The different types of rug pulls in cryptocurrency scams

Last Updated on 35 mins by Jordan

Cryptocurrency investors have recently fallen prey to scams, with founders pulling the plug out of nowhere, leaving investors stranded. The type of scam known as a rug pull takes a few different forms. Knowing what it looks like can help you avoid losing your money to a fraudulent project.

What is a cryptocurrency rug pull?

A “rug pull” in cryptocurrency is a type of scam that happens when a person creates a fraudulent project that might appear legitimate, boosts the token and feature, boosts the price to attract investors, and then disappears with the funds. It’s called a “fraud pull” because it feels like investors have had their rug pulled out from under them for believing a project is a worthwhile investment, only to realize it’s a scam and they are left with a worthless asset. It occurs in decentralized finance (DeFi), where the legalities for investing are much less regulated than traditional finance.

The three different types of rug pulls

There are three different types of rug pulls that can be seen in cryptocurrency. These are:

  • liquidity theft,
  • Limitation of Sell Orders and
  • pumping and draining.

liquidity theft

Liquidity theft, or liquidity theft, occurs when the founder of a project (the creators of a token) suddenly withdraws all coins from the pool of liquidity used to fund a project. When this happens, the value locked in the token is removed, leaving investors with a worthless asset that cannot be used for anything. This type of rug pull is the most common in the DeFi space.

Limitation of Sell Orders

This is a more subtle way for rogue founders to steal from investors. In this type of scam, a developer encodes a token with a smart contract, meaning they are the only party who can sell it. This means that the token itself cannot be sold by investors to other competitors, locking them into an asset that cannot be traded. When enough investors have bought the token and the founder is sitting on a profit, they throw away their tokens, leaving investors with worthless tokens that they can’t do anything with.

pumping and draining

When a founder or crypto developer quickly sells a significant portion of their own tokens, this is known as dumping. When this happens, the price of the coin is radically driven down as demand essentially falls and available supply skyrockets. In a carpet move, fraudulent founders will pump the token to increase the value and appeal of the cryptocurrency to attract investors to the project. With marketing and advertising, vulnerable investors will buy the tokens. If the price action is high, the founder will dump the tokens and capitalize on the hype.

The two different forms of rug pulls

There are also two different forms in which a carpet pull can occur:

  • Hard carpet pulls and
  • Soft carpet train.

A cryptocurrency hard carpet move

A hard carpet pull happens when a founder uses coding to maliciously exploit the project to defraud investors. This means that the smart contract contains hidden things aimed at deceiving investors and the intent to steal funds is evident in the code. Liquidity theft is an example of a hard carpet move because the code is written to lock investors into an asset that has no real direction or function.

A soft carpet train

Soft rug pulls in cryptocurrency scams occur when founders and teams quickly dump their assets, debase the token and take advantage of the profit generated by investors buying the cryptocurrency. The intent to steal investors may be in place from the start, but the project’s token is not designed to scam investors by code.

The different types of rug pulls in cryptocurrency scams post first appeared on Coin Insider.

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