A rug pull is a type of scam where the developing team of a project abandons it midway and runs off with the investor’s money.
Understanding the term
Before a rug pull takes effect, scammers pump their projects by guaranteeing unparalleled success to the investors. But when the time comes, the project is dropped, and the coin becomes valueless instantly, leaving several holders in a dire situation.
Rug pulls have three different types:
1. Restriction of Sell Orders
By limiting all of the sell orders made by investors, a fraudulent developer can fool the community into thinking they have the authority to sell tokens. But in reality, only project creators have the ability to sell.
2. Emptying the liquidity pool
Crypto enthusiasts are well acquainted with the term “dumping”. Dumping occurs when creators sell a huge portion of the total supply out of nowhere and end up crashing the token’s value.
To spot and avoid rug pulls, industries have developed contingency measures like liquidity checkers and due diligence reports.
It is a common misconception that rug pull scams thrive on decentralized exchanges and in the DeFi space due to the lack of security requirements. But in reality, both centralized and decentralized platforms are threatened by its existence.