In the world of cryptocurrency, it is a variant of exit scam where devs or hackers vanish all of a sudden with the funds of investors. It is mostly seen in decentralized finance (DeFi) projects, new tokens, or liquidity pools. The word “rug pull” is used to describe this situation which involves pulling the rug from beneath the investors and leaving them with no value or even inaccessible assets.
So, what is the usual procedure? Most of the time, the fraudsters make a new coin and market it heavily through social media, offering high returns or special features. The early price rises draw in more investors who then throw money into the project. But actually, the price of the coin is boosted in an artificial way through manipulation or fake trading. And when the liquidity pool or the smart contract has enough money, the creators take away all the money and vanish.
The investors are then left with the tokens that can no longer be sold or even traded resulting in total losses. Pulling the rug became a widely recognized practice during the period between 2020 and 2022 when the DeFi hype was at its peak and unverified projects were everywhere on decentralized exchanges.
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To protect against rug pulls, analysts advise verifying a project’s audit report, liquidity lock period, and developer transparency. The credible teams lock the liquidity, open-source their contracts and communicate effectively about the token distribution.