Rug Pull

What Is A Rug pull?

A rug pull refers to abruptly removing significant support from someone. Pulling the Rug out in the crypto world refers to removing liquidity from a Decentralized Exchange (DEX).

The phrase “rug pull” has been used frequently in the cryptocurrency community and mainstream finance, particularly in the Decentralized Finance (Defi) field, to characterize a highly miserable tragedy that arises in decentralized financial services and elsewhere in cryptocurrency that may leave a trader with massive losses.

Deeper Definition

DEXs rely primarily on individual stakers to provide liquidity through the liquidity pool to ensure seamless trading. Because this sort of trading is decentralized, no one has direct control over it, allowing each trader to have an equal level of control. While this allows legal users to earn from the benefits of decentralization, it also enables fraudulent users to commit crimes.

On a DEX, anybody may list a token. Unlike a centralized exchange, where token owners must apply and wait for permission.

A rug pull occurs when a single individual or group of people depletes the liquidity pool. This makes it hard for investors to exchange their tokens.

The Defi network allows developers to generate their unique tokens based on a particular coin, subsequently published on DEXs. Some developers use the opportunity to defraud users by producing tokens with little or no value and launching them on DEX platforms. Such tokens are now flooding the market space, and you should take caution when buying any.

If a token, for example, is traded against ethereum (ETH), the liquidity provider’s absence of ETH makes trading such a token impossible. And so, as the number of Rug pulls escalates, Defi token investors should be more cautious in buying as that could lead to the end of the token.

Rug Pull Example

For example, suppose James, a prominent cryptocurrency exchange company owner, launches a token. Many people buy it because of his fame. He then vanishes after conducting a multimillion-dollar scam. With such a large sum taken, more investors in the coin will be pulled under the Rug.