Rug pull is a common scenario in the decentralized finance space, and it is crucial to find out the telltale signs. Rug pull involves the team members withdrawing their backing of the project. They withdraw their support after selling the native tokens to others.
Cases of founders disappearing into thin air or suddenly withdrawing their support of the project exist. The token's value usually plummets and falls to near zero when this occurs.
Below are some signs that a rug pull may occur.
The whitepaper is meant to detail the different aspects of a project – from its business model, use cases, tokenomics, and much more. In addition, it is the tool to communicate with potential investors on what the project intends to offer. If a whitepaper is ambiguous and doesn't state what the project represents, then a rug pull may occur in the future.
When a team has little or no credibility, then there is a chance that they may abandon the project in the future. To verify credibility, check their history, achievements, employment history, connections in the industry, social media, and much more.
It may be a red flag when a project claims that it will bring unrealistic returns to those who buy their native tokens. The percentage of returns that they offer may seem outrageous. Features that the project claims it will offer may seem unachievable. If the aforementioned occurs, then it is a red flag.
Most Decentralized Exchanges have a permissionless listing system, meaning that anyone can list their token there without any verification process. If a token is listed only on decentralized exchanges, a rug pull may occur in the future. Once a check is done, and you realize that only a few wallets hold the coin in large bulk, that's a sign of trouble.