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What is a Rug Pull? Crypto Scams

The price explosion of Dogecoin and Shiba Inu has made people millionaires and even billionaires. However, this did one harm as people are buying every penny coin and expect those to skyrocket while they turn out to be Crypto scams or Rugg Pull.

Cryptocurrencies are very lucrative and have nefarious volatilities. Suppose one day your friend suggests you a coin with low market capital which is rising 2x, 5x, and even 10x every day. Numbers convince easily – right? So, you decide to jump in the trade and the coin or token shows you some green candles until the worse happens. One morning you wake up and find out that the price has plunged to almost zero. This is not only super annoying but wants you to quite a cryptocurrency trade forever. Since the team is doxxed or anonymous there is no way to get even your investments back. What actually happened to you was a crypto Scam or infamous Rug Pull.

What is a Rug Pull:

Rug Pull is used in cryptocurrencies when investors or developers run away with all the investments in their projects. People create the projects with malicious intent and convince investors and buyers to put their money in. When there is enough money in the project, they just bag it and disappear. This recently happened with the Squid Game Token. That token peaked to more than $28,000 before plummeting to zero on November 1, 2021. Squid Token gained more than 83,000% in a few days turning pennies into millions but unfortunately, no one was able to withdraw their funds. 

CoinMarketCap tried to alert people however greed took over. Binance has opened an investigation into the scam and any credible output is still awaited. Surprisingly, the token is up and live with a new team of developers and managers. The Squid Game official Website states that this token was created by scammers and the new team has blacklisted their contract addresses. I doubt who will put the funds in a broken reed.

This also happens with even NFTs but we’ll cover that in some other article later, let’s keep this article crypto-specific. There are many ways to such rug pulls, however, there are two main ways that scammers adopt.

  1. Yanking Liquidity:

To understand this kind of liquidity approach let’s first understand what does ‘Liquidity’ or ‘Liquidity Pool’ mean. A liquidity pool is a smart contract where assets are locked to help traders process their trades at the desired prices. Let’s break it down even simpler.

Liquidity Pools, unlike their names, are not pools filled with water instead they are pools filled with assets based on smart contracts. Usually, you buy something when there’s someone to sell it. When it comes to asking the desired price, this makes the trade even rare.

In the finance and crypto trade, the buyers and sellers book their orders in the order book. When the asked price by a seller reaches the price of the bid price of the seller the trade executes. A buyer comes with money and records the order with a quantity of the asset required and the seller records the order to sell at a certain price for a certain quantity, as highlighted in the above image. When the trade executes, the seller gets the money and the buyer gets the assets. The image below shows many buyers and sellers who are there in Bitcoin trade on Binance. 

Simple! But what if there are no sellers?

That’s where the role of Liquidity Pools comes in. These Liquidity Pools have both assets locked in with a 1:1 ratio. This liquidity Pool leverages an algorithm to find efficient trades no matter how high or low the price of an asset is. If there is more quantity of assets in the Pool it will be difficult to impact or alter the price. So, to stabilize the price, the crypto ecosystems encourage investors to lock their funds in the liquidity pools in return for the interest collected as fees. Crypto ecosystems offer lucrative APRs, as high as 1000%, to win investors but that’s where the trouble begins.

So, what scammers do is they create a liquidity pool of a valuable token with their developer token, which is needless to say worthless. When people put their money into the liquidity pool. The price of their token keeps rising due to the increased liquidity due to the market makers. At some point, when the price of the token is high – boom!!! Rug Pull happens and they withdraw their token value leaving nothing to trade from the pool.

  1. The inability to sell:

All crypto coins are a piece of code and we trust the developers to be fair and honest as not all coins or tokens are open source. Developers can write anything in their code including not authorizing the buyers to sell their tokens at any point. By this approach, anyone can buy the tokens but only developers are able to sell them. In this way, the price of the token only goes up. The developers who bought a very large quantity at a very low price sell it when the price is considerably high or the worse happens: they run away with all the money invested in the tokens.

This type of rug pull was implemented by Squid Token I talked earlier about. The Squid game token required another token to successfully trade it back. The second token could only be obtained by playing and winning a blockchain, play-to-earn, game whose entry fee at one point was $770. The buyers and investors were thus trapped in with the token until the developers decided to rug pull.


Having said that, don’t fall in for the numbers and DYOR (Do Your Own Research) before investing. Since you are now fully aware of what approaches these scammers use, pay close attention to spot these signals. Remember, Squid token coaxed people to buy by saying they won’t allow them to sell normally to organically raise the price of the token. Check who governs the liquidity pool, use BSCScan or EthScan to check who owns most of the coin. And if the team holds more than 5%, there is definitely something fishy there.

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