What is a Rug Pull in Crypto?
A crypto rug pull is a type of scam where developers create a new token, shill it to users and then pull out majority of the funds in the asset till it drops to zero. They abandon the project afterwards.
There are different types of rug pull depending on the nature of the scam. Exit scams are an example of rug pulls that happen when founders promote a crypto project and then elope once they have accumulated enough funds. This was a common occurrence with Initial Coin Offerings (ICOs) in 2017. Developers can program the smart-contract of a project to allow only them to be able to sell the coin. This is known as a ‘honey pot’. Unsuspecting investors can only buy the tokens but cannot sell. This allows the developers to sell their share and drive the price to zero.
Examples of crypto rug pulls
The $SQUID rug pull was one of the most prominent rug pulls in 2021 and used the ‘honey pot’ rug pull model. The $SQUID token and project were inspired by the popular Netflix series, ‘Squid Game’. Days after launch, the $SQUID token soared and the developers dumped the tokens to zero, absconding with $3M. Investors were unable to sell their tokens.
Are Crypto Rug Pulls Illegal?
The crypto market is still nascent and as such there are currently few to no laws criminalizing rug pulls. When you invest in a project, you are betting on its success and trusting the founders to deliver. If it goes bust, then you are unlikely to get legal support. Crypto rug pulls are, however, generally agreed to be immoral by the entire market.
How to Avoid Rug Pulls
There are several ways to protect yourself from a crypto rug pull. First, always do your research on any new project or coin. Read the white paper and dig into the founders. Have they worked on other projects? Are they public figures?
Additionally, blockchain scanners like Etherscan and BSC Scan can check the tokenomics of the project. If a wallet holds a large amount of the token, this could be a red flag, as this may mean there might likely be dumping after launch.
Finally, avoid FOMO – when you buy at the top because of a fear of missing out, you may end up losing significant funds when the market corrects or when a scammer pulls the rug out from that project.