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Rug Pull Crypto Explained: Is It Illegal?
In the cryptocurrency world, a rug pull refers to when project developers suddenly abandon a digital asset they created, often leaving investors with significant financial losses. This malicious tactic involves draining the liquidity pool or making it impossible for anyone but themselves to sell the token, rendering all previously bought tokens essentially worthless.
Types of Rug Pull Crypto Scams
There are mainly two types of rug pull scams: soft and hard rug pulls. A soft rug pull occurs when developers slowly drain funds without breaking the project’s rules. On the other hand, a hard rug pull involves suddenly removing all liquidity and disappearing with investor funds.
Common Types of Rug Pull Crypto Scams
1. Liquidity Stealing: This is one of the most straightforward types of rug pulls. Developers create a new token and pair it with a well-known cryptocurrency (like Ethereum or a stablecoin) to create a “liquidity pool” on a decentralized exchange. As people buy the new token, more funds flow into this pool. Once enough money has been collected, the malicious developers simply withdraw all of the legitimate crypto from the pool, making it impossible for anyone to trade the new token, and its value instantly drops to zero.
2. Limiting Sell Orders: In this type of rug pull scam, developers code the token’s smart contract in a way that allows people to buy the token but prevents them from selling it back. They might even let a few early investors sell to make it look legitimate, but once the price goes up due to new buyers, they activate the hidden code.
3. Pump and Dump: This is where developers, or even large holders working with them, create massive hype around a new token using social media and fake news to drive its price up artificially (the “pump”). They encourage a lot of people to buy, creating a frenzy. Once the price reaches a high point, these insiders then quickly “dump” all their own large holdings. This sudden sell-off floods the market, leaving new investors with huge losses and a devalued asset.
4. Malicious Smart Contract Backdoors: This is more technical, where developers intentionally include hidden code within the token’s smart contract that allows them to take control of investor funds or manipulate balances without anyone knowing. They might have the ability to mint unlimited new tokens, directly drain wallets, or alter transaction fees to their benefit.
How to Detect Rug Pulls
To detect rug pulls in cryptocurrency, you need to check the project team, liquidity pool, smart contract code, token distribution, and unrealistic promises & hype.
Source: www.cryptoninjas.net
