number of gaming and revenue-generating features. Shortly after launch, the Evil Ape vanished with $2.7 million in investor funds and left behind a dead project.

How to Protect Yourself from Rug Pulls

Do Your Research

Always research the project's developers, their background and place in community under the projects you are going to invest. Find projects with strong & transparent teams and backers

Verify Token Allocation and Liquidity

Check the token distribution and if liquidity is locked using blockchain explorers. More secure investment - If the token supply breakdown follows a good distribution and there is locked liquidity.

Demand Audits

The funds should only be parked in projects that have already been thoroughly audited by external parties. This internal process can cause information security flaws or malicious code buried into solidity codes.

Be Skeptical of High Returns

High returns often come with high risks. Be cautious of projects offering returns that seem too good to be true, as they may be setting up for a rug pull.

Stay Updated

Be sure to follow crypto news and updates regularly as you may learn more about potential scams or fraudulent projects. Actively communicating with the community and keeping an eye on reputable sources will help you recruit also counteracting potential risks.

Conclusion

Rug pulls are one of the big dangers in crypto, but you can offset that risk by keep yourself up to date and being careful. Remember to research in-depths, check if projects are valid and good deals often looks to good. Learning to recognize the red flags of a potential rug pull and acting on them sooner rather than later will help you better navigate through the world of crypto.