Rug pull or rug pulling is a type of scam in which a team instantly leaves a project and disappears with the investor’s funds. It is also known as a crypto rug. This type of scam is increasing day by day, and users lose millions in cryptocurrencies due to malicious users. To easily promote a rug for rug pulling, scammers use the DeFI ecosystem where they can implement their schemes easily. Another reason to use decentralised exchanges by the user is that it allows coins to be listed without paying money and without the mandatory auditing required for listing on CEX.
Scammers take advantage of the popularity of meme tokens. And no special technology is required in the process of creating coins on Ethereum or Solana.
Understanding Rug Pulls
Rug pulls are a type of cryptocurrency scam that have destructive results for investors. There are generally two types of rug pulls:-
1) Hard rug pulls: developer has no intention of completing the project.
And withdraw all the funds of the investors. In this type of rug pull, no early warning was given to the investor and they were left with valueless assets.
2) Soft rug pulls: developer may provide information or contact with the community before eventually disowning the project. The developer will be in regular touch with the community and give false hopes of security, and at the end, withdraw all the tokens and leave the investor with zero value.
Steps Involved in Rug Pulling
→ developer creates a project → attracts the customers → back off from the project and takes all the funds from the investors.
How Does a Rug Pull Work?
Developers start promoting their coin through different social media platforms or using any other skills. As a result, the victims make an impulsive decision without analysing the purchase.
The investor needs to read the disclosure and the content behind the contracts provided by the crypto companies to understand the threat and legal complications.
Attackers provide cheap allocations and promise to give 100-fold profit in return. And once the project got the hype and started getting the attention of the people, the scheme organisers placed the token and created a liquidity pool (LP) on decentralised exchanges, uniswap or PancakeSwap.
The attacker’s team withdraws all the funds after exchanging ETH or other cryptocurrency for a scam token.
What Are the Different Types of Hard Rug Pulls?
The goal to steal money from investors varies from scheme to scheme. There are two main types:-
1)Hard rug pulls
2)Soft rug pulls
Hard rug pulling is also known as “carpet pulling”. It occurs without any warning to the investor. Value of the coin starts depleting and the investor is left with no value because of lack of liquidity.
On the other hand, in soft rug pulls, developers do not lose the contact instantly, they provide false information and give false hopes to the investor for a period of time and then withdraw the funds.
Soft rug pulls attract more victims as compared to the hard rug pulls.
Regardless of the timing, the various rug pulls also fall into three categories:
1) Liquidity Theft: it is the most common way of rug pull as it is easy to implement. In this, the developer takes all the assets of the investor from the Liquidity Pool (LP).
2) Sell Restriction: it is more secretive in nature. In this, some changes were done to the token at the smart contract level to limit the options of the holders. For example: scams 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.
3) Dumping: the method in which the scammer advertises their coins through campaigns, influencers, advertising, etc. After selling the coin, they abandon the investors.
Red Flags To Watch Out For
It’s important to know the warning signs before investing your assets
- 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.
- Lack of transparency or clear information about the project: Authorised projects always provide full information about the projects, etc.
- No audits or security testing – respected projects always ensure the security and undergo third-party audits to fulfill their goals in a reputable manner.
- Centralized liquidity control: to decrease the threat of rug pull, the project should be controlled by two or more entities.
- Misleading or unclear white papers: the investor should check the outline of the project and all the details required to complete the process successfully.
- Pressure to invest quickly or fear of missing out (FOMO): a sense of urgency is created by the scammers using aggressive marketing tactics.
How To Avoid Rug Pulls
Some measures should be taken by the investor to avoid the threatening rug pulls:
Conduct thorough research
investing in the project, including the development team, technology and community. Look for transparent and clear information about their goals, roadmap, and tokenomics.
Diversify the investments: The investor should not put all the investment in a single project. To avoid the risk, investments should be spread across different projects.
Stay informed: Keep an eye on the latest trends in the crypto world to be aware of thepotential scams.
By following the mentioned steps, the scams can be mitigated by the investor and can protect the investment.
What High-Profile Rug Pull Cases Are Known?
Anubis DAO
It was launched in 2021. It is a DeFi project positioned as one of the Olympics DAOs. Before the end of the token sale, an estimated damage of approximately $ 60 million was estimated. It was all because the developers withdrew all liquidity from the ANKH/ETH pool. Investors were scammed and lost all the money.
SQUID
This coin is based on the popular Netflix series The Squid Game. $4.5 was its asset’s value when it was launched, but it collapsed to $0.005 and the investors were not able to sell the tokens.
The PEPE incident
In August 2023, the number of confirmations was reduced from 5 to 2 and transferred more than 15.7 trillion coins to exchanges. As a result, the exchange rate collapsed by 20%. And the reason behind this theft was that the three members of the team stole $15 million.
Bot Scheme
Scammers created more than 1,300 scam tokens in 2024. The attacker pulled more than $32 million from approximately 42000 users. The process of making the coin was automated.
Presale URF
Around 2,400 SOLs ($450,000 at the time) in the pre-sales. The attackers stole the money without even launching the coin. This scam occurred on the Solana network.
The Impact of Rug Pulls on the Crypto World
Rug pulls are one of the biggest threats for the crypto currencies world. As well as for the investors. They destroy the trust and confidence of the user and make it more difficult for them to invest in legitimate projects. Rug pulls also lead to financial losses, damage to reputation and even legal consequences.
To expand the market of the crypto, more transparency and security of the assets of the users is needed. It will create a secure environment to work for people. More awareness should be spread and warning signs should be given to the investors before making a transaction.
How To Identify a Rug Pull?
The first step is to get through the outline of the project goals and the information of the people in the team. Attention should be given to the suspicious signals. The assets which are blocked for a certain time are relatively safer than the other ones.
Communication should be built between the different members of the team, and information needs to be collected on a regular basis. Aggressive marketing and returns of hundreds of percent per month are clear signs that the time is unscrupulous. With the passage of time, developers decide to drain the coin.
