Rug pull

Rug pulls are a type of scam and DeFi on-chain abuse in the crypto world. A development team promotes their project's token / coin and then disappears with all the liquidity, leaving their investors with a worthless asset.

Rug Pulls: The Dark Side of DeFi and DEXs

Rug pulls usually take place in the DeFi ecosystem, especially on a decentralized exchange (DEX). Fraudulent individuals create and list their token and then pair it with some large cryptocurrency such as ether (ETH). Rug pull thrives on DEXs because these types of exchanges allow users to offer tokens for free and without any audit, unlike centralized exchanges (CEXs). In addition, creating tokens on blockchain protocols such as Ethereum is easy and free of charge. Scammers use these two factors to their advantage.

Once a project has reached a certain value, scammers have two options: hard or soft rug pull.

Hard rug pull

It occurs when developers deliberately modify the terms in a smart contract. This gives them access to the total liquidity of the project and allows them to easily withdraw it. An audit should prevent that. It's not a 100% guarantee, but it can reveal flaws –  either intentional or unintentional – in most cases.

Soft rug pull

It occurs when developers who are rewarded with project tokens start selling all their assets, driving the price down to zero.

How to reduce the risk of a project rug pull

There are a few clear signs that investors can watch out for to protect themselves from rug pulls, such as unlocked liquidity and no audit.

When looking for new projects for your investment, just answer following few questions, which will reduce the risk of entering a scam project:

• Have the developers been KYCed? If NOT, it's time to be vigilant.
• Are there any sales limits? If YES, it means that you will only be able to sell a limited amount of purchased tokens.
• Is there a liquidity lock? If NOT, then after reaching a certain attractive amount, developers can withdraw liquidity and run away.
• 1000 % appreciation in just a few days? If YES, then the project can't run for long without an added 'use case'.
• Has the project been audited? If NOT, then it is an obstacle regarding the safety of the entire project.

Always ask yourself these questions when researching a crypto project; you will significantly reduce the risk of losing your funds.

An example of a rug pull project:

Squid Game

The Squid Game project with its SQUID token has been one of the largest rug pulls in the crypto world. You may know its film version from Netflix.

The creators of this project have promised to create a money-making game that would require a certain amount of SQUID tokens to enter.

Unlike the TV series, where there was a limit on the number of possible prizes and participants, the Squid Game project proclaimed there would be no restriction on the number of winners, and it would accept an unlimited number of participants.

In just a few days after token sales began, the project gained a significant audience on social media and the price skyrocketed from a few cents to several dollars along with a lot of media attention. The SQUID token value was rising at a rapid rate, and  it was then that the developers pulled the rug unexpectedly, tanking the price per token from 3,000 USD to virtually zero in just about 5 minutes.

Because of the anti-dumping feature, many investors would have lost their life savings as they were unable to sell their tokens. The developers deleted the official website after depriving investors of millions of dollars.

To add insult to injury,  the last game of the TV series was called a "Rug pull."

FOMO was really huge here and investors could not resist buying in as they watched the price fly up.

The lesson everyone should take from this case is that you need to DYOR thoroughly prior to making any investment, no matter how good the project seems to be.