LeoGlossary: Rug Pull
A rug pull is a cryptocurrency scam where a team of developers put together a project with the intention of making off with the fund. This is typically done in the Decentralized Finance (DeFi) space.
The idea is either to get the price of a token to pump or get people to place other tokens in a Liquidity Pool (LP) which is suddenly drained.
During the pump, scammers generate excitement through a combination of market activity along with marketing. Wash trading is common in these situations.
Once the price is high enough, the team starts to dump their tokens on the open market. The activity can be fierce meaning prices collapse in a short period of time. Those running the scam are out with profit while the rest are stuck holding worthless tokens.
Smart Contract Exploits
Rug pulls became popular with the introduction of smart contracts on the Ethereum blockchain. This was the onset of major steps forward in the world of decentralized finance. Unfortunately, the tools also could be used by those with nefarious intentions.
This was a process that was duplicated as Ethereum forked, resulting in the difference EVMs such as Polygon and BSC.
The ability to set up liquidity pools was a way to attract value from existing coins. By having a token associated with a project and a LP set up, people would place their ETH, as an example, in the pool. As mentioned, the valuable coins was drained as the token was left.
It is also a common strategy used by hackers although that wasn't really a rug pull. Under that scenario, they tapped into the code, exploiting a bridge or some other weakness. This would allow them to create a massive amount of the token, which was used to swap into the valued coin.
Fraud
Whether a rug pull is done using a pump and dump strategy or a straight stealing of the valued coins, in the end it is fraud. This is something that captured the attention of the regulators. Unfortunately, fraud happens in regulated environments also.
Sadly, many astute people get caught up in situations such as this. One of the biggest proponents of DeFi on Ethereum was Mark Cuban. For a year, he discussed how easy it is to use, quick, and the advantages over the existing system and dealing with traditional financial institutions. That was his viewpoint until the moment he experienced a rug pull for himself. Then he shifted to calls for regulation.
Code or laws seem ineffective at stopping fraudulent activities. They are a part of markets going to the earliest days. How long have Ponzi Schemes been around? Why are people so familiar with the concept of a pump and dump?
The answer is we all have witnessed them.
Rug pulls are just another form of fraud that happens when people seek to bilk others out of their money.
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