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What is a rug pull and how can you prevent it?

The world of cryptocurrencies offers huge opportunities, but unfortunately also significant risks. One of the most common forms of fraud is a rug pull—a situation where the developers of a project suddenly disappear with investors‘ money. In this article, you‘ll learn what a rug pull is, how it works, which warning signs to look out for, and most importantly: how to protect yourself against these types of crypto scams.

What is a rug pull?

A rug pull is a crypto scam in which the creators of a project—often within DeFi (Decentralized Finance) or newly launched tokens—suddenly remove all funds or liquidity. As a result, the value of the associated token collapses and investors are left holding worthless assets. The term “rug pull” comes from the expression “to pull the rug out from under someone”, meaning to suddenly remove support or security.

In short

  • A rug pull is an exit scam where developers disappear with investors‘ funds.
  • It often occurs with new DeFi or meme coins that are driven by hype.
  • The token‘s value can drop to zero once liquidity is removed.
  • Anonymous teams and missing audits are common red flags.
  • Warning signs include unclear tokenomics and unlocked liquidity.

How does a rug pull work in crypto?

A rug pull usually starts with a project that looks too good to be true. Developers launch a new token and generate hype through social media, promises of innovation, and claims of extremely high returns.
  • Project launch: A new token or DeFi platform is introduced with aggressive marketing and community engagement.
  • Liquidity collection: Investors buy tokens or add liquidity to pools, often via decentralized exchanges (DEXs).
  • The exit: Once enough funds are collected, developers remove liquidity or sell their large token holdings. The price crashes instantly and the team disappears.
Due to the lack of oversight or regulation—especially in anonymous projects—this can happen within minutes.

What types of rug pulls exist?

Liquidity stealing

Developers remove all liquidity from the pool, making it impossible to trade. This is the most direct and classic form of a rug pull.

Honeypot coins

These tokens can be bought but not sold. The smart contract code is written so that only the developers are able to execute sell transactions.

Pump and rug

Developers or insiders artificially pump the price through marketing or influencers. Once the price peaks, they dump their tokens, leaving investors with heavy losses.

Smart contract scams

Some rug pulls are hidden within the smart contract itself. A concealed function allows developers to drain liquidity or tokens without warning.

What is the difference between a rug pull and a pump and dump?

  • A pump and dump involves traders manipulating the price of an existing token and selling after a rapid increase.
  • A rug pull involves scammers creating an entire project—token, website, and community—only to collapse it intentionally.
  • A pump and dump is price manipulation; a rug pull is a fully orchestrated scam.

How can you recognize a rug pull?

Warning signs in projects

Lack of transparency, anonymous teams, and promises of unrealistic returns (e.g. “1000% in a week”) are major red flags.

Suspicious tokenomics

An unfair token distribution—such as 70% allocated to the team—makes a rug pull more likely. Always check whether liquidity is locked.

Unreliable or anonymous teams

High-risk projects often hide behind anonymity. Legitimate teams usually share names, profiles, and a track record in crypto.

Risks with new DeFi and meme coins

New DeFi and meme projects are often launched quickly and without audits. This is where most rug pulls occur. Never invest more than you can afford to lose.

Famous rug pulls in history

DeFi examples

A well-known case is Meerkat Finance (2021), where more than $31 million vanished from the Binance Smart Chain. Projects like SnowdogDAO and Squid Token ended similarly.

NFT rug pulls

In the NFT space, projects such as Evolved Apes and Frosties promised exclusive benefits and future releases, only for the creators to disappear with millions.

Lessons for investors

Always verify that a project has a clear roadmap, a known team, and audited smart contracts. Avoid projects built purely on hype and promises.

How can you prevent a rug pull?

Do your own research (DYOR)

Research who is behind the project, read the whitepaper, and look for independent reviews. Check whether team members have verifiable identities.

Check smart contracts

Make sure the smart contract code is public and verified on platforms like Etherscan. Third-party audits (e.g. CertiK or Hacken) add an extra layer of trust.

Evaluate liquidity and locks

Liquidity that is locked for a longer period reduces the risk of sudden exits. Tools like DexTools and Token Sniffer can help you verify this.

Diversify risk

Don‘t invest all your funds in a single token or project. Diversification helps limit losses if a rug pull occurs.

Frequently asked questions

What is a rug pull?

A rug pull is a scam where the developers of a crypto project suddenly disappear with liquidity or investor funds, causing the token‘s value to collapse.

What are NFT rug pulls?

NFT rug pulls occur when creators sell NFTs with promises of future value or benefits, then abandon the project without delivering.

What is a pump and dump?

A pump and dump is a form of market manipulation where the price of a token is artificially inflated and then sold off for profit.

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