Rug Pulls: What Is a Rug Pull in Cryptocurrency?

The Rug Pull schemes are the kink in the armor of the blockchain network. This scam is why nobody will buy a Squid game token in the next century.  

The world of cryptocurrency has had enough time in the limelight for people to catch onto its worth. There is a saying that nothing in this life is guaranteed but death and taxes. Well, I’d posit that the other thing that is always guaranteed in this life is that if money is to be made, someone will find a way to scam the system to make a quick buck. This was true of the gold bar and the crisp green dollar bill, and now it is true of the cryptocurrency token.  

There is a new system for exploiting the blockchain network, and the scheme is called the Rug Pull. As far as schemes go, this one is quite elaborate and takes a hefty amount of time and resources to pull off in the first place. Even criminals entering the Web 3.0 space embrace innovation as a way of life.  

What is Crypto Rug Pulling? 

The concept of rug pulling in the crypto space is straightforward, but it takes weeks or even months to pull it off. True genius comes from the execution of the deviant act, not the idea itself. It takes a certain level of malicious intent to set up a crypto project to fraud their investors out of thousands if not hundreds of thousands of dollars.  

In short, rug-pulling schemes are not petty crimes and are not for the faint of heart.  

The first red flag to look out for is the code audit. Most rug pull scams are operated through a crypto project that has not had its code audits and has hidden escape doors programmed either into the blockchain product itself or built into the design of the project to give the project leaders an easy escape route when your digital gold turns to confetti flies into the abyss. This usually leaves their investors, also known as the liquidity pool, with their hands in their pants and nowhere to sell their worthless goods.  

Sadly, this has become increasingly prevalent in recent years.  

How does the rug pull scam work? 

This scam is more prevalent than anyone would like to admit. With the novelty still attached to the young blockchain and DeFi industries, many prospective investors are still naïve regarding potential crypto projects. In many ways, this is the ultimate example of wearing rose-colored glasses. Instead, the glasses paint the world in Bitcoin Gold this time, and most people can’t tell an NFT from a JPEG.  

To avoid the Rug Pull scam, let’s look at how the scam is set up: 

1. Step 1: Create an elaborate crypto project and advertise it to anyone and everyone. Ensure that there is an escape hatch programmed into the crypto token that allows you to run away when the token’s value evaporates into thin air  
2. Step 2: Make your coin available on the most popular crypto exchanges so many people can get their hands on it. The Binance Chain, Ethereum network, or good ol’ Bitcoin network are prime choices.  
3. Step 3: Create hype around your project and try to inflate the coin’s value as much as humanly possible and then inflate it some more.  
4. Step 4: As soon as you have enough investors, dump or liquify your coin until it’s worth less than the time it takes to check your MetaMask balance.  
5. Step 5: Run, Forest, Run.  

Congratulations, now you know how to set up a rug pull scheme, and more importantly, you know how to spot one from lightyears away.  

What are the different types of rug pull schemes? 

There are three main types of rug-pulling schemes to look out for. To know how to avoid these scams, make sure you know which one you’re dealing with first: 

• Liquidity: This form of scheming involves accumulating a large liquidity pool in their DeFi environment. The scam uses a standard DeFi rug pull method of exiting the fraud. As soon as they have a healthy liquidity pool, the creators withdraw all the coins and leave their investors with nothing.  
• Limiting Selling Order: This is a subtle method of defrauding investors. This involves setting up your crypto token to restrict the parties capable of selling the token. This uses paired currencies that are developed to trade against each other. The scheme involves this setting up their retail investors to fail. Then they finally dump the coin, and it becomes worthless. The Squid Token Scam was a prime example of this kind of rug-pull scam.
• Crypto Dumping: This is a quick pump-and-dump scam that most of us are available. They hype the coin until its price rises and it becomes profitable. This is an ethical dilemma for the cryptocurrency community. Some argue it’s okay to drive demand, while others believe that coins without real-world utility should not be released on the blockchain network. 

Hard pulls vs. Soft pulls

Both Rug Pull types involve crypto developers, including a back door in their crypto project, to exit with the money after the scam is complete.  

Hard Pull	Soft Pull
The developers include malicious code	Asset dumping (quiet attraction)
Liquidity stealing	Pump and dump scheme
Exploits smart contracts	It is stealing money that is promised to be donated
The developers intend to commit fraud	Hyping up a useless or undervalued coin/ tokens
This is illegal	This is tolerated but unethical

Are crypto rug pulls illegal? 

The short answer is yes, but it’s quite a complex issue. The reality is that the entire Web3 community and its technological infrastructure are very new. This means that the law has not quite caught up to the latest technology. This is how people used the blockchain to conduct illegal and illicit behavior, and now people are using it to fraud thousands of people out of their money.  

Hard rug pulls are always illegal. These rug pull schemes incorporate malicious code into the crypto project, explicitly indicating their malicious intent. An example of this was the Thodex incident in Turkey. The Turkish officials discovered a fraudulent crypto project that promised to donate the project’s proceeds to charity, but this was a scam. This was one of the most infamous examples of a rug pull scheme on the centralized financial exit scheme (CeFi). The scammers walked away with $2 billion from their 2021 crypto rug pull scam. Thankfully, Turkish officials were able to detain 62 people in connection to the fraud.  

