What Is a Rug Pull?

Beginner Jun 28, 2021 · 3 min read

Rug pull
Key Takeaways:
— DeFi provides people with financial freedom, it protects your privacy. It’s non-discriminatory and offers the ability to bank the unbanked.  
— Great freedom entails some kind of risk. A rug pull is a malicious maneuver in the cryptocurrency industry where crypto developers abandon a project and run away with investors’ funds.
— While scams are prevalent in the cryptocurrency space, don’t let that deter you. There are various ways to protect yourself – all you need is a little research.

A rug pull is a type of crypto scam where developers raise funds from investors and then ditch the project they used to create the buzz. Here, we explain the manoeuvre – and how to avoid one yourself.

DeFi – are you paying attention?

Financial freedom is something of a mantra in the cryptocurrency space, doubly so in decentralized finance (DeFi.) DeFi promises ultimate financial freedom, bringing traditional finance options to the blockchain. Bitcoin aspires to “bank the unbanked.” DeFi is actually doing it. 

The DeFi world is entirely user-run, thanks to the autonomous nature of blockchain networks. Here, anyone can create a project with a promised use case, and if you think it has value, you can buy-in.

But remember – here, there are no restrictions. Anyone can list any asset and there is no regulatory authority in place to insure the project is real. So while there are far lower barriers to entry for regular people like you and me, there’s also no one to tell you if a project is looking to scam you.

How a rug pull works

Bad actors look at DeFi as a perfect access point to take advantage of the “get-rich-quick” crowd.

They create a project, promise a particular result (a future NFT, for example) and begin to generate hype – and crypto – from investors who want to get involved. The crypto starts flowing, and the project’s value shoots up. You want to get involved due to fear of missing out (FOMO) hoping to buy in at a low before selling later on.

However, the developers aren’t what they say they are. Once they’ve pocketed your cash, the project mysteriously comes to a stand-still. pulling the rug out from you, its hopeful investor – you may also know this as a pump and dump scheme, or shilling.

A recent example of this is the alleged SushiSwap (SUSHI) exit scam. The project saw a significant price increase, which saw its creator, the anonymous Chef Nomi, cashing out $14 million worth instantly. This crashed SUSHI’s price from over $9 to just over a dollar in less than a week. Chef Nomi eventually sent the funds back but after extreme community backlash. Most rug pulls don’t end that positively.

But that’s no reason not to get involved. DeFi can and is quite rewarding for many users, assuming they pick the right projects. Ledger is here to help.

Here are a few things to look out for when scoping out your next purchase to protect yourself from the next big scam.

Tips to prevent falling for a rug pull

  1. Keep an eye on liquidity – The number one way to get a quick overview of a token’s legitimacy is to look at its liquidity. Real projects tend to have millions, if not billions, in liquidity. Also, see if there’s a staking period. Legitimate projects will lock up a significant amount of their tokens for a lengthy time frame. Locked tokens cannot be withdrawn from the liquidity pool, making a project much less likely to be a scam.
  2. Skyrocketing value – If a small project is suddenly shooting up in value, there’s reason to be concerned. The goal is to get you and other buyers involved via FOMO. If you see a project skyrocketing in value, check the reasoning for it. Is there news of an exchange listing? Did the group partner with someone new? If you can’t find any reason, you should probably be skeptical.
  3. Conduct background research – Look at the project’s purpose. Does it have a genuine use case? Look at the project’s team. Do they have a reputable background? Can you even find information? Check their social media platforms and see what others have to say. Is there a strong following or just a bunch of random posts talking about price? A legitimate project will have nothing to hide and should engage with their community to build a reputation.

Of course, when you find a legitimate asset to acquire, you can use Ledger to store and protect it. The best way to store your hard-earned crypto is a hardware wallet, like us! We give you complete control of your digital assets, allowing offline storage for the ultimate security.

Concerned about crypto scams, but not sure how to detect them? What better place to start than Inside The Head of a Scammer! Check out our School of Block episode for the inside scoop on everything to watch out for.

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