Rug pull is a malicious activity in the crypto industry where the developers of certain crypto projects are often seen abandoning a project and scamming the investors with their funds. Rug pulls are quite common in the decentralized finance (DeFi) sector. Decentralized Exchanges (DEX) also face a lot of these scams where the scammers often create tokens and list them on the decentralized exchanges, pairing them with top crypto assets such as Bitcoin or Ethereum.
Rug pull happens when a large number of unsuspecting investors swap their Bitcoin or Ethereum for the listed token on the DEX; the developers withdraw the liquidity pool, which leads to the price of the token falling to zero. Scammers are often seen creating hype around the tokens using social media platforms. DEXs are subjective to rug pulls because exchanges like these often let users list their tokens or coins for free without conducting any audit, which is not the case for centralized exchanges. Token creation is also simple by using the open source blockchain protocols present on Ethereum. The scammers use the above-listed factors to their advantage and scam innocent investors.
The best way to avoid getting into such rug pulls is to research before investing in any crypto asset. Investors are advised to check the liquidity pool as one of the first steps before investing in any crypto asset on the decentralized exchanges. Locking the liquidity pool is also one of the ways to identify reputable projects. Investors must check for such scenarios to avoid getting rug pulled. Rug pulls can also be identified when the prices of certain tokens skyrocket within a few hours.