In This Article
What is a rug pull?
Rug pull or “rug pulling” is a type of financial fraud, often referred to as a crypto rug, in which a team suddenly abandons a project and disappears with investors’ funds. This type of scam is extremely common in the digital asset market;
Every year, users lose millions of dollars in cryptocurrencies due to malicious users. Often, scammers implement their schemes in the DeFi ecosystem, especially on decentralized exchanges (DEX), where they can easily promote a token for “rug pulling”.
Rug pull thrives on DEX because the platforms allow coins to be listed for free and without the mandatory auditing required for listing on CEX. At the same time, the process of creating coins on Ethereum or Solana smart contracts does not require any special technological knowledge, which is what scammers take advantage of.
Scammers especially benefit from the popularity of meme tokens, as there is no need to think up a fake business plan or roadmap when creating a deliberately fraudulent “joke” project.
Understanding Rug Pulls
Rug pulls are a type of cryptocurrency scam that can have devastating consequences for investors. To understand rug pulls, it’s essential to know how they work and what warning signs to look out for. A rug pull typically involves a developer creating a project, attracting investors, and then suddenly abandoning the project, taking all the funds with them. This can happen in various forms, including hard rug pulls, where the developer has no intention of completing the project, and soft rug pulls, where the developer may provide updates or engage with the community before eventually abandoning the project.
In a hard rug pull, the developers abruptly withdraw all the funds, leaving investors with worthless assets. This type of scam is often executed without any prior warning, making it difficult for investors to react in time. On the other hand, a soft rug pull involves a more gradual approach. Developers may continue to engage with the community and provide updates, creating a false sense of security. Eventually, they withdraw the funds, leaving investors with worthless tokens. Understanding these different types of rug pulls is crucial for protecting your investments in the crypto world.
How does rug pull work?
As a rule, developers start actively advertising their coin through influencers or using other marketing tricks. The main goal is to create FOMO in the victim and make him/her make an impulsive purchase without prior analysis;
It is also crucial to read disclosures associated with investment opportunities, particularly in the context of crypto companies offering investment contracts, to understand the legal obligations and risks involved.
Attackers can promise 100-fold profit, offer cheap allocation of not yet released coin, lure with fictitious technologies and so on. ;
Once the project starts attracting people, the scheme organisers place the token and create a liquidity pool (LP) on decentralised exchanges like Uniswap or PancakeSwap. If possible, developers can “inflate” the asset themselves with available funds.
Buyers then exchange ETH or other cryptocurrency for a scam token, after which the project team withdraws all funds from the pools and disappears, leaving investors with depreciated coin.
What are the different types of hard rug pulls?
Although the goal of all rug pulls is the same - to steal money, the methods of achieving it may differ from scheme to scheme. They are divided into two main types: hard and soft;
In the first case, the “carpet pulling” occurs suddenly and without any indicating signs. Quotes of the coin begin to drop sharply to zero, and investors are left with worthless rug pulls due to the lack of liquidity.
A soft rug pull differs in terms of duration. In this variant, developers postpone the “escape” for a period of time to attract more victims.
Regardless of the timing, the various rug pulls also fall into three categories:
Liquidity theft. The most common and easiest to implement is a scheme in which developers take all the assets invested in the project from the LP. Since the token’s team has control over its smart contract, it can also prescribe for itself unlimited access to the coin’s pools on DEX.
Sell restriction. A more “stealthy” tactic involves making changes to the token at the smart contract level to limit holders’ options. For example, scammers can prohibit opening orders to sell the coin when sufficient liquidity has accumulated. After that, scammers drain their assets at any convenient moment, leaving investors with a useless token.
Dumping. A type of rug pull that is similar to the traditional Pump & Dump scheme. Developers promote the token to attract investors and stimulate trading activity by using marketing strategies like contests and giveaways, as well as social media advertising. Scammers sometimes organise communities and other additional activities, but at some point they still sell some of their coins, abandoning the project.
Red Flags to Watch Out For
To avoid falling victim to a rug pull, it’s crucial to be aware of the warning signs. Some common red flags include:
Anonymous developers or teams. Projects with unknown or anonymous developers can be risky, as there is no accountability.
Unrealistic promises of high returns or guaranteed profits. Be wary of projects that promise extraordinary returns with little to no risk.
Lack of transparency or clear information about the project. Legitimate projects usually provide detailed information about their goals, roadmap, and team.
