Rug Pull: definition, meaning, examples

The crypto world offers many opportunities, but also poses risks - one of the most serious is the so-called rug pull. A rug pull happens when developers of a project deceive investors and disappear with their money. Here we explain what exactly a rug pull means, how the scam works and how you can recognise it.

• A rug pull is a scam in which the developers of a project withdraw all the liquidity and leave the project worthless

• Rug pulls are most common in the world of decentralised finance (DeFi) and new cryptocurrencies

• Warning signs of rug pulls are anonymous teams, unrealistic yield promises and lack of audits

• Thorough research and the use of trustworthy platforms are essential to avoid rug pulls

What is a rug pull?

The term "rug pull" metaphorically describes the act of pulling the rug from under someone, leaving investors destabilised. In the world of decentralised finance (DeFi) and cryptocurrencies, a rug pull is a scam where project developers withdraw all funds from a project and abandon it. The project loses its value, leaving investors with worthless tokens or coins.

Developers often create tokens and lure investors with promises of high returns or groundbreaking technologies. Once sufficient funds are amassed, they withdraw all liquidity, leaving investors in the lurch. Understanding rug pulls is vital for protecting yourself, particularly when investing in new and less-established projects.

Significance of rug pulls in the crypto world

Rug pulls are among the most damaging crypto scams, not only ruining individual investors but also eroding trust in the crypto sector. Alongside scams like phishing attacks, ICO scams and pump-and-dump schemes, rug pulls inflict significant financial and reputational damage.

How does a rug pull work?

Rug pulls involve convincing investors to buy into projects tied to coins, tokens, or NFTs, often linked to established cryptocurrencies like Ethereum (ETH). Promises of high returns and endorsements from trusted figures inflate the asset's value. The scammers then withdraw the funds and abandon the project, rendering the purchased assets worthless.

Rug pulls are categorised into hard pulls and soft pulls, which differ in execution:

Hard pull:

Developers withdraw all liquidity at once, transferring funds to their wallets. The token loses all value instantly, leaving investors with worthless assets.

Soft pull:

Funds are siphoned off gradually over time, maintaining the illusion of an active project. Developers may provide updates or engage on social media to appear legitimate, but eventually abandon the project.

Recognising and avoiding rug pulls

While rug pulls can be devastating, you can mitigate the risks by recognising red flags and conducting thorough research:

Warning signs:

• Anonymous developers: legitimate projects have transparent teams with verifiable experience.

• Unrealistic returns: be wary of promises of high, risk-free returns.

• No audits: lack of independent audits increases the likelihood of hidden risks.

• Centralised liquidity control: projects where developers control liquidity pools are high-risk.

• Misleading whitepapers: vague or overly technical documents may conceal fraudulent intentions.

How to avoid rug pulls:

• Research thoroughly: review the team, community, and project history. Avoid projects with unclear structures.

• Check liquidity pools: snsure the project has a stable and sufficient liquidity pool.

• Use trusted platforms: invest via reputable exchanges with security checks.

• Monitor community activity: a genuine, engaged community is a positive sign.

• Diversify your investments: avoid concentrating funds in a single project to minimise risks.

Known rug pulls

Rug pulls have made the headlines several times in the past and involved millions of victims. These well-known cases show how differently such scams can operate - and what lessons investors should learn from them.

• OneCoin: OneCoin is probably one of the best-known and largest crypto scams. The coin was framed by its developers as a revolutionary cryptocurrency, although in reality there was no blockchain or real cryptocurrency. Network marketing was used to attract numerous investors who expected high returns. The creators collected several billion US dollars and eventually disappeared.

• Squid Game Token: The Squid Game Token was launched in 2021 and rode on the popularity of the Netflix series. Within a few days, the price of the token skyrocketed before the developers withdrew liquidity. Investors were no longer able to sell the token as the developers had blocked the sell function. The damage amounted to several million dollars.

• Thodex: Thodex was a Turkish crypto exchange. In 2021, the exchange suddenly stopped trading and was no longer accessible. Previously, the platform advertised high returns and favourable prices for cryptocurrencies to attract investors. Thodex withdrew the money of more than 400,000 investors worth over two billion US dollars.

These examples show that it is important to remain vigilant in the crypto world. Especially with new or unknown projects, you should keep an eye on the warning signs to avoid falling victim to a rug pull.

Conclusion: Spot the red flags and stay vigilant

Rug pulls are a serious danger in the crypto world that can cost investors not only financial losses but also confidence in the entire market. It is therefore crucial to remain vigilant at all times and look out for the typical warning signs of rug pulls. By doing thorough research, using trustworthy platforms and diversifying investments widely, you can significantly reduce the risk of a rug pull.

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