Rug Pull

A rug pull (literally, "pulling the rug out") is a common type of scam in the world of cryptocurrencies, particularly within DeFi projects (those based on decentralized finance systems). 

This scheme occurs when developers launch a token, attract investors to drive up its value, and then abruptly withdraw all funds, leaving the project—and its investors—empty-handed. When scammers drain the liquidity pools, the token’s price plummets to zero, and investors are left unable to trade their worthless tokens for stable assets or fiat currency.

• Liquidity Theft: Developers lure victims into investing in their tokens or project, often-generating hype through social media. Once they have enough funds, they vanish, leaving behind valueless tokens and an empty liquidity pool.

• Fake Investors: Scammers create a seemingly promising project that appears to have many backers. However, the developers themselves control these wallets. After inflating the token’s price and gaining the trust of new investors, they sell off their holdings all at once, causing the asset’s value to crash. While not technically illegal, these projects are built with the intent to deceive.

• Project Manipulation: Using technical expertise, developers can block investors from selling their tokens without disclosing this in advance. After artificially inflating the token’s price, they dump their holdings, draining liquidity and disappearing with investor funds.

While some projects raise clear red flags—such as unrealistic promises of massive returns—others are much more subtle. Many rug pull frauds have been disguised as legitimate, solid investment opportunities, making them difficult to identify, even for seasoned investors.

According to Chainalysis, rug pull swindles are a relatively new form of crypto crime but have grown significantly in recent years. In 2021 alone, they accounted for an estimated $2.8 billion stolen from victims, representing 37% of all funds lost to crypto-related scams.

This type of fraud is particularly prevalent in the DeFi space due to its ease of execution. With sufficient technical expertise, these scams are cheap and straightforward to pull off. Developers can simply create tokens and list them on decentralized exchanges, bypassing the need for code audits or other measures that might verify the project's legitimacy.

Liquidity Pool: A reserve of funds locked in a smart contract, enabling decentralized trading and often targeted in rug pull scams.