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In the crypto world rug pull is a term that refers to when a team of a developer working on a crypto project, ditches that project and withdraws the total liquidity. This simply means to remove base support suddenly.
This “Rug pull” of a thing is commonly related to the Non-centralized Finance Projects: Defi. DeFis usually supply Non-centralized exchanges with funds. Non-centralized Finance: DEXs cryptos are not always displayed on centralized exchanges: CEXs. Normally a Non-centralized finance project designs its crypto and tenders some amount of fund as liquidity to a Non-centralized Exchange: DEXs. This can then be deposited in a liquidity pond, or sold in a starting Non-centralized Exchange Offering known as IDO. Here investors buy the coin, and yields are normally kept for some time to secure an amount of liquidity.
How Does a Rug Pull Happens?
After the project gains access to its liquidity, individuals who pull the rug can decide to do two things. These people can offer their crypto at elevated values and then withdraw all their liquidity. Also, they can maneuver smart contracts to cart away money that belongs to investors. Because of the low liquidity created by the rug pullers, investors will now labor to sell the cryptocurrency in their possession. Another option is that they may have to sell their crypto at a lowered value. The value of such cryptocurrency is lowered by the AMM which means Automatic Market Maker. This system calculates the worth of crypto based on the proportion of two coins in a liquidity pond.
Where It Occurs?
Rug pulling is usually seen in non-centralized Finances because crypto can be designed without difficulty and displayed on non-centralized Exchanges: DEXs with slack protocols. Just any individual can prop up a liquidity pond. A significant number of crypto lacks identity, which makes it too doable for rug pullers to do their dirty work with no risk to their identity.
Signs of a Rug Pull
One could suspect the onset of rug pulling when the worth of a crypto skyrockets within a little space of time. If the people who started the project can withdraw their money not long after the project is started, this creates a chance for rug pulling to occur. One can as well notice many such project adverts over the internet. For one not to be a victim of a rug pull, one will have to conduct serious fact-finding on any project of interest. This research must consist of knowing the economics of such crypto, the method of disbursing the cryptocurrency, the liquidity, and the team behind it.
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