Cryptocurrency space is well known for its mass of fraudulent activity. The malignant players of cryptocurrency space resort to a great number of fraudulent schemes to trick users into giving their money away. One of the most common types of fraud that cryptocurrency space is known for is called the rug pull tactic.

What Is a Rug Pull Tactic?

A rug pull is when the development team of a project suddenly vanishes, abandoning the project, and instantly sells off its native assets, or drains available liquidity. The name of the tactic comes from the malignant trick of pulling a rug out from someone’s feet, essentially making them lose their footing and fall very suddenly.

Rug pull tactics are a common occurrence in the case of DeFi projects, which are best known for accumulating sums of liquidity in vulnerable pools. Since the development teams have access to these pools, their trustworthiness and honesty is often the only thing preventing them from setting a rug pull in actions.

In some DeFi projects, the concept of a liquidity lock period is applied to ensure that a rug pull cannot be set in action immediately after the project is launched. However, it is not a guarantee, since a rug pull can happen immediately after the period ends.

Options of a Rug Pull Tactic

When a project has accumulated a large enough level of liquidity after attracting the attention of users, the development team has two main options before them if they want to set in motion a rug pull.

  • Sell off the available tokens at a high price while project hype is high and run off with the proceeds.
  • Exploit smart contract vulnerabilities to drain liquidity from pools and thus steal investors’ funds.

In both cases, the loss of liquidity from a DeFi liquidity pool will result in an immediate drop in the value of the native tokens, forcing users to sell off their assets at dumping prices and resulting in significant losses. Automated Market Maker mechanisms are responsible for such a balance of liquidity and prices, and therefore the depreciation takes place automatically.

Reasons for Rug Pull Tactics

Rug pulls are easy to pull off in DeFi space due to the poor level of control and legislative responsibility on the part of the projects and authorities. Among the main reasons for rug pulls are:

  • The lack of KYC procedures further reduces security measures and removes any guarantees of returns of lost funds.
  • The anonymity of project founders is another reason for easy rug pulls, as it is easy for development teams to fake their identities.
  • Rug pulls happen, because the smart contracts needed for DeFi project founding are publicly available, meaning anyone can launch their own project.

Signs of a Rug Pull

There are some ways of identifying a project with high potential for a rug pull. Among the most basic telltale signs is the rapid increase in the price of the native DeFi project token and a lack of underlying liquidity. Other signs include:

  • Lack of security guarantees for liquidity withdrawal.
  • Increased hype around the project with active calls to invest.
  • Attractive APYs that are significantly higher than the market average.
  • Lack of clear information about team members.

Key Takeaways

To protect themselves from rug pulls, users are encouraged to carefully review all available materials about DeFi projects and remain aware about the possibility of fraud. fights rug pull tactics through the application of a liquidity lock measure that lasts for six months.