What Is A Rug Pull?
A rug pull is an exit scam where crypto developers swiftly abandon an ongoing project, taking all of the investor’s funds with them. They pull the rug from under investors’ feet.
How Does A Rug Pull Work?
Rug pulls are most common within Decentralized Finance (DeFi), namely Decentralized Exchanges (DEXs).
On DEXs coins are able to list without an official audit such as on Centralized Exchanges and these coins are able to be created for free using open source standards such as ERC-20.
The fraudulent developers will pump the price as high as possible before dumping their holdings, which is usually a majority of the circulating token.
Signs Of A Rug Pull
Liquidity
A liquidity lock is a feature encoded within a smart contract that won’t give developers their funds until well after an ICO. This prevents developers from quickly selling off their tokens.
Liquidity should also be locked in the liquidity pool, this metric called total value locked (TVL) defines the total amount of assets deposited within a project. Ideally, this should be over 80% of the project’s market cap.
Limit Orders
Bad actors can encode a limit on selling tokens within the project. This would allow for users to buy the token, but not to sell it, or make it extremely difficult to do so. Although, the developers would make it so that they would be able to sell.
Unknown Developers
Despite the developer of the largest cryptocurrency Bitcoin remains anonymous, anonymity has become a potential red flag in recent times.
The credibility of developers should be known and their track record verified and their history researched. Having anonymous developers makes it easier for them to potentially get away with a scam or hide their relation to a previous one. No face, no case.
Appearing Out Of Nowhere
A legitimate project should be in development for a long time. This is in comparison to a scam coin which is developed in little to no time, usually days or weeks.
These projects are accompanied by a lot of hype, claims that seem too good to be true, and a lot of influencer promotion. These factors will drive the price high in a short amount of time, where people will FOMO in, bringing more and more money in and driving the price higher and higher – all in favour of the scammer.
High Yields
High yields are a big red flag, although investors are very often blinded by the claims for triple-digit yields. If something seems too good to be true, it very likely is. Although high yields don’t necessarily indicate a scam or Ponzi scheme, they do equate to higher risk.
Due diligence is a key factor in avoiding a rug pull. Looking at the tokens whitepaper, roadmap, tokenomics, distribution, liquidity, team, and factors listed above is very important. Sites such as TokenSniffer and RugDoc scan projects for potential fraudulent code and activity.
