What Are Crypto Rug Pulls?

The birth of cryptocurrency and blockchain through the launch of Bitcoin has expanded into an entirely new sector complete with new jobs, jargon and much more. Keeping up with changes in the crypto market is near impossible as this decentralised world moves at breakneck speeds.

Naturally, when speed is the name of the game, things like security, transparency and risk management are overlooked, and we see breakages in the system.

These breakages can manifest in hacks to hard forks or, as we refer to it, "rug pulls".

What is a rug pull in crypto?

In plain English lexicon, to pull the rug out (from under someone) means to take away necessary support (from someone) suddenly. If we apply this adage into the context of crypto and Decentralised Finance (DeFi), having been rug pulled means to have, buy support or Decentralised Exchange (DEX) liquidity pool taken away from a market.

This sudden loss of liquidity results in a sell death spiral as other liquidity providers, holder and traders sell to salvage their holdings. Typically, it is a new form of "exit scamming" where someone will drain the DEX pool, leaving the token holders unable to trade.

Rug pulls are the pain of DEX's

The success of Uniswap on Ethereum has seen the DEX model prove to something that can scale in a trustless and permissionless environment. The ability to trade without a central body validating listings authenticity and allowing anyone to list a token naturally attracts both good and bad actors to the platform.

Uniswap being the biggest of the DEX's, naturally becomes the playground for these bad actors, but it's not to say other DEX's don't have the same issues; they have less liquidity at stake, which is why Uniswap rug pulls tend to grab the most headlines.

As more liquidity pores into DEX's, so too do DeFi tokens continue to flood the markets as developers are minting new coins and listing them on Uniswap every day to try and capture some of that capital flow.

While this might present an earning opportunity for some, the number of the so-called 'rug pulls' is also rising. Investors need to be extremely careful and selective regarding the tokens they put their money into and do proper research.

How rug pulls are made possible?

Uniswap is a protocol that allows buyers and sellers to swap ERC20 tokens without an exchange or order book. It uses an algorithmic equation that determines the swap rate automatically based on the balances of both tokens, as well as the actual demand for this swapping pair.

Since anyone can spin up a token and smart contract on Ethereum and list it on Uniswap, some developers have come up with rug pull operations. The con begins with minting new tokens, creating Telegram groups to get the buzz going, followed by a Uniswap listing and injecting liquidity.

At this point, the original malicious liquidity provider would wait for people to swap their ETH for the newly minted coin, after which the token's creators would drain the liquidity pool, leaving holders with nothing but a worthless coin.

We've seen other cons mint tokens of similar names to popular projects, too, then listing these on other DEX's to try and capture investors funds before pulling the rug.

Thousands if not millions lost already

New coins are being listed on Uniswap and other DEX's every single day. And, to an extent, that's to be expected. Unfamiliar retail investors with no previous experience in the field are happy to spend their ETH on coins that are going to pull off a "10x" increase in 24 hours.

These new investors are normally suckered in via social media or chat groups, thinking they found the investment of a lifetime.

Crypto Twitter sees major accounts talking about new coins regularly. A recent example comes from a coin mimicking Ampleforth (AMPL), called TRUAMPL (TMPL). Someone was shilling "TRUAMPLE" yesterday, and 3 hours later, the developers pulled the rug, stealing 1800 ETH.

And that's far from the only recent example, as rug pulls off the kind take place regularly.

How to stay away from crypto rug pulls?

We can't stress this enough, but before you swap your ETH or other assets for a so-called next "Uniswap gem," make sure to check whether or not the liquidity is locked.

The most common means that reputable teams use to lock their pooled liquidity and gain additional user confidence and trust are through Unicrypt. It's also very easy to verify whether or not liquidity for a particular pair is locked and the date that it is locked to.

You should also make research on what the coin funds are used for, who the team behind the coins are and the history of trades with this coin.

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Recommended reading

If you enjoyed this post and have a little extra time to dive deeper down the rabbit hole, why not check out the following posts on cryptocurrency and blockchain.

• Why Blockchain and Cryptocurrency Is The Future Of Money
• 24 Ways To Earn Cryptocurrency
• How To Pay Tax On Cryptocurrency In South Africa
• How To Buy Bitcoin In South Africa
• Why Does Your Bitcoin Wallet Address Keep Changing?

Disclaimer: This article should not be taken as, and is not intended to provide any investment advice and is for educational purposes only. As of the time posting the writers may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency as all investments contain risk.

Tags: Cryptocurrency , Blockchain , Scam