Imagine you're standing there on a beautifully woven rug. It's a new rug. You spent some good money on it. You may have even convinced a few friends to throw some money in to buy the rug. And, since the day you bought it, it's actually appreciated in value.
Now imagine the rug's creator walks up behind you, grabs hold of the edge it's edge, and whips it right out from underneath you.
Now this isn't a magic trick. The rug doesn't just disappear from under your feet leaving you undisturbed.
No. You're wearing sneakers today. Maybe even hiking boots. Something with good traction.
When that rug gets pulled, you and everyone else standing there with you, are sent cart-wheeling into the air only to come crashing down into a pile of bruised torsos and limbs.
That's a rug pull.
There are several different ways to rug a community.
In Decentralized Finance :
- Hard Rug - Illegal/Unethical - When the founders of a project build an exploit into the smart contract of a token and use it to steal the token after launch.
- Soft Rug - Legal/Unethical - When the founders hold their share of the tokens until the point where they are no longer contractually required to do so. Then they sell them all at once and walk away, which tanks the value of the coin and destroys the community.
A typical rug pull in the world of NFTs involves promising a certain quality of art or utility, but never delivering. Since it's nearly impossible to prove intent, it's nearly impossible to prosecute. It's important to keep in mind that there could be any number of reasons why you might get rugged by an NFT project.
- Malicious - Founder(s) of a project make promises they never intend to keep. Once the launch is over, they take down the website, delete the social accounts and disappear with the proceeds. This usually only happens when the founders of a project are anonymous.
- Unqualified - Founder(s) have big dreams for their project, but discover they don't have the skills to deliver. It's basically a failed business. The ethical thing to do here is return the money. But most of it is spent trying and failing to keep their promises, so that rarely happens.
- Loss of interest - Sometimes a project delivers most of what it sets out to do. But the founders either run out of money or move on to the next shiny object before the project is complete. This leaves the community to fend for itself, which usually results in a slow, unceremonious death.
When a rug pull is caused by a team that is unqualified from the start, or slowly loses interest after launch, it's commonly referred to as a "slow-rug".