What is a rug pull?
Rug pull or "carpet pulling" is a type of financial fraud in which a team suddenly abandons a project and disappears with the funds of investors. This type of scam is extremely common in the digital asset market.
Every year, due to intruders, users lose millions of dollars in cryptocurrencies. Scammers often implement their schemes in the DeFi ecosystem, especially on decentralized exchanges (DEX), where they can easily promote a token for "pumping".
Rug pull thrives on DEX because the platforms allow you to place coins for free and without the mandatory audit that is required for listing on CEX. At the same time, the process of creating coins on Ethereum or Solana smart contracts does not require special technological knowledge, which is what scammers use.
Scammers derive particular benefit from the popularity of meme tokens, since when creating a deliberately fraudulent "joke" project, there is no need to think through a fake business plan or roadmap.
How does rug pull work?
As a rule, developers begin to actively advertise their coin through influencers or using other marketing tricks. The main goal is to create a victim's FOMO and force her to make an impulsive purchase without prior analysis.
Attackers can promise a 100-fold profit, offer cheap allocation of a coin that has not yet been released, lure with fictional technologies, and so on.
As soon as the project begins to attract people, the organizers of the scheme place a token and create a liquidity pool (LP) on decentralized exchanges like Uniswap or PancakeSwap. If possible, developers can independently "inflate" the asset at the expense of 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 a devalued coin.
What are the types of rug pull?
Although the goal of all rug pull 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 "pulling out of the carpet" occurs suddenly and without any signs indicating this. The quotes of the coin begin to plummet to zero, and investors cannot sell it due to lack of liquidity.
The soft rug pull differs in duration. In this version, the developers postpone the "escape" for a while in order to attract more victims.
Regardless of the timing, the various rug pull are also divided into three categories:
Theft of liquidity. The most common and easy-to-implement scheme in which developers take all assets invested in the project from the LP. Since the token team has control over its smart contract, it can also register for itself unlimited access to coin pools on DEX. Restriction on sale. A more "secretive" tactic involves making changes to the token at the smart contract level to limit the capabilities of holders. For example, scammers, when accumulating sufficient liquidity, can prohibit opening orders for the sale of coins. After that, scammers merge 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 using marketing strategies such as contests and sweepstakes, as well as advertising on social networks. Scammers sometimes organize communities and other additional activities, but at some point they still sell some of their coins, abandoning the project.What high-profile cases of rug pull are known?
AnubisDAO is a DeFi project launched in 2021, which was positioned as a fork of OlympusDAO. A few hours before the end of the tokensale, the developers withdrew all liquidity from the ANKH/ETH pool. The damage was estimated at $60 million.
SQUID is a coin based on the popular Netflix series "The Squid Game". After the launch, the asset price skyrocketed to $2,856, but investors complained that they could not sell tokens on the PancakeSwap platform. Later, its quotes collapsed to $0.005.
The PEPE incident — in August 2023, the multi-signature meme token wallet reduced the number of required confirmations from five to two and transferred more than 15.7 trillion coins to exchanges, causing a 20% collapse in the exchange rate. The only remaining PEPE developer said that three former team members were behind the theft of $15 million worth of assets.
Bot scheme — in early 2024, Blockfence analysts identified scammers who created more than 1,300 scam tokens and as a result of rug pull stole over $32 million from approximately 42,000 users. According to experts, the operation to create coins was performed almost completely automatically. The algorithm selected and issued a token that is similar to the asset of an existing company or project.
The URF scam presale that occurred on the Solana network. The memcoin team collected about 2,400 SOL (~$450,000 at that time) during pre-sales and disappeared with user assets without even launching the coin.
How to define a rug pull?
Care and caution are required to identify criminal schemes. First, you need to study the team, goals, and community of the project. It is necessary to 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. Detailed reports on token vulnerability checks can be found online. If there is no such data, then this 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 community on social networks or forums can say a lot about the coin. A large number of active participants is a positive sign, but ordinary investors may not always be aware of the real plans of developers.
Attackers often give themselves away with unrealistic promises and inflating FOMO. Aggressive marketing and profitability of hundreds of percent per month are clear signs of dishonesty of the team.
Sometimes projects are not initially conceived as a scam, but as things get worse, developers may decide to gradually "drain" the coin.