Understanding Rug Pulls in Web3: A Simple Guide
As the Web3 and cryptocurrency landscape evolves, new terms and scams emerge, one of which is the notorious “rug pull.” This guide will help you understand what a rug pull is, how it happens, and how you can protect yourself from falling victim to this deceitful practice.
What is a Rug Pull in Web3?
A rug pull is a type of scam in the cryptocurrency world where developers of a project suddenly withdraw all the funds and disappear, leaving investors with worthless tokens. This scam is prevalent in the decentralized finance (DeFi) space, where new tokens and projects frequently launch.
How Do Rug Pulls Occur?
Rug pulls generally occur in two main ways: liquidity rug pulls and project rug pulls.
Liquidity Rug Pulls
In liquidity rug pulls, scammers create a new token and pair it with a popular cryptocurrency, such as Ethereum, on a decentralized exchange (DEX). They provide initial liquidity to the pool and aggressively promote the token to attract investors. Once a significant amount of funds is pooled, the scammers withdraw all the liquidity, causing the token’s value to crash to zero.
Project Rug Pulls
In project rug pulls, developers launch a new project, such as a DeFi platform or an NFT collection, and raise funds through token sales or initial coin offerings (ICOs). After accumulating a substantial amount of money from investors, the developers abruptly shut down the project and vanish with the funds.
You can read more about this event here: Understanding Rug Pulls in Web3 (freecoins24.io)
