Understanding Crypto Rug Pulls

Beware the Carpet Snatch: A Guide to Understanding Rug Pulls


Crypto rug pulls. You might've heard whispers of it. But what is this deceptive maneuver everyone seems so wary of? Let's take a journey down the rabbit hole, do a deep dive, and see if we can uncover this unusual term!

Defining the crypto rug pull.

So, what is a rug pull? Imagine you are on a beautiful Navajo rug, only to have your best friend pull it out from under you as a joke. Besides creating a horrible fall, that hurt! The term rug pull comes from the expression "to pull the rug out" from under someone, leaving the victim off-balance and scrambling. Specifically, in the crypto world, a rug pull is when developers abandon a project and run off with investors' funds.

A look into history - the first rug pull

When was the first rug pull identified? Let's look at the Ponzi scheme OneCoin, which raised $4 billion and defrauded people of billions of dollars. How did they do it? They promised investors returns on their crypto investments. Not only that, OneCoin also pitched the company as a legitimate business.

The founder of OneCoin, Ruja Ignatova, vanished in 2017 without a trace. According to securities.io, Ms. Ignatova is only one of 11 women that have appeared on the FBI's Ten Most Wanted Fugitives.

Varieties of the scam: different types of rug pulls

Currently, there are three types of rug pulls, as explained in the Coin Insider:

  1. Liquidity theft – (also known as liquidity stealing) The founder of a project suddenly takes all the coins from the liquidity pool used to fund a project.

  2. Limiting sell orders – In this scam, fraudulent founders are sneakier in how they do a crypto rug pull. Coin Insider says, "In this type of scam, a developer codes a token with a smart contract, meaning they are the only party to sell them. Moreover, investors can't sell the token to other peers. If this happened to you, you would have an asset you can't trade."

  3. Pumping and dumping - When a founder or crypto developer quickly sells off a significant portion of their tokens, it's referred to as dumping them. So, when this occurs, the coin's price is forced down when demand decreases. In the rug pull scenario, the corrupt founders cause the token to increase in value and charm.

With marketing and promotion, unsuspecting investors will buy the tokens. When the founder "pumps" the price high enough, the founder can "dump."

A Deeper Dive: Hard vs. Soft Rug Pulls

Two other types of rug pulls are hard rug pulls, and soft rug pulls. Typically, soft rug pulls are more common than hard rug pulls. With soft rug pulls, scammers urge investors to buy by making the token look very appealing. They may also include false promises. Hard rug pulls are more vicious as scammers input malicious code or exploits in smart contracts.

Law and Morality: Are Rug Pulls Illegal?

Yes, and this holds true globally. Unfortunately, because cryptocurrency is decentralized, tracking the crypto rug-pull offenders is tough. So, your best bet is to follow the tips below:

  1. Do your research (DYOR) on any project.

  2. Evaluate the quality of community involvement.

  3. Pre-Mint: Watch out for red flags in the project's vision or roadmap. Watch out for guaranteed profits, fast-tracked timelines, and overpromises on marketing without sound focus on product development, technical milestones, or user adoption.

  4. Post-Mint: Check the NFT's history and marketplace activity.

  5. Be Proactive about Security Education.

 Conclusion: Beware of carpet pulls.

The world of cryptocurrencies is filled with immense opportunities. Unfortunately, specific scams like crypto rug pulls are becoming more prevalent. Now that you know what rug pulls are, different types of rug pulls, the steps to take to protect yourself, and the legality of rug pulls, go forth with knowledge, caution, and a sense of community. 😊

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