Rug pool – what is it in cryptocurrency?
In the English language, "rug pull" means "to pull the rug out from under someone" - to deprive them of important support. In the world of cryptocurrencies, it refers to a scam or fraud in the decentralized finance (DeFi) space. The cause of such an event is often attributed to the actions of the development team.
Let's examine this concept in more detail.
Detailed Description of Rug Pull
A rug pull typically follows a similar pattern - the development team suddenly sells the project's liquidity, causing the token price to collapse to zero. This often happens with DeFi tokens traded on small decentralized exchanges, as major exchanges rarely list such tokens. The creators of a DeFi token transfer the liquidity to an exchange where traders acquire the assets and conduct other transactions.
When the token price is high, developers engage in the following manipulations:
- Selling the tokens at a high price.
- Stealing buyers' funds through vulnerabilities in smart contracts.
Decentralized exchanges lack stringent security systems, making it possible for anonymous projects to remove liquidity without the risk of punishment.
How Investors Can Avoid Losses
Investors should avoid tokens with unjustifiably skyrocketing prices within a short period of time. Additionally, prior to making a purchase, they should study the white paper of the cryptocurrency project. Unrealistic activity on the project's Twitter and Telegram profiles can also be a sign of fraud.
It is also important to examine the composition of the development team, the token supply and price, and the availability of liquidity. It is advisable to refrain from purchasing new and little-known tokens that have not offered any significant innovations.
The final stage of due diligence is to verify the presence of a liquidity pool lock. Honest projects lock their liquidity for a specified period, taking responsibility before the exchange and investors.