The five biggest rug-pulling schemes

This is a list of the biggest Rug Pull schemes in recent history:  

1. 1. Neko Inu 

Image 2: https://sgbudgetbabe.com/is-neko-inu-scam/ 

Neko Inu was a crypto play-to-earn where players could earn USDT coins. It was a virtual player-versus-player (PvP) platform that hosted adorable characters to engage with. The Neko Inu game was a joint venture between the Hong Kong consortium and a Cambodia casino.  

The game was attractive. To new players, it is evident that the game was a blooming MLM scheme. The reward for recruiting new players was too hefty for usual. The second red flag was the lag in the withdrawal time. The first time took 2 minutes, but the subsequent withdrawal lagged by a day or two. That immediately made players suspicious… and they even charged a 5% withdrawal fee.  

1. 2. Squid game rug pull 

This one particular rug pull scam was taken personally. It preyed on people’s love for the global Netflix phenomenon, Squid Game. The creators of the projects dangled Squid tokens in front of their investors, promising that those with a specific number of Squid tokens would be allowed to play a Squid Game-inspired play-to-earn game. Unlike the original Korean series, the winning pot was not limited to a single winner, and there was even a final bonus that would be accessible to unlimited participants.  

The project received thousands of investors seemingly overnight. This saw the price soar to $3,000 per token. Then, disaster struck, and the developers pulled the rug out from under their feet. People who had invested their life savings saw their $3k token drop to $0 within a few minutes. The developers also included an antidumping feature that seemed great at first but soon became the reason that millions of dollars could not be withdrawn, and thousands of people lost their life savings.   

1. 3. Luna Yield rug pull 

 

This crypto scam preyed on a rather significant issue in the blockchain industry. Luna yield was an excellent project on paper that served the world and helped the environment. If only it were legit. Sadly, the ecological farming project was released on the Solana network (SOL) with zero interest in making a positive difference in the world. Initially, the project grew steadily, until finally, POOF… Luna Yield vanished without a trace. The creators wiped the internet of their social media presence right after they managed to withdraw millions of dollars from the project.  

An investigation revealed that the developers of Luna Yield had set up the investors to stake their SOL on the platform and then ran away without allowing them to withdraw even a fraction of their tokens. So much for caring about the environment.  

1. 4. One Coin 

This notorious crypto scheme made Ruja Ignatova one of the most wanted people on the FBI registry. It was the most rent rug pull scam that holds the title of the most ruthless cryptocurrency rug-pulling fraud.  

It was launched in 2014 with the shared vision to become the next big name in cryptocurrency. Its CEO did countless interviews discussing the potential of the OneCoin tokens and how they would surpass Bitcoin. She even spoke at Wembley Stadium in London. This alone garnered the project 90 000 investors and accumulated millions of dollars.  

Then, overnight, Ruja was gone, and so were the accumulated millions she managed to swindle from her investors. An investigation was done that found two things: 

• The scheme had amassed over $4 billion!  
• The blockchain infrastructure supporting the cryptocurrency NEVER existed.  

The currency was based on the SQL server, but ultimately, it was found to be a Ponzi scheme set up by the Ignatova family. To date, the investigation continues without any convictions.  

1. 5. Evolved Apes 

Image 3: https://opensea.io/collection/evolved-apes-inc 

We all love an overhyped NFT project … NOT! This was the case for Evolved Apes. It launched initially as “Evil Ape.” The project’s developers managed to perform a daylight robbery and walk away with $2.7 million after a single week.  

The NFT collection was initially intended to be characters for a fighting game that players could purchase to play within the game. There was an extensive social media campaign deployed to hype up the project.  

Other than the creators of the scam walking away from the project with millions of dollars in their pockets, the rest of the people involved in the project walked away with an impressive $0. To make matters worse, not even the artists nor the winner of the game earned a cent. 

How do you avoid the rug-pull scam? 

The rug pull scheme manipulates the crypto market’s vulnerability to the hype and people’s excitement about the new technology. In short, the conniving people involved in these kinds of scams are engaged because they want to profit off people’s desire to make money quickly. Cryptocurrency is the ultimate get-rich-quick scam if you don’t know what you’re doing.  

For those of you who want to know how to spot a rug pull scheme, this is how:  

• Do your research. Before investing in a new crypto project, do your due diligence and independently research the project. Internal reports will always paint the project in a good light.  
• Always take the time to consider the coin’s utility and how it will be used in DeFi and the blockchain industry. If the coin doesn’t have a logical use case, it’s probably a hype coin.  
• The third and most important tip is to never buy crypto while emotional. This means that if your heart is beating because of the money, you think the project will make you, take a step back and breathe. This is when you revise steps one and two. Think before you invest.  
• If you still don’t know whether the project is legit or a scam, consult resources that make it their business to track and shut down rug pull schemes. Tokensniffer, BSChecker, and Cryptach are our go-to trackers for this.  

Cryptocurrency and its surrounding technology are fascinating; understandably, millions flock to this technology to improve their lives. But there will always be those who want to profit from the hopes and dreams of the masses, and FOMO is the perfect way to do so. Just remember to do your research and explore the Web3 community before you invest your hard-earned money into a shiny new project. Do that, and you’ll find yourself spotting legitimate gold mines in the crypto space that will help you achieve the life you’ve always wanted.