TLDR: A rug pull is generally where a cryptocurrency or NFT project is abandoned more often than not through a pump and dump. The hype (excitement) by the market can cause prices to skyrocket (pump), then the founders sell (dump) causing the market to crash.
There’s a phrase in the English language “pull the rug out from under,” which means “remove all support and assistance from, usually suddenly.” Basically, it means when something changes abruptly. A good example is having financial support by way of a budget, but due to the financial situation, the allocation of budget changes despite the plans someone may have made.
A rug pull in Web3 is when a crypto or NFT team abandons the project. This abandonment can come from: Selling and cashing in on the money that others invest (exit liquidity)
Not delivering on the roadmap, or perhaps they never intended to, ghosting everyone and/or pretending to be someone or something they are not.
A slow rug pull where the hype is continued to be led by the teams, but deliverables are not met.
Here are a few prominent examples of rug pulls that have happened in the world of crypto and NFTs.
Many hear stories like Dogecoin or Shiba and hope to ride that pump of skyrocketing prices to invest, then cash out and hopefully become a millionaire. Crypto rug pulls can happen especially because founders can list these tokens on decentralized exchanges (DEXs) that don’t require audits and fees to list. The hype surrounding a particular token can drive these prices to pump, creating a sense of FOMO (fear of missing out) that makes people want to jump in and buy in order to catch that upward momentum.
If you have been on Netflix and any form of media last year, you would have heard of Squid Game. The Korean Show was released on Netflix worldwide on September 17, 2021 in 94 countries and had more than 142 million member households and 1.65 billion viewing hours - all during the first four weeks of launch. It held the #1 spot in the Top 10 Series for Netflix.
Riding on the wave of this Squid Game hype cycle a cryptocurrency called SQUID was launched as a play-to-earn token on October 20, 2021 at $.001 on Pancake Swap with the supposed plan where holders could participate in a game that was inspired by the show in November 2021 (no affiliation with the Netflix Show Squid Game). The SQUID Whitepaper shares plans for this token and is seemingly supported by a Crypto Twitter following of 57,000 and 71,000 telegram subscribers.
According to Coin Bureau and the chart below it skyrocketed 75,000% to $2,861 in less than one week. That came to a screeching halt when the founders sold their token for cash draining the amount of cash (liquidity) and drove the price of this token to zero. Along with the reports that cash out wasn’t possible for investors.
A couple of major red flags to note with SQUID were that the founders were not doxxed, (not publicly identified, basically you can’t google them and know who they are), there were spelling errors on the website, a Twitter account that did not allow for comments and more. These are all things to consider as investments are made.
Sadly, NFT rug pulls happen also like the token SQUID, however there are also comeback stories that are a part of Web3 history. Fame Lady Squad otherwise known as FLS is exactly that. (Full Disclaimer: I am a Fame Lady Squad holder).
Launched in July 2021, FLS was marketed as the “first female avatar project of all time.” The founders were supposedly three women that were eventually outed as a group of men who had lied about their identity as women on multiple projects including FLS. Not only was this a rug pull because they pretended to be someone else, but also because this was a cash grab, meaning there was no intention of delivering the roadmap (project plan) to grow the project. In addition, royalties for secondary market sales was non set up which is off because that is how project founders make additional profit.
Once the FLS founders were outed about pretending to be someone else, the FLS community asked for the contract, art and other assets. These were ultimately turned over to the community on August 24, 2021, after the founders conducted a poll asking the community where the smart contract and more should go. Handover of the project was brokered by @digitalartchick and then through a community vote Bored Becky, NFTignition, and Data - were chose to lead the project.
The trio, FLS team members and the entire FLS community have been building the project back from scratch and a tanked floor price of .01 to .084 (at the time of this article). Since then the team has hustled to rebuild this project including efforts through building community, collaborations and even through media like the launch of a podcast.
On September 28, 2022 FLS announced that they would be joining Daz3D through a Twitter Spaces where resources would be allocated and the team would come under the support system that is Daz3D. In addition, FLS has also joined HUG as part of the “groupHUG accelerator” program to help build and accelerate the project.
“We are an underdog in the space. The first year was about survival and we have survived," said FLS Director of Collaborations Cara Ricketts. "We are lucky to have a very passionate group of holders. People who hang on to the token for the story and nostalgia.”
FLS is a rare case of an epic comeback story within the Web3 space from a rug pull to be a project that is building with the support of their own community as well as the community at large through collaborations, donations from other projects and now a partnership with Daz3D.
Really it comes down to the potential to make a lot of money especially as a founder through initial sales and royalties. Web3 has an incredible community of builders, investors and creators, but there are also those who are looking for opportunities to make money through scams like rug pulls to take money to line their pockets.
DYOR. Do your own research. Each investment move needs to be carefully considered with research and a financial decision that is made by an individual as an investor who is ultimately responsible for their investments.
Even those who have been in the Web3 space may not be immune to rug pulls, but the right questions and considerations need to be taken into account. Who is the team? Are they doxxed? Do they have a whitepaper? What is their roadmap (plan) and it is realistic? Being a part of a community and friends in the spaces help to bounce off ideas and reservations that we may have to make sure that we are making the most informed and wise decision as we all navigate this wild wild west that is called Web3.
Stay safe frens.
This is not financial advice. If you don't want to spend money investing in crypto or Web3 — you don’t have to. The intent of this article is to help others educate themselves and learn.
Janey Park is a Web3 Content Creator (writer, speaker, video creator) & Brand Strategy Consultant. She is on a mission to help others jumpstart into Web3, especially through Fashion & Beauty.
