What the Rug Pull Scam Is: Definition, Types, and Signs

Rug Pull is a term that is familiarly discussed among investors Cryptocurrencies.

This term is used for fraud or scam a new type that occurred recently. 

This time, VCGamers will discuss what Rug Pull fraud is, types of fraud, and how to avoid it.

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Rug Pull Is: Definition, Types, and How to Avoid it

Definition of Rug Pull

Rug Pull is a form of fraudulent activity involving Cryptocurrency investments. 

This fraudulent activity falls under the Exit Scam type and Decentralize Finance (DeFi) exploitation.

The name comes from the English expression that is "pulling the rug outor interpreted as "pulling the rug." 

Fraudsters who use the Rug Pull method work by inciting investors to get involved in developing new Cryptocurrencies.

These scammers pretending to be Developers will attract investors to new cryptocurrency projects.

Rug Pull occurs when the fraudulent Developer creates a new crypto token, increases the price and then withdraws as much value from that Crypto as possible before abandoning it as the price drops to zero. 

Developers will leave investors with worthless, non-tradable Crypto currencies and lost invested money.

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Rug Pull Fraud Type

Fraud with the Rug Pull method is a fraud that has various forms and methods.

There are three main types of Rug Pull in Crypto: liquidity theft (liquidity stealing), limit sell orders (limiting sell orders), and discard (dumping).

Liquidity theft occurs when the Developer token withdraws all the coins from the liquidity pool. 

This can erase all the value injected into the currency by investors, causing its price to drop to zero.

Limit sell orders is a more subtle means of Rug Pull fraud than liquidity theft.

Developers will code tokens so they are the only party who can sell them.

These Rug Pull scammers will then wait for retail investors to buy their new crypto using Paired Currencies. 

Currency pairs are two currencies that have been paired for trading, with one currency against the other. 

Once there is a large purchase, the developer will leave a worthless token.

Discard or Dumping occurs when Developers quickly sell off a large supply of created tokens. 

Doing so lowers the price of the coin and leaves investors left holding worthless tokens.

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Signs to Avoid To Avoid Rug Pull

In order for you to avoid this Rug Pull scam, there are several signs that indicate Rug Pull is a scam by Developers.

These signs show that it is very likely that the Crypto you are buying has the potential to ensnare you in a Rug Pull. The following are the signs:

Unknown Developer

Usually Developers who definitely do Rug Pull are using unfamiliar or anonymous names.

You as an Investor should consider the credibility of the people behind a new crypto project. 

What you can do is look at the track record of developers and promoters in the crypto community, media such as Social media Developers, and White Papers, a website that shows the identity of the Developer.

No Locked Liquidity

One of the easiest ways to differentiate a Rug Pull scam coin is from a legit Crypto currency is to check if the currency is liquidity locked (Liquidity Lock).

Without a liquidity lock on the token supply, there is nothing stopping project creators from running away with all the liquidity.

Locks only help in proportion to the amount of liquidity pool they secure. Known as the total locked value (TVL), this number should be between 80% and 100%.

Pay attention to Sales Order Limits

These sales restrictions are typical signs of the Rug Pull scam project.

One way to test this is to buy a small number of new coins and then immediately try to sell them. 

If there are problems unpacking what was just purchased, the project is most likely a scam.

Sales Results Skyrocketed Too Highi

If the yield for a new coin seems really high but turns out to be unappealing, it's likely a Ponzi scheme.

When a token offers an annualized percentage yield (APY) in the three digits, although not necessarily deceptive, this high return usually translates to equally high risk.

No External Audit

It is now standard practice for new cryptocurrencies to undergo a formal code audit process performed by a reputable third party. 

Auditing is especially true for decentralized currencies, where a default audit for DeFi projects is a must.