What is a rug pull in crypto?

1. What is a rug pull in cryptocurrency?

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 and 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.

When trying to return the funds sent, the attackers will point out that they need to pay a commission to do so. The Better Business Bureau warned that the criminals will swindle as much money as they can until the victim is finally convinced that they have fallen into a trap.

2. What are the various types of rug pulls?

There are three main types of rug pulls in crypto: liquidity stealing, limiting sell orders and dumping.

Liquidity stealing occurs when token creators withdraw all the coins from the liquidity pool. Doing so removes all the value injected into the currency by investors, driving its price down to zero.

These “liquidity pulls” usually happen in DeFi environments. A DeFi rug pull is the most common exit scam.

Limiting sell orders is a subtle way for a malicious developer to defraud investors. In this situation, the developer codes the tokens so that they’re the only party that is able to sell them.

Developers then wait for retail investors to buy into their new crypto using paired currencies. Paired currencies are two currencies that have been paired for trading, with one against the other. Once there is enough positive price action, they dump their positions and leave a worthless token in their wake.

The Squid Token scam exemplifies rug pulls of this kind.

Dumping occurs when developers quickly sell off their own large supply of tokens. Doing so drives down the price of the coin and leaves remaining investors holding worthless tokens. “Dumping” usually occurs after heavy promotion on social media platforms. The resulting spike and sell-off are known as a Pump-and-Dump Scheme.

Dumping is more of an ethical gray area than other DeFi rug pull scams. In general, it’s not unethical for crypto developers to buy and sell their own currency. “Dumping,” when it comes to DeFi cryptocurrency rug pulls, is a question of how much and how quickly a coin is sold.

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