It involves malicious project developers withdrawing all funds invested in the project, leaving it without liquidity. As a result, individuals and institutions that invested in the project also become victims.
Although rug pulls are frequently seen in the cryptocurrency world, they are actually a fraud technique that can be encountered almost everywhere.
How is a rug pull executed?
Malicious project developers launch a new token with various promises to make it popular and achieve a rise. Then, they attract investors, and the funds of the rising project are gradually transferred to the developers' own wallets, causing the token's price to decline.
Malicious developers often target investors who may agree to invest in high-risk projects to achieve high returns. Therefore, investors must be careful before making investment decisions.
What are the types of rug pulls?
There are three types of rug pulls: liquidity zeroing, blocking sell orders, and dumping.
Liquidity zeroing; is the result of project developers withdrawing all liquidity from the liquidity pool, causing the value that investors put into the project to disappear. After this, the token's price is set to zero and victims are created. Liquidity zeroing is the most common method of rug pulling.
Blocking sell orders; is done with malicious code written into the project's smart contract. Malicious developers can write a code to be the sole party selling the token, preventing investors from selling their tokens. An investor who wants to take profit cannot complete the transaction due to the blocking.
Dump; is to rapidly decrease the price of a token. The price drops quickly as developers sell a large amount of their created token at a sharp speed. Dumping cases may often come after intense campaigns conducted on social media. This is also known as pump and dump fraud.
What can be done to protect against rug pulls?
Investors can implement the following methods to protect themselves from rug pulls:
Research and examine the project in detail
Pay attention to concepts like unlocked liquidity and suspiciously high yields.
Check if the project has been audited
Check if there are restrictions on sell orders
In addition to all this, researching developers and selecting projects with reviewed code are also measures that will protect investors.
