In the world of Decentralized Finance (DeFi), Rug Pull means to have buy support or Decentralized Exchange (DEX) liquidity pool taken away from a market.
Rug Pull in DeFi is the new scam in crypto just like the ICO scam of the 2017 and one reason you should be careful while trading/swapping your coins on DEXes for new coin/projects. Have you checked if the liquidity provided for the coin is locked? If yes, how long was it locked for?
The ease of minting ERC tokens offers scammers opportunities to exploit investors looking for projects that will quickly do 10x, 20x of it's initial price. Once these investors swapped their Ethereum for this new token and the scam project owner has gotten enough Ethereum from the token, the project owner quickly drain the liquidity pool, causing a sell death spiral till the token becomes worthless.
DeFi Scammers tactics
Telegram has become the chat social media of choice for most Crypto projects/enthusiasts and these scammers leverage on this by spreading fake Airdrops campaigns where all you need do is interact with a Telegram bot, after joining their Telegram group to get a certain amount of tokens.
This way, they gradually build a community around the project. After this, they move ahead to list on DEX, provide/inject liquidity on DEX of which Uniswap is the most popular. The red flag here is, liquidity provided for their trading pair will not be locked or if locked, it will be for a short period of time. The community around this scam project will then go ahead to spread the buzz on Twitter, Reddit and other social media sites.
With the above mentioned steps, the stage is set for the scam. These scammers will wait for more people to swap their Ethereum for their coin and may even go as far as pump the coin just to get more people out of FOMO. Immediately they reach their targeted amount, they pull the rug and drain the liquidity provided.
Many examples of this scam abounds. In 2020, TRUAMPLE stole 1800 Eth within 3 hours; YMD. finance is another scam around August 2020 that added $40,000 liquidity on Uniswap and withdrew $80,159 barely two hours later doubling his capital within 2 hours.
Rug Pull in DeFi/DEXes is now the biggest Cryptocurrency exit scam. So when you want to trade that much hyped new gem on Uniswap, be careful not to lose your fund. Always check if the liquidity pool is locked and for how long.
There are scammers everywhere! Telegram as well... you're right!