Every market of values ​​has its own fraudulent schemes. Precious stones, for example, are synthesized, and paper banknotes are counterfeited. There are similar schemes in the crypto market. One of them is ragpulls.

What is ragpull

Speaking about the crypto industry, we have to mention a lot of pools: mining pools, liquidity pools, staking pools. They represent an association of someone, since “pool” is translated from English as “association”. And there is also such a thing as ragpull (sometimes written as “ragpul”). Is this also a union of something?

And here it is not. In English, this is written as “rug pull”. Literally translated as “pull out the carpet.” This is a metaphor. And the rug pull itself is a fraudulent scheme that is usually used in DeFi. What is the point?

First, a new token is created. Then its price accelerates in all sorts of ways. After that, the entire value that the tokens were endowed with is withdrawn by the developers, and the price drops to zero.

There are several varieties of ragpulls. Let’s consider each of them.

Types of ragpulls

It is believed that there are three variants of ragpulls: theft of liquidity, limiting sell orders and a price collapse.

Most popular first. Liquidity theft occurs by creating a liquidity pool. There, a certain ratio between the tokens is set, after which investors begin to fill the liquidity pool, and the developers take everything they have contributed.

Sell ​​order limit is an opportunity to sell newly created tokens only to developers. This is done using encryption. Thus, new investors come to the pool, exchange their conditional bitcoins for “shieldcoins”, but cannot sell such garbage. Developers get all conditional bitcoins to themselves.

Price collapse is a classic example of aggressive advertising. First, the developers publicly declare that their token is a kind of holy grail. By such actions, raising the price, simultaneously selling the token itself. Then the cost collapses, and the developers have already sold everything. Unlike the first two methods, this option is not so much criminal as unethical. In general, the method is close to the “pump and dump” scheme.

There is a conditional division of ragpulls into “hard” and “soft”. The former include limiting sell orders and stealing liquidity, while the latter is a price collapse. The essence of the legality of the method. The first two options are outright fraud, that is, clearly an illegal event. And the collapse of the price is simply an unethical action without a clear egregious crime. You can carry out aggressive advertising, but not completely fulfill the stated. There may or may not be questions from the authorities to you, depending on the jurisdiction.

Examples of ragpulls

At the end of August, the yield aggregator on the Solana Luna Yield blockchain “took and disappeared”. At the same time, about $6.7 million was withdrawn. Initially, everything looked quite decent. The developers claimed complete transparency, even enlisting the support of another Solana project, SolPad. Before the initial offering on the DEX (IDO), everything looked tolerable. This happened on August 16th. And already on August 19, all customer funds turned out to be
moved into the Tornado Cash mixer.

A little earlier in June 2021, the WhaleFarm project, which promised “millions in earnings”, also evaporated. Only the creators withdrew less – $2 million. Moreover, there were quite a lot of alarming things in advance, from the anonymity of the development team to a 100% growth of the token in a few minutes. It all ended with the deletion of Twitter and Telegram accounts, as well as
collapse token prices up to $0.2.

In October 2021, AnubisDAO was able to draw out from under customers $60 million in about 20 hours. The project did not even have an official website, but only a Discord server and a Twitter account.

How to protect yourself from ragpulls

There is no one hundred percent way to completely protect yourself. But there are a number of aspects that you should pay attention to in order to reduce the risks.

First: the identity of the developer behind the project. Find out as much as possible about him: what projects he participated in, who he is, what experience, and so on. Again, the criterion is not an absolute. Let’s remember at least bitcoin with its Satoshi Nakamoto or Shiba Inu with Ryoshi. Both developers are still unknown, but the projects have stood the test of time.

Second: how much liquidity is locked up. If none, then it is better to bypass the project. Most likely you ran into ragpull. Liquidity must be protected by smart contracts for a period of three to five years from the start of the initial offering. Pay attention to the percentage of blocked liquidity in the pool (TVL). Ideally, it should not be less than 80%.

Third: you can try to buy a small amount of a new token and immediately sell it. This method will allow you to find out if there is a limit on the sale. If so, you will be warned. If not, then the chances that you did not hit the ragpull increase.

Fourth: pay attention to the growth rate of the price of the new token. If the speed seems to be cosmic, if in a few hours or minutes the cost grows by tens or hundreds of percent, then most likely nothing good should be expected. In particular, this should lead to bad thoughts when there are few holders of a new coin.

Fifth: promise of huge returns. Usually projects like financial pyramids or Ponzi schemes do this. Free cheese only happens in a mousetrap.

Sixth: pay attention to whether the project has a third-party audit. This is the point that many still doubt the reliability of Tether. After all, the parent company issuing the stablecoin USDT began to conduct a public audit relatively recently.

In short, ragpulls are scams related to the creation of new tokens. Usually developers promise a lot, but they don’t finish their projects and are quickly washed away with what they managed to earn.

This material and the information in it does not constitute individual or other investment advice. The opinion of the editors may not coincide with the opinions of the author, analytical portals and experts.