Another day, another crypto lingo. That’s what I like about this realm. Everyday, a Gen Z would come up with a fresh perspective and an absolutely bizarre way of representing it. One such term that we all have heard about recently, is a Rug Pull. For the uninitiated, after the immense success of Squid Games, a project on BSC was launched on a similar theme. Since it was one of the first GameFI projects on Binance Smart Chain, it immediately caught attention. Riding on the crazy hype of the Netflix Original, Squid Games token started surging. From a price of $0.012 it went up to about $2800 within 3 odd days. And then, the inevitable happened. On the third day, within 5 minutes, Squid Game Token crashed. It fell down to zero within a few seconds.
Events like these might shake the core belief system of the people who plan to invest in crypto. But there’s an art behind how these scams are conducted. And knowing about that, we might just safeguard ourselves. Today, we are going to learn just that. What is a rug pull and how does it work?
What is a Rug Pull?
Rug Pull is a classic maneuver in cryptoverse where the developers run away with people’s money once they invest in their projects. There are various ways this could be done (more about it in a while). The key issue here is that it is very difficult to differentiate between an actual project and the scams.
This not only impacts the investor’s wealth but also pushes normies away. Their general notion of cryptocurrency being a bubble just gets validated. Apart from that, because these incidents spread faster than the positive news, a lot more people hesitate from investing into cryptocurrencies. In a nutshell, it is a loss for the entire community. But how does a scam of such epic proportions work? For example, in the example quoted above, the people/team behind squid games was able to rake in a sweet INR 25 crores.
Let’s find out what are the various modus operandi for a rug pull.
A. Sucking Liquidity
For truly appreciating this technique, you need to understand how liquidity pools work. Please go through the article that talks about Automated Market Makers or AMMs here. Once you create a token, the entire supply is in your wallet. You could send it to anyone but it’s still not available for trading on public platforms and exchanges like Uniswap, Pancakeswap or CoinDCX.
For enabling that trading, you need to provide liquidity in certain pairs. That means that developer takes the token he developed (which has no value initially) and supplies it along with a valuable token like ETH, USDT, BNB etc. in equal proportion.
That means if I supply a liquidity of 1000 coins for 20 USDT, each of the coin would be priced at $0.02.
Now when someone comes along with USDT and tries to exchange it with the newly minted token, price of the token will keep on increasing. This also means the quantity of token present in the pool (1000) is constantly decreasing and the quantity of the valuable token like USDT (20) is constantly increasing.
It’s pretty simple from here on. Once the pool has sufficient valuable currency, you simply withdraw the liquidity. Not only you can take the entire quota of valuable tokens, but others won’t be able to trade using this pool anymore. Whoops!
B. Selling Stake
This one’s classic. Why? Because it is really hard to differentiate between an actual project or a rug pull executed like this.
Anyone can come up with a token. For the hell of it, even I did a few days ago. If you are interested in knowing more, here’s a step by step guide on how to create one. Coming back to the topic. Now it’s up to the developer or team to portray the project. The project can have an actual use case like MANA, BTC, ETH or could just have a perceived value like DOGE or SHIB.
Either way, if you convince the masses about the value your project has, they are going to buy it. And guess what are they paying in order to buy? Yup. Valuable currencies like ETH, USDT etc.
At this point, you could slowly sell your own holdings of your worthless token and accumulate more and more value. EZPZ right? That’s why you need to do a thorough DYOR.
I’ll leave you with an example. Riding on the immense popularity of our honorary PM, I could literally create a token using his name and sell it to people in the name of fandom. I won’t do it, but possibilities are endless.
C. The Code Scam
Well, they say a mother knows everything about her children. Same is the case with a developer and his code. As you know, cryptos at a fundamental level are nothing but programmable money. You want people to spend it only at a particular location, you could program it that way.
Downsides? You could also program your crypto token in a way that no one can sell it. They could only purchase it and when they come back on a DEX to sell it, they just can’t.
Source code for all major tokens is available in open source. But hey, general unsuspecting people can’t understand that.
I don’t know. These scams make cryptoverse a very exciting territory. I have been lucky so far to not be a victim of any such rug pulls, but I have friends who have lost a decent sum. But then that’s what makes it all so intriguing. On some days you win, some days you learn. Also, don’t lose hope yet. There are ways by which you can validate the legitimacy of a project. But that’s a topic for another blogpost.
Have you ever been caught up in a rug pull?
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Until next time..
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