What is a rugpull? A rugpull happens when a development team suddenly abandons a project and sells all its liquidity.
Rugpulls are usually associated with Decentralized Finance (DeFi) projects that provide liquidity to Decentralized Exchanges (DEXs). For DeFi tokens of new projects, DEXs are the only source of liquidity. Usually, new projects will put some tokens into the DEX as liquidity. A project may either choose to participate in an Initial DEX Offering (IDO) to raise funds for the token, or put new tokens straight into a liquidity pool.
As these new tokens gain sufficient attention from the public, rugpullers can choose to either sell their tokens at a high price and remove their liquidity, or even alter smart contracts to steal investors’ assets. Investors have no choice but to sell their tokens at a very low price because there is no liquidity. Either way, investors who have fallen victim to rugpulls will find themselves losing a lot of money.
How to avoid rugpulls
Now that we have answered the question: what is a rugpull, we would like to help investors avoid falling prey to such phenomena. Because many new projects are set up in DeFi, with little to no KYC or AML, many crypto projects are anonymous, hence making it very easy for them to execute a rugpull with low chance of being caught.
A tell-tale rug pull sign includes a token price that increases exponentially in a short amount of time without any protection on liquidity. Projects that allow owners to remove their funds immediately or very shortly after the project’s launch may be rugpulls. Investors are greatly encouraged to do diligent research on projects before investing. This will include looking at the state of the product, its tokenomics, token distribution mETHod, liquidity, and team. You can reduce your risk by ensuring that the above are as transparent as possible.
In Conclusion
What is a rugpull? It is a phenomenon where investors will lose a lot of their funds due to rapidly selling away all their liquidity. Similar to scam projects, investors should be extremely wary of this possibility when trading on DEXs.
