Mr_Bob_Ferguson back here again, hot off the back of explaining the ponzi scheme.

"Rug pull", just like "ponzi scheme", is another one of those terms which is incorrectly floated around almost any time that someone loses money in crypto.

A rug pull has a specific meaning. It refers to a specific type of scam.

So let's gather around the camp fire again, and see if we can get through this one.

Rug pulls revolve around a creator or developer. In many/most cases they have established the token for the purpose of performing the scam.

The TLDR

It's where a token creator or developer remove liquidity from a pool and effectively abandon the project. Another way to view it is as a specific form of a "pump and dump", led by the founders who have a specific exit strategy in mind.

Liquidity pools

The rug pull situation usually revolves around the liquidity pool. A liquidity pool in simplistic terms consists of one or more people who add 2 tokens of generally equal total values (a pair) into a bucket. For example, it may initially be $100 of the "scam token" and $100 of Ethereum.

This bucket is then accessed when someone wants to buy or sell the token. For example, you pay in Ethereum and receive scam token.

The more funds which are in this bucket the more stable the token price, the more investor confidence. On the contrary, with very few tokens in the bucket, price of the tokens becomes highly volatile, and it may be near impossible for people to sell.

The Scam

For this example, we shall name our scam token "BobRocket".

Here is how the scam generally plays out:

1. Mr_Bob_Ferguson Scammer creates BobRocket token (I hear it's a winner!).
2. Scammer adds $100 of BobRocket and $100 of Ethereum into a liquidity pool. The scammer is provided with liquidity pool tokens, representing their contribution to the pool. The liquidity pool value at this time is $200.
3. Scammer jumps onto crypto forums and socials and hype up BobRocket.
4. More people jump on board and start buying into BobRocket. They see money sitting in the liquidity pool, they have confidence that this is the 0.01% of shitcoins, the one that pays off.
5. BobRocket is a hit, it's price soars.
6. The value of the liquidity pool increases to $5000 based on the trades, but we must remember that it's not just the value of the BobRocket in the pool that has gone up, but also the value of Ethereum (which people used to buy their BobRocket).
7. Scammer then "does a rug pull" and withdraws everything from the liquidity pool.
8. BobRocket is now likely untradable, there is nobody to buy it in the liquidity pool, it's value plummets. Investors are left holding yet another valueless BobRocket.
9. Scammer is now holding a big bag of Ethereum ...as well as a bag of valueless BobRocket, but they don't care about that part, it's Lambo time.

The rug pull is complete.

In crypto we see plenty of scams.

Let's see if we can start labelling them correctly.

Bullish on BobRocket.

Find part 1 about ponzi schemes here: https://np.reddit.com/r/CryptoCurrency/comments/15h13sv/many_dont_seem_to_understand_the_meaning_of_a/