DeFi – Rug Pulls

Published by Franziska on

Rug Pulls are a special form of exit scams. Rug pulls usually happen in decentralized financial ecosystems (DeFi), especially on decentralized exchanges (DEXs). Criminals create a token (see Mini-Glossary) and list it on a DEX, then link the token to a leading cryptocurrency such as Ethereum.

Once a significant amount of unsuspecting investors exchange their ETH for the listed token, the creators then withdraw everything from the liquidity pool and drive the price of the coin to zero. Creators may even create temporary hype on Telegram, Twitter, and other social media platforms, initially injecting a significant amount of liquidity into their pool to boost investor confidence.

Rug pulls thrive on DEXs because these types of exchanges allow users to list tokens for free and without verification, unlike centralized cryptocurrency exchanges. In addition, creating tokens on open-source blockchain protocols is easy and for free (except from the blockchain-based transaction fees).

An indication of a possible rug pull is, for example, when the price of a coin skyrockets within a few hours. For example, a Rug Pull coin can go from 0 to 50 times in 24 hours. This trick is meant to do “FOMO” (see Mini-Glossary) that gets more people to invest in the token quickly without taking their time to think about the risks.