Rug Pull in the crypto industry is a common term, referring to a development where the team behind a project decides to sell or remove all its liquidity from the project after getting investors into the project and getting them to invest. This is what it is when we talk about the crypto market or even in the Defi scenario, but rug pulls are common even in NFTs as well.
It isn’t only when the liquidity is removed or sold, but also when sometimes the project developers attract investors and conduct a pre-sale before the product launch, and once the investment comes in, the team abandons the project, runs away with the money, and there is nothing that the investors can do to track them or get a refund for the money invested.
Given the nature of how things happen, there are categories like hard rug and soft rug, where for a quick example, an NFT project where the arts are sold by the team but there is no roadmap or future goal, or any utility to it, and the team knew it all along. The NFT sold, each for about $200, is now valued at about $20 as there are no buyers in the secondary marketplace only because these are just another piece of art.
For a very basic user, here’s how you would look at things when someone is talking about it: “The project dev raised $2 million, rugged and is now MIA”. This means that the developer siphoned off the money and what you invested is gone.
Rug pulls are more associated with DeFi projects that are getting listed on Decentralized Exchanges (DEXs), and since they are not launching on the centralized exchanges because they are new and the centralized exchanges don’t launch those tokens that early, and dex is the only option of liquidity for the same. Now, early investors who get these new tokens mostly have their tokens locked for a certain vested period as these become a part of the liquidity too, and since these investors have bagged a good deal already, they usually are okay with the vesting lock. When the project grows and there is a lot of hype, the price of the tokens is high, that’s when the RUG PULL happens – either by the developers selling most of their own tokens at that high price and removing all their liquidity, where a massive fall in price happens and the investors are stuck with no option to claim those tokens and sell at whatever price it fell to, or the developer uses one of the backdoors in the smart contract to steal the investors’ funds.
There are many ways rug pulls can happen, but the above-mentioned are the common ones. A very common sign of a rug pull about to happen is the token price shooting up with no protection on the liquidity, and if one can understand from the smart contracts that the developer can remove their funds immediately, they know this can be a rug pull in the future.
Img source: Medium