Crypto Rug Pull: Spotting the Evil in Crypto

Rug pull in crypto means the occurrence of any scam while a team starts pumping the tokens for their projects before they disappear along with the funds. This leaves a worthless asset with its investors. Rug pull occurs when a fishy developer builds a new token for crypto and pumps up the price to pull in the maximum value of the tickets before disposing of them as their price touches zero. Experts define this scam as a type of exit scam and an exploit marked as decentralised finance or Defi.

Before hopping on to the method for spotting crypto rug pull and why it occurs, it is necessary to know about the three types of rug pull.

Liquidity Theft

It occurs when the token’s creator starts withdrawing every coin existing in the liquidity pool. As a result, the value inserted by the investors into the currency decreases the price to zero. This kind of liquidity pulls occur in the environment of decentralised finance. Defi rug pull is the most commonly found exit scams.

Limiting Sell Orders

It is a crafty way for a developer to deceive investors efficiently. In such cases, the developer usually uses coding for the tokens such that he can be the sole party to sell them. After doing so, developers hold back for some time to let the retail investors buy the new crypto with paired currency. This type of currency entails two currencies explicitly paired for trading with one another. When the developer receives sufficient positive action, they begin dumping the positions to make the token valueless.

Dumping

This type of scam occurs when the developers are quick enough to sell an ample supply of their tokens. Besides, this practice aids in bringing the price of the coin down and leaves the other investors with valueless tokens. It usually happens after intensive promotion on various social media. The resultant activity leads to a scheme called the Pump-and-Dump. This scam is regarded as more of a grey area marked ethically than other rug pull scams. 

Hard pulls and Soft pulls: The difference

Hard rug pulls happen when a developer codes the tokens as malicious backdoors. Malicious backdoors are the various hidden exploits that the developers code into the contract of the project. Liquidity stealing comes under this term.

On the other hand, soft rug pull takes place when the developer disposes of his crypto assets within a short period. This leads to the creation of a critically devalued token for the investors. Dumping comes under this term.

What makes crypto rug pulls unlawful?

Crypto rug pull is not always illegal, but it is always unethical. Experts have found hard rug pulls to be unlawful. On the other hand, soft rug pulls can be corrupt, but they are not always prohibited. Regardless, both these types are extremely challenging to track and prosecute further. There have been many rug pulls registered in cryptocurrency in the past years.

Final Words

Traders perceive locking liquidity as one of the most convenient ways of distinguishing between scam and legitimacy. Checking whether the liquidity is locked or not is necessary. Locked liquidity does not let the creators run off with the entire liquidity. A no-name trader should strike the bell. One of the must-follow rules in trading is to stay away from marked anonymous developers. So, always pay keen attention next time you are trading and trade safe.

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