A rug pull is a type of scam where developers abandon a project and take their investors' money.
A rug pull is a malicious maneuver in the cryptocurrency industry where crypto developers abandon a project and run away with investors’ funds. Rug pulls usually happen in the decentralized finance (DeFi) ecosystem, especially on decentralized exchanges (DEXs), where malicious individuals create a token and list it on a DEX, then pair it with a leading cryptocurrency like Ethereum.
Once a significant amount of unsuspecting investors swap their ETH for the listed token, the creators then withdraw everything from the liquidity pool, driving the coin's price to zero. The coin’s creators may even create a temporary hype around Telegram, Twitter, and other social media platforms and initially inject a substantial amount of liquidity into their pool to cultivate investor confidence.
Rug pulls thrive on DEXs because these types of exchanges allow users to list tokens for free and without audit, unlike in centralized cryptocurrency exchanges. Furthermore, creating tokens on open source blockchain protocols like Ethereum is easy and free. Malicious actors use these two factors to their advantage.
Note that decentralized exchanges such as Uniswap algorithmically determine the prices of tokens in a pool depending on the available balances. To ensure you don’t fall victim to a rug pull, check the liquidity in a pool. However, this is only the first step. You must also check if there is a lock on the token’s pool. Most reputable projects lock pooled liquidity for a certain period.
Another major characteristic of a possible rug pull is a coin skyrocketing in price within hours. For example, a rug pull coin can move from 0 to 50X within 24 hours. This trick is meant to drive FOMO that leads more people to invest in the token.