Simply put, a Rug Pull is a scam that involves developers of the cryptocurrency taking advantage of their power over the project. This can happen in multiple ways and they can even be associated with NFTs and not just cryptocurrencies. During the Rug Pull, developers advertise their new project in order to attract investors and get money into the project fund. Once these developers think that they have gathered enough money, they simply disappear taking the money with them. This is an exit scam, where developers straight up abandon the project while taking most of the funds with them, or simply devaluing the project while profiting themselves. There are multiple different rug pull scams out there, so let’s take a look at some of the most common ones.

Liquidity Stealing

One of the most common rug pull scams out there is liquidity stealing. As the same suggests, this is the rug pull scam where developers steal liquidity from the project and devalue the project while profiting themselves. This is the most common rug pull in DeFi projects, where developers simply go to the liquidity pool and take out cryptocurrencies to then sell.

Since they are the developers, they have control over the liquidity pools which are there to make sure people are able to trade with this crypto. These developers simply provide liquidity to different decentralized exchanges by creating certain trading pairs. But since they are the ones who are putting these coins there, they can easily take them out and use them as they see fit. 

Limiting Sell Orders

Another common rug pull scam is limiting sell orders. When developers are creating cryptocurrencies they have the ability to manipulate smart contract code in different ways, and one of the abilities they have is the ability to limit the sell orders. They can simply input a code that will limit the majority of coin holders from selling their cryptocurrencies, and these developers can simply state different reasons for not allowing sell orders, or they can simply say nothing and just do it. When this happens, prices usually go up, as people are buying a crypto but they are unable to sell it, but for this developers need to come up with a good reason for not allowing selling. 

When these developers think that prices have reached high enough, they sell their own coins and make huge profits. They usually swap their cryptocurrencies for other more stable coins such as BTC or even stablecoins such as USDT. When this happens, they flood the market with a very large number of coins, and only after this, do they then allow selling orders, but since they have already sold a big number of coins, prices are already down. This completely kills the crypto, as people who invested will sell their coins as well in order to at least limit the losses suffered. This devalues the coin completely, leaving investors counting their losses. 

Dumping

Probably one of the most popular rug pulls out there is coin dumping. When developers are creating cryptocurrencies, they are in control of spreading these coins around. While most coins go to liquidity pools and pre-sales, these developers are still left with quite a large number of coins. This creates a threat of dumping, which refers to developers selling off all of their coins and leaving the project stranded. When these developers sell their own holdings, they devalue the price of the crypto, as the market is flooded with coins.

Dumping is pretty much the main rug pull scam, as both of the previously mentioned two scams all involved dumping in some way. When developers steal liquidity, they dump it to make profits, and the same for limiting sell orders. But in some cases, they don’t need to do either of those, and they can simply dump their own cryptocurrencies, as they most likely own large amounts of them.

Hard and Soft Rug Pulls

Before we take a look at different ways of spotting potential rug pulls, we also need to differentiate between hard and soft rug pulls. Hard rug pulls are instances when developers leave certain backdoors when developing code for cryptocurrency. With this, they clearly have intentions of pulling a rug and are making preparations for that. Liquidity stealing and limiting sell orders are both hard rug pulls as developers are manipulating the code in order to make profits.

While soft rug pull refers to rug pull such as simple dumping. This is a simple exit from developers who quickly sell off their own assets, leaving the crypto worthless. But since these developers are not doing anything with the code, but simply selling their own assets, soft rug pulls are rarely considered criminal activities. While hard rug pulls are considered criminal activities since there is clear intent and code manipulation.

Since Rug Pulls are scams, in most cases they are masked in a way that is hard to spot. But despite this, there are some characteristics shared between crypto projects which developers are planning on pulling the rug. Let’s take a look at some of the most common red flags that signal potential rug pulls.

No Liquidity Locked

One of the first things that we should look for when checking the legitimacy of the cryptocurrency project, is to see if its liquidity is locked. If there is no liquidity lock on the coin, it gives developers full control over the liquidity and they can do whatever they want with that.

Liquidity locking is a smart contract function that locks liquidity for a certain period of time. During this period no one has access to liquidity and these coins only move through trading. These liquidities are usually locked for a few years, and most safe liquidity locks are done by reputable third parties, rather than developers.

It is also important to check what amount of coins are locked. Developers have the option of locking a certain amount of liquidity while maintaining control over the remaining coins. The most secure liquidity lock is when 100% of liquidity is locked, but 80% is also considered a good number. This is because developers might maintain access to some amount of coins in case of emergencies or some other reasons. But in this case, we should always try to learn if there is a good reason developers did not lock everything.

Unknown Developers

Another prominent sign that we have a potential rug pull on our hands, is when cryptocurrency is developed by an unknown group of developers. The cryptocurrency and blockchain ecosystem is becoming very large and there are a big number of developers working on numerous projects. When we see a cryptocurrency that is being developed by unknown people, we should always investigate who they are.

We should look for information regarding their previous work. Most legit developers who are developing new cryptocurrencies will have some prior experience in that field. They might not have developed any cryptocurrency before, but they might have been part of other notable projects or have something backing their status. 

Because of this, when we see projects with unknown developers, we should dig very deep. In this case, looking at just developers might not be enough and we should look for other clues as well. Best practices involve checking the project white paper, social media, and community channels, and in general, learning everything that is possible about the project. If you have coding experience, you can also take a look at the smart contract of the cryptocurrency to check if there are any issues with that.

Not Allowing Sell Orders

The most obvious red flag is the limiting of sell orders. As we mentioned above, limiting sell orders gives developers the ability to restrict certain investors from selling, while they themselves retain this ability. 

Spotting this scheme is really hard since the code that limits sell orders is usually buried deep inside the smart contract. Because of this, if you are not an expert in coding, it’s pretty much impossible to spot this issue. One of the best ways to avoid falling victim to this scam is to never buy large amounts of coins at once. It’s best to first buy a very small number of coins and then try to sell them immediately. If you can’t sell them, it’s most likely a scam and you should avoid investing in this cryptocurrency.

But even if you were to be able to sell these cryptocurrencies, it does not guarantee that you are safe from this scam. Developers might have the ability to limit these sell orders whenever they want, so even if you can sell them now, it does not guarantee that you will be able to sell them in the near future. 

The Majority of Coins Being Owned By a Few Wallets

Another sign of potential rug pull is when the majority of the cryptocurrencies are stored in a small number of crypto wallets. There are several reasons that make this a very big red flag, and every time you are investing in a new cryptocurrency, you should check how many wallets hold this coin.

One of the main problems with the majority of coins being stored in a few wallets is that whales control the project. If only a select few wallets have the majority of coins, they have the ability to manipulate the market as they see fit. They can cause prices to go up and eventually dump their holdings once the price reaches their desired mark. Because of this, if we see the price of cryptocurrency rising very fast and there are only a few wallets that hold the majority of the coins, we should immediately avoid this crypto.

The crypto and blockchain space is full of new projects that show up every single day. While this is good for the development of this industry it has also created a big hunting ground for scammers. Cryptocurrencies carry big levels of anonymity, especially in the DeFi ecosystem, which gives scammers the freedom to operate with fewer restrictions. 

We mentioned multiple examples of the rug pulls and ways to avoid them, and every investor should take them into consideration when investing in new cryptocurrencies. But we can not say that these rug pull signs are absolute and if you spot them you should definitely avoid them. These are just signs that might end up false, and the project might succeed in the end. Because of this, every project should be assessed from top to bottom, you should take into account everything there is, and only after this decide if it’s safe or not to invest in this coin.