The term “rug pull” comes from the English expression “to pull the rug from under someone”, suggesting that investors are taken by surprise and left vulnerable. In the cryptocurrency world, a “rug pull” happens when the developers of a crypto project (usually a token or a DeFi project) abandon the project and run off with investors’ funds. In other words, the team behind the crypto project creates a seemingly promising token or project to attract funding, and after they attract enough capital, they shut down the project, liquidate the funds, and leave investors with no chance of recovery.
How does a “rug pull” work?
A rug pull can occur in different ways, but the most common ones are as follows:
1. Liquid withdrawn from a DeFi platform
DeFi projects rely on providing liquidity for decentralized exchanges. Scammers introduce a large amount of liquidity at the beginning to gain trust, but then abruptly withdraw the funds, making it impossible to trade the token.
2. Scam code token
Developers write code that allows the team to control token sales and price. A common example is including code that prohibits buyers from selling their tokens while the developer team sells all their tokens for profit.
3. Fake or abandoned projects
In such cases, projects aggressively promoted through social media and influencers attract gullible investors. Once the funds are raised, the project is abandoned and the associated websites and accounts disappear.
Examples of notable rug pulls
- Thodex (2021): an exchange platform in Turkey where the founder disappeared with over $2 billion in customer funds.
- Squid Game Token (2021): Nearly $3.4 million was lost by investors attracted to a project inspired by the popular TV show. The token was heavily promoted but was bypassed by any real liquidity.
These incidents show how frequent and sophisticated such schemes can become.
How to spot and avoid a rug pull
The best defense against a rug pull is information and caution. Here are some signs that should raise alarm bells:
1. The anonymous team
Projects with anonymous developers or no verifiable team information are risky. A serious project will have full transparency.
2. Rapid growth and suspect prices
If the value of a token increases rapidly and for no obvious or fundamental reason, it may be a sign of manipulation.
3. Lack of security audit
More and more successful projects are being audited by blockchain security firms. Lack of audit or ambiguous documentation can be a problem.
4. Limited technological capacity
Check if the source code is available on GitHub or similar platforms. Opaque or malicious code may reveal malicious intent.
Why are rug pulls on the rise?
The growing popularity of blockchain-based technologies and the crypto market is attracting many investors as well as scammers. In particular, the DeFi space, which is not as regulated, offers opportunities for those who want to take advantage of the lack of clear regulations.
How to invest wisely
All is not lost! With a few simple steps, you can start investing in a safer way:
- Thoroughly research each project you want to invest in. If you want to learn more about the crypto universe, we invite you to read our blog post: The cryptocurrency market: the $3 trillion industry that almost nobody understands.
- Only invest amounts you can afford to lose. Crypto markets are risky even without scammers.
- Use secure and reputable platforms like Abarai to transact.
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