A rug pull is a sort of cryptocurrency fraud that takes place whenever someone pumps the token for their project before vanishing with the money and leaving its investors with a worthless asset. Rug pulls take place when dishonest developers produce a new cryptocurrency token, inflate its value, and then extract as much money as they can before leaving it when its value reaches zero. Rug pulls are an exploit for decentralized finance (DeFi) and a sort of exit scam.
There was two category under which rug pull happens which are Soft rug pull and Hard rug pull . A soft pull is when an asset is dumped, but a hard pull is malicious coding and liquidity theft. When project creators include nefarious backdoors in their token, hard rug pulls take place. The authors of the project have included malicious backdoors, which are covert exploits, into the smart contract. Right away, it is evident that fraud will be committed. Stealing liquidity is likewise seen as a hard pull. Token creators that swiftly sell their crypto holdings are referred to be soft rug pulls. As a result, the surviving cryptocurrency investors have a token that has been significantly depreciated. Even though it's immoral, dumping could not be a crime the same way that hard pulls are.
In the world of cryptocurrency, there are three basic sorts of rug pulling:
· Liquidity snatching- It is an example of a Hard rug pull, in this rug pull token producers take out all the coins from the liquidity pool, this is known as liquidity theft. By doing this, all of the value that investors have added to the currency is taken away, bringing its price to zero. These "liquidity pulls" frequently occur in DeFi settings. The most typical exit fraud is a DeFi rug pull.
· Sell order sizing- It is an example of a Hard rug pull, in this a hostile developer can stealthily swindle investors by limiting sell orders. The developer in this case has the tokens coded such that only they are authorized to sell them. Developers then wait for individual investors to use coupled currencies to purchase their new cryptocurrency. Two currencies have been coupled together for trading purposes, one against the other. Once there has been sufficient upward price movement, they exit their holdings and leave behind a worthless token.
· Dumping- It is an example of a Soft rug pull. The latest biggest example can of Squid Token fraud that took place previously where people lost millions. When developers suddenly sell off their own substantial quantity of tokens, this is known as "dumping." As a result, the coin's value drops and the remaining investors are left with useless tokens. Dumping typically happens following intensive social media advertising. A pump-and-dump scheme is the term for the subsequent surge and sell-off. Compared to other DeFi rug pull scams, dumping has more morally gray aspects. The buying and selling of one's own currency by crypto developers is generally not immoral. When it comes to DeFi cryptocurrency rug pulls, "dumping" refers to the amount and speed at which a coin is sold.