You might have come across the term crypto rug pull in the news over the years, but what does it mean? Different to a pump and dump scheme, we explore the rug pull crypto meaning to help you gain a greater understanding of the industry.
What is a Rug Pull Crypto?
A rug pull is a malicious cryptocurrency industry technique where developers abandon a crypto project and flee with investors' funds.
In the decentralized finance (DeFi) ecosystem, particularly on decentralized exchanges (DEXs), bad actors create a token and list it on a DEX, then link it to a major digital currency like Ethereum.
Developers will often also create hype around the token on Telegram, Twitter, and other social media platforms by abruptly pumping loads of money into their liquidity pool in an attempt to reassure investors. Once a large number of unsuspicious investors swap their ETH for the offered token, the creators drain everything from the liquidity pool, bringing the coin's price to zero.
This is typically seen in a new project, and not in established projects such as Bitcoin, Ethereum, etc.
Rugs Pools and DEXs
Rug pulls thrive on decentralized exchange platforms like DEXs since they allow users to list tokens without undergoing an audit, unlike centralized cryptocurrency exchanges. Furthermore, creating ERC-20 tokens on open-source blockchain technologies such as Ethereum is simple and free. These two features create the ideal climate for a rug pull, and are being used against the unsuspecting public.
What To Look Out For
While this is unlikely to happen to established cryptocurrency projects, there are many crypto projects out there, especially new ones, that might signal a red flag.
It's important to note that the prices of tokens in a pool are determined by the current balances of each. To prevent being caught off guard, ensure there is liquidity in a pool. However, this is only the beginning; you must also look for any lock-in requirements on the pooling system. Most reputable firms lock pooled liquidity for a certain length of time.
A coin that has risen in price within hours is another common feature of a rug pull. A rug pull coin, for example, might jump from 0 to 50X in just 24 hours. This scheme is intended to generate FOMO among investors and encourage them to invest even more money into the project.
An "unruggable" project is one that doesn't have a significant number of tokens held by the development team. A project may be classed as "unruggable" if it does not include the signature big number of team-held tokens that could be stolen through a rug pull or exit scam.
An unruggable project is one in which the team gives up any ownership of tokens, such as those they would have received during a presale.
Are Crypto Rug Pulls Illegal?
While crypto rug pulls should be illegal, unfortunately, due to the youth of the crypto industry the laws surrounding rug pulls are not the legal system. Unfortunately, many criminals have and continue to get away with rug pulls and related crimes.
Biggest Rug Pulls
One of the biggest rug pulls to take place in the crypto industry is the Squid game crypto rug pull, which took place in late 2021.
The token, which was named after the popular Netflix series Squid Game was created by an unknown group, and grew dramatically in value with each coin rising from next-to-nothing to an astounding $2,861.
At the peak of its performance, the website was taken down and the promoters were unable to be reached. The liquidity suddenly vanished, sending the value of the token plummeting to near zero while the developers took home more than $3.3 million. Over 43,000 investors had the rug pulled out from under their feet as they suddenly become holders of a worthless token.
It was subsequently discovered that the project's creators had included an anti-dumping mechanism preventing individuals from selling their tokens, indicating that it was designed to be a rug pull from the beginning. By using the name of a well-known TV program and gaining a lot of media exposure, the creators were able to boost public awareness and lend the fraudulent coin a sense of legitimacy.
While not terribly common, rug pulls happen from time to time and it's in investors' best interests to know about them. Consider these tips mentioned above when navigating the crypto space, and be sure to fully vet a project's quality or investment potential before parting ways with any money. Choosing established cryptocurrency projects is always advisable, particularly over a new project that has garnered a lot of hype. Unfortunately, crypto rug pulls are here to stay, but that doesn't mean that you need to be involved.