A “rug pull” refers to a type of scam or fraudulent activity where the team behind a cryptocurrency, token, or DeFi project abruptly withdraw all their funds from the project’s liquidity pool, leaving investors with worthless assets.
This term is particularly common in the DeFi ecosystem and has become a major concern due to the relative ease with which such scams can be executed.
“Rug pull” scams typically unfold in several stages. Initially, scammers list a newly created token on a decentralized exchange, setting up a scenario where investors can trade a more valuable, established token for the new one. This phase often involves aggressive promotion strategies, utilizing both direct and indirect marketing techniques. A key tactic is leveraging the influence of reputable personalities in the cryptocurrency community to endorse or mention the new token, thereby lending it credibility and attracting investor interest.
As the trading volume increases and the new token gains apparent legitimacy, its price begins to inflate, driven by growing investor enthusiasm and the perception of a solid investment opportunity. At this critical juncture, the inflated price of the new token sets the stage for the ‘rug pull.’
The scammers, who typically hold a significant portion of the token’s total supply, capitalize on this artificial price surge. They execute a massive sell-off, exchanging their holdings of the overvalued token for the more valuable asset that investors initially traded in. This sudden, large-scale withdrawal not only crashes the price of the new token but also allows the scammers to abscond with substantial amounts of the more valuable asset, leaving investors with a devalued or worthless token.