What exactly is a rug pull in the NFT & crypto space?
A Rug Pull is used in the crypto/NFT industry to describe a fraud where the creators or developers fail to fulfill their commitments after receiving money.
In essence, the founders walk away after they have received the money.
How Are Rug Pulls Created?
In the case of rug pulling, there are a variety of ways that this could be observed.
In the cryptocurrency space, “rug pulls” can be seen in NFT projects that are post-mint following the time the founders are given money. For smaller cryptocurrency it is possible to get this type of scam in three distinct ways : by developers selling their shares, or taking away the power to sell, or by taking away liquidity.
The founders of an NFT project could invest large sums of money to make a project seem more attractive even though they plan to pull the rug.
The hype could be created through the use of influencers who are paid to speak about their project or offering expensive products, and so on. Even though the founders do incur costs to make the project appear authentic, they will still make huge profits from this fraud.
What Does A Rug Pull Look Like?
With small cryptocurrencies, unfortunately lots of people rush to invest without doing any research. This could result in purchasing rug pulls.
The primary way in which this could occur is by developers selling the tokens they owned to themselves when they reach a certain price. The tokens could be sold swiftly within only a few minutes, or gradually over a longer time.
Another way in which this scam can be perpetrated is when the creators of a token who remove the possibility of selling the token. The purchasers are unable to sell the token since they have added code that removes this capability. In most cases, this code permits the developers to market.
Developers might be selling tokens they have reserved at minting themselves, or tokens they purchased at a time when prices were extremely low.
The third method by which the scam could be carried out is to eliminate liquidity, which is usually only seen in small amounts of market capitalization currency. In this particular type of scam, the creators will invest large amounts of a high-priced token like ETH to exchange to purchase their fake token.
Because they’re investing a substantial amount, the cost is likely to rise and will encourage others to make a bet.
If the price becomes higher , they take out all the expensive tokens, leaving only funds for other users to take action. In the absence of liquidity, people cannot buy or sell the tokens, and the project would simply cease to exist.
Here are some tips to avoid rug pulls:
-
Check Social Media
You want to first check out the social media of the NFT Project or the Cryptocurrency.
Social media can be an effective indicator to determine an area of rug pull. You want to check the if there are disproportional following in the social media channels.
For example, if a project has 50,000 Instagram followers but only 2000 Twitter followers.
-
Look At The Website
It’s crucial to check the website. If it appears unprofessional or is grammatically incorrect then its is a sure sign that the site is a fraud.
The NFT space is booming and do you think that NFTs will kill traditional art? Well, we wrote an article about that exact topic here.
