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🚩🚩 What Are Rug Pulls?

  • Writer: Lara Hanyaloglu
    Lara Hanyaloglu
  • Feb 13
  • 3 min read

Updated: Feb 14

Rug pulls are a common type of scam in the cryptocurrency world where developers abandon a project and run away with investors' funds. The term “rug pull” comes from the expression “pulling the rug out,” meaning to suddenly withdraw support and leave people in a difficult situation. This fraudulent practice is especially prevalent in the DeFi and meme coin spaces due to their lack of regulation and the ease of launching tokens.


How Rug Pulls Work

Rug pulls typically happen in decentralized exchanges (DEXs) like Uniswap or PancakeSwap, where anyone can list tokens without scrutiny. Here’s how the scam unfolds:

  1. Creating a Token: Scammers create a new cryptocurrency token, often with a catchy name and promising whitepaper.

  2. Marketing the Project: They aggressively promote the token on social media platforms like Twitter, Reddit, and Telegram, generating hype and FOMO (Fear of Missing Out).

  3. Providing Liquidity: To gain trust, they add liquidity to the token on a DEX, allowing people to trade it.

  4. Attracting Investors: As more people buy the token, its price skyrockets.

  5. Pulling the Rug: Once enough funds are pooled, the developers suddenly remove the liquidity and vanish, leaving the token's value worthless.


Types of Rug Pulls

There are three primary types of rug pulls:

1. Liquidity Pulls (Exit Scams)

  • The most common type of rug pull.

  • Developers withdraw all liquidity (more on this in the next post "What is liquidity") from a DEX, making it impossible for investors to sell their tokens.

  • Example: In 2021, the Squid Game Token gained popularity but turned out to be a rug pull when the developers drained the liquidity, causing the token’s value to plummet to zero.

2. Dumping (Pump and Dump)

  • Developers or insiders hold a large portion of the token supply.

  • They artificially inflate the token’s price through marketing and then sell all their holdings at the peak, crashing the price.

  • Example: Many meme coins without real use cases experience this type of rug pull.

3. Function Manipulation (Hidden Backdoors)

  • Developers insert malicious code into the token’s smart contract.

  • Common tactics include disabling selling or restricting it to only certain wallets.

  • Example: A token may allow only the developer’s wallet to sell, leaving buyers stuck with worthless coins.


How to Spot and Avoid Rug Pulls

To protect yourself from rug pulls, always conduct thorough research and be cautious of projects with these red flags:

🚩 Red Flags to Watch For:

  • Anonymous Developers: No public information or track record about the project’s team.

  • Unverified or Copied Smart Contracts: Use of open-source contracts with minimal modifications.

  • No Liquidity Lock: Check if liquidity is locked on platforms like Team Finance or Unicrypt. Locked liquidity prevents developers from pulling out funds prematurely.

  • Excessive Hype and Unrealistic Returns: Promises of guaranteed profits are a common scam tactic.

  • High Token Concentration: If a few wallets hold a large portion of the supply, it increases the risk of a dump.

  • No Audit Reports: Reputable projects undergo smart contract audits from firms like Certik, SolidProof, or Hacken.

🛡️ Tools to Use for Safety:

  • Token Sniffer: Scans for suspicious contract code.

  • DEXTools: Provides real-time analytics and trading pair insights.

  • Etherscan/BscScan: Helps check token distribution and developer activity.


Famous Rug Pull Examples

  1. Squid Game Token (SQUID): Gained massive attention but turned out to be a scam, with developers vanishing and the token crashing from $2,861 to nearly zero.

  2. Thodex Exchange (Turkey): The CEO fled with over $2 billion of investor funds.

  3. Meerkat Finance: A DeFi project on Binance Smart Chain that disappeared with $31 million.


How to Protect Yourself from Rug Pulls

  • Do Your Own Research (DYOR): Always research the project, team, and community feedback.

  • Verify Smart Contracts: Ensure they are audited and available for public review.

  • Diversify Investments: Avoid putting all your funds into a single token.

  • Use Reputable Exchanges: Centralized exchanges (CEXs) are generally safer than new DEX listings.

  • Watch Liquidity Locks: Projects with locked liquidity are less likely to rug pull.



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