A rug pull gets its name from “pulling the rug out,” which is a type of scam that occurs in crypto when a team pumps their project’s token before disappearing with the funds, leaving their investors with a valueless asset.
Rug pulls are common with DeFi projects that aim to disrupt traditional financial services such as banking and insurance. NFTs have also been involved in rug pulls. Rug pulls occur when fraudulent developers create a new crypto token, pump up the price and then pull as much value out of them as possible before abandoning them as their price drops to zero.
There are three main types of rug pulls in crypto: liquidity stealing, limiting sell orders and dumping. Liquidity stealing happens when token creators withdraw all the coins from the liquidity pool. When this occurs, it removes the value injected into the currency by investors, driving its price down to zero.
Limiting sell orders is a subtle way for a malicious developer to defraud investors. In this situation, the developer codes the tokens so that they’re the only party that is able to sell them. Finally there is dumping, which occurs when developers quickly sell off their own large supply of tokens. Doing so drives down the price of the coin and leaves remaining investors holding worthless tokens. “Dumping” usually occurs after heavy promotion on social media platforms.