No audits or security testing. Reputable projects often undergo third-party audits to ensure security and transparency.
Centralized liquidity control. If the project’s liquidity is controlled by a single entity, it increases the risk of a rug pull.
Misleading or unclear whitepapers. A well-written whitepaper should clearly outline the project’s objectives and technical details.
Pressure to invest quickly or fear of missing out (FOMO). Scammers often use aggressive marketing tactics to create a sense of urgency.
By being vigilant and recognizing these warning signs, you can better protect yourself from potential rug pulls.
How to Avoid Rug Pulls
While rug pulls can be devastating, there are steps you can take to avoid them. Here are some tips:
Conduct thorough research. Investigate the project, including the development team, technology, and community. Look for transparent and clear information about their goals, roadmap, and tokenomics.
Check for audits and security testing. Ensure the project has undergone third-party audits and security testing to verify its legitimacy.
Be cautious of unrealistic promises. Projects that guarantee high returns with little risk are often too good to be true.
Engage with the community. Interact with the project’s community on social media and forums. A large, active community can be a positive sign, but always remain cautious.
Diversify your investments. Don’t put all your eggs in one basket. Spread your investments across multiple projects to mitigate risk.
Use reputable platforms and exchanges. Stick to well-known and trusted platforms for your investments.
Stay informed. Keep up-to-date with the latest developments in the crypto world to stay ahead of potential scams.
By following these steps, you can reduce the risk of falling victim to a rug pull and protect your investments.
What high-profile rug pull cases are known?
AnubisDAO is a DeFi project launched in 2021 that was positioned as a fork of OlympusDAO. Hours before the tokensale ended, the developers withdrew all liquidity from the ANKH/ETH pool. The damage was estimated at $60 million. Investors were rug pulled, losing all their funds when the developers withdrew the liquidity.
SQUID is a coin based on the popular Netflix series The Squid Game. After launch, the asset’s price soared to $2856, but investors complained that they couldn’t sell the tokens on the PancakeSwap platform. Its quote later collapsed to $0.005..
The PEPE incident - in August 2023, the multi-signature meme token wallet reduced the number of confirmations required from five to two and transferred more than 15.7 trillion coins to exchanges, causing the exchange rate to collapse by 20 per cent. PEPE’s only remaining developer said that three former team members were behind the $15 million asset theft.
Bot Scheme - In early 2024, Blockfence analysts identified scammers who created more than 1,300 scam tokens and rug pull stole more than $32 million from approximately 42,000 users. According to experts, the coin creation operation was almost entirely automatic. The algorithm selected and issued a token that resembled an asset of an existing company or project.
Presale URF is a scam that occurred on the Solana network. The meme coin team raised about 2,400 SOLs (~$450,000 at the time) in pre-sales and disappeared with users’ assets without even launching the coin.
The Impact of Rug Pulls on the Crypto World
Rug pulls can have a significant impact on the crypto world, not only for individual investors but also for the industry as a whole. They can erode trust and confidence in the market, making it more challenging for legitimate projects to attract investors. Additionally, rug pulls can lead to financial losses, damage to reputation, and even legal consequences.
The prevalence of rug pulls highlights the need for greater transparency and security within the cryptocurrency market. Investors, developers, and regulators must work together to create a safer and more transparent crypto ecosystem. By understanding rug pulls, being aware of the warning signs, and taking steps to avoid them, you can protect yourself and your investments in the crypto world. Remember to always conduct thorough research, stay informed, and be cautious of projects that seem too good to be true.
How to identify a rug pull?
Identifying criminal schemes requires care and caution. The first step is to study the project’s team, goals, and community. You should pay attention to suspicious signals like unknown developers or lack of transparency.
Reputable projects often undergo third-party audits from security firms. Sometimes some independent experts conduct their own investigations of popular coins. You can find detailed reports on token checks for vulnerabilities on the web. If there is no such data, it is a reason to be wary;
Relatively safe are those digital assets whose liquidity is blocked for a certain period of time.
Interaction with the project’s community in social networks or forums can say a lot about the coin, and strong community engagement is often a positive sign. A large number of active participants is a positive sign, but not always ordinary investors can be aware of the developers’ real plans;
Often abusers give themselves away with unrealistic promises and inflated FOMO. Aggressive marketing and returns of hundreds of per cent per month are clear signs that the team is unscrupulous;
Sometimes projects are not initially conceived as scams, but as things deteriorate, developers may decide to gradually “drain” the coin.
