Will Rug Pulls Ever Cease In Crypto?

News, Opinion | December 16, 2021 By:

You could have a rough sense of what a ‘Rug Pull’ entails if you consider the term itself. Imagine if you were standing on a rug or carpet and it suddenly shifted out of your way. Cryptocurrency rug pulling is a theft method in which the creators of a crypto project take all of the liquidity from their project, making the coin useless and leaving investors’ hearts broken to million pieces.

It’s a mystery to me. Using a decentralized exchange, the fraudsters establish their own digital currency called a token. Anyone may generate tokens and list them on the exchange without going through KYC because of the exchange’s decentralized nature. As a result, in the Decentralized Finance ecosystem, it is common for people to pull the rug out from under others.

After the token is listed, they use social media hype to make big promises about what their project can do. Unwary investors put their faith in them and begin investing. Once the fraudsters have amassed sufficient funds, they drain the liquidity pools and bring the value of the crypto asset to an all-time low. As a result, investors have had their money stolen from them.

There must be an amount of the currency held in a liquidity pool in order for investors to purchase and sell a cryptocurrency. In most documented rug pulls, the scam token and a legal cryptocurrency, like Ether, were used to form a liquidity pool.

They purchase the fraudulent coin in return for their Ethereum (ETH), which is locked up in the liquidity pool and cannot be used for any other purpose. More and more ETH is pumped into the liquidity pool as more and more investors acquire the false currency and its value rises.

While the final effect of the scam is the same as that of liquidity theft, the technique is distinct from that. Code that prevents investors from returning their money to the exchange is used in this fraud.

This is how it works: Investors can purchase the fake currency, but only the creator may sell his coins due to a bogus piece of code. Those who attempt to cash in on the rising value of their coins will discover that they are unable to do so. This means that scammers will sell all of their scam tokens whenever they think the price is high enough, and they will walk away with the value of their investments.

What Are The Common Signs Of Rug Pulls?

Real cryptocurrency and Defi initiatives take years to build, whereas rug pulls appear out of nowhere. Fake initiatives frequently come with a lot of hype, making use of currently prevalent cultural memes. Something that appears suddenly and looks too good to be true in the crypto realm is almost always a scam.

Ethereum and Solana, two popular cryptocurrencies today, have a team of well-known executives who are driving their rise. A cryptocurrency or Defi project may have legitimate grounds for keeping their identity a secret from the public, and you should avoid it at all costs.

If you have a cryptocurrency, you may always check the liquidity of Defi projects. This signifies that the token has low liquidity, which may be due to the fact that the creator had a limited quantity of capital to construct the token. The more difficult it is for the developer to influence the token’s value, the lower the liquidity.

If you want people to believe that your cryptocurrency project is legitimate, it’s best to give up management of the liquidity pool and place it in a trustworthy third party. 

However, if there is no lock on the liquidity, developers have nothing to stop them from removing it and making a dash for it. However, determining whether or not the liquidity has been locked is a quite involved task.

Can Rug Pulls Be Avoided?

A rug pull may be avoided if investors exercise prudence and keep an eye out for the warning indications outlined above. Knowing the telltale factors of shady business practices can help you avoid being a victim of your own greed.

Scams and possible swindles in crypto projects may be avoided by completing your own study and being aware of the risks. Checking the authenticity of any project may be done in a number of ways.

The owners and developers of any enterprise that has the potential to be a rug pull define it. If they want to be taken seriously in the cryptocurrency community, they must have a strong connection to the sector, as well as a strong track record, social media presence, and industry relationships. There is a greater chance of fraud when there are more questions than answers concerning the project’s founders and crew.

Because of the lack of activity on many exchanges, a token with a small number of token holders may be a rug puller.

A rug-pulling problem in crypto is nearly impossible to stop as long as Defi remains uncontrolled. Fraudsters will always be out there, and they will always be able to earn money by taking advantage of others. Regulators, on the other hand, can’t ensure that they won’t be subject to malpractice. As a precaution, you should do thorough research and be extra vigilant.