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A “rug pull” is a term used for “exit scam.” This is a situation when crypto developers abandon a project, and they run away with investors’ funds. Rug pulls many times happen in the DeFi ecosystem, particularly on DEXs. This is where malicious individuals create a token and list it on a DEX, pair it with a leading cryptocurrency like Ethereum.
To get a deep insight into Rug Pull, it is important to understand “Liquidity Pool.” In a liquidity pool, creators create a token that is paired with a very famous token. Then they list it on the Decentralized exchange.
Those who are looking to make profits from yield farming invest in the famous token, and in exchange, they get the liquidity pool token. Malicious scammers come up with a scheme to create hype around the token. When more numbers of investors contribute to the pool, the bad actors flee with the high-value token, breaking all promises proposed by the protocol.
Meme coins are an interesting example of where investors are attracted to invest, and they are pulled through a maze of FOMO and therefore get the rug pulled.
Liquidity pools get easily marketed when they are paired with top cryptos, as it provides buy and sell orders for a given token. Exchanges need a way to keep the orders flowing. In a decentralized token, there is no one to audit the listed tokens.
The core idea of the Liquidity pool is the collection of investor funds that are locked up in crypto pairs, making it possible for users to trade between cryptocurrencies. The trading fee charged on the transaction encourages investor participation, and the returns are based on the total value lent to the pool, like the Dividend. Thus, according to the scheme, the more money the investor lends, the more money he makes. The bad actors exchange the assets in another market and make the assets untraceable to the victim.
DeFi rugs are made possible because the DeFi protocols do not have an oversight. Record numbers of crimes have been documented. Investors are informed these days, and they are trying to be more vigilant than in the past.
Some of the past examples of scams are Thodex, Compounder Finance, Meerkat Finance, Whale Farm.
When the yields are too high, and the creator is anonymous, and the prices are rapidly increasing without reason, then there are high chances for a rug pull.
