What is Rug Pull?
Rug Pull is a fraudulent act in the crypto industry, when a development team suddenly abandons a project and sells or withdraws all of the project's liquidity. This name comes from the phrase "pull the rug out from under (someone)", meaning "over the drawbridge".
Rug Pull is a popular action in DeFi as tokens can be easily created and then listed on a DEX without the need for KYC or AML.
Types of Rug Pulls
Rug Pull can be divided into 2 types: hard or soft.
Hard Rug Pull occurs when a developer intends to defraud investors from the beginning by installing lines of code that allow for the theft of investors' money.
Soft Rug Pull occurs when developers tend to inflate project value through marketing activities, then close the project and run away with investors' money.
Common forms of Rug Pull in the crypto market: Liquidity stealing, Limiting sell orders and Dumping.
Dumping
Dumping is a type of Soft Rug Pull similar to a pump and dump stock plan. Project developers will inflate the project token value to attract investors and encourage trading activity. After inflating the value of a token, developers quickly sell off all of their token holdings. Sell-off schemes can last hours or years depending on the developer, and can sometimes look more like normal market fluctuations than intentional scams.
Liquidity stealing
This is a form of Hard Rug Pull. Fraudulent projects using this method will issue tokens, and put this token into a liquidity pool along with other valuable assets such as BNB, ETH, stablecoins to create the initial value of their tokens. Then, the project development team will push up the token price to create FOMO to attract investors to buy. Finally, the fraud team will suddenly withdraw liquidity, causing the token price to plummet, causing losses to investors.
Limiting sell orders
Limiting sell orders is a form of Hard Rug Pull. With this form, the project developer will code the project's token so that they are the only one who can sell the token. Investors who buy these tokens will suffer losses, having to spend a large amount of money to buy worthless assets.