Rug Pulls Explained
Crypto fraud is an unfortunate blight on the blockchain world, with scammers, cybercriminals, and nefarious individuals using digital assets as a way to steal billions of dollars from investors.
This guide will help you to understand crypto rug pulls, how these fraudsters operate, and how you can identify fake crypto projects to keep you and your investments safe.
What is a Rug Pull?
In crypot, a rug pull is a type of malicious cryptocurrency scam where developers intentionally abandon their project after collecting and withdrawing investor funds.
They start by creating and promoting a new token, keeping a large percentage reserved for themselves, then they abruptly sell off their holdings or disappear with all of the capital raised. In both situations, the outcome is a token crash, leaving investors with worthless digital assets.
This sophisticated and cruel deception has become commonplace in the decentralized finance (DeFi) world, with billions in losses made throughout the blockchain ecosystem.
It requires the nefarious individuals to co-ordinate social media and KOL campaigns, trick partners and influencers, to maintain multiple lies, and to generate artificial hype that lures in unsuspecting victims.
As well as investors who lose their funds, rug pulls damage the professional reputations and credibility of those who were duped in the process, such as the influencers and trading platforms.
Rug pulls are not specific to any one area of cryptocurrency. They can take place with NFTs, memecoins, regular tokens, Web3 games, and beyond.
What is consistent, however, is the high level of manipulation involved to create the illusion of legitimacy, activity, and opportunity.
Often, these cybercriminals will go as far as generating artificial market activity by buying and selling tokens to control prices.
Now that you know that this danger exists, here’s more about how they operate.
How Do Crypto Rug Pulls Work?
Rug pull scams begin with a project and campaign designed to pump a token’s price or gain a large amount of investment.
These campaigns typically take place on Twitter, Discord, and Telegram, and usually involve social media influencers (known in the industry as key opinion leaders - KOLs), whether they are aware it is a scam or not. Scam projects often make big claims and promises, which will never be realized.
At some point in time, there will be a dramatic upward spike in token value - this is when the criminals strike. The perpetrators execute a massive orchestrated sell-off, tactically maximizing their profits, while devastating investors. This is called a liquidity pull, and it leaves investors with worthless tokens.
The most common place for a rug pull to take place is on a decentralized exchange (DEX).
Since these trading platforms are anonymous, they lack centralized oversight, which has its pros and cons.
Unfortunately, this autonomy is also a vulnerability, and makes them the perfect breeding ground for fraudsters who are keen to avoid detection and accountability.
Now, while many rug pulls appear similar, under the hood at least, they have quite different mechanics. It pays to be aware of the different methods.
Types of Crypto Rug Pulls
Liquidity Pulls
A liquidity pull is truly one of the most brutal and damaging forms of crypto fraud.
This is when developers suddenly remove all available trading liquidity from DEXs, typically when the token price, investor confidence, and project hype are all high.
Once the liquidity pull is executed (typically during off-peak hours when big token holders are sleeping), investors are left with worthless tokens and their investments destroyed.
Warning signs:
No liquidity lock or very short lock periods
Single wallet holding the majority of LP tokens
Suspicious contract permissions
Unusual liquidity pool configurations
Fake Crypto Projects
Using every trick in the book, fake crypto projects will try to mirror legitimate and credible cryptocurrency ventures.
They’ll build professional websites, compose white papers, and even grow a social media following. They’ll invest in the illusion through fake partnerships, fake team members, fake documentation, fake development updates, fake product releases, and fake IP.
For months, they will build trust and collect investments, maintaining the facade before suddenly disappearing with investor funds.
Red flags:
Anonymous team members
Unrealistic promises or returns
Plagiarized content
Pressure to invest quickly
Limited technical documentation
Pump and Dump Scams
This is a coordinated market manipulation strategy where cybercriminals find ways to artificially inflate token prices through fake trading volume, coordinated buying, and aggressive social media campaigns.
The fraudsters will accumulate large positions at low prices, before working together to pump the price using multiple wallets and trading patterns to make growth appear organic.
New investors will see the price growth, get FOMO (fear of missing out) and begin to accumulate tokens. The price will continue to rise, and the scammers will prepare to orchestrate their crypto rug pull.
When the price reaches their target, the team will all sell rapidly across different wallets and exchanges, leaving regular investors with devastating losses.
Warning Signs
Sudden price increases without fundamentals
Unusual trading volume spikes
Coordinated social media campaigns
Bot-like trading patterns
Team Exit
There are two types of team exit rug pull crypto scams - gradual and sudden.
In a gradual team exit, the developers slowly abandon their legitimate (or legitimate-appearing) project, reducing their activity and communications, while doing just enough to avoid a panic sell-off from investors.
What hurts most for investors is that they buy tokens as long term investments and hold out hope for a project’s revival, long after the team has abandoned it, causing them a large opportunity cost.
With a sudden team exit, as you can imagine, everything happens very quickly and in an orchestrated way. Communication channels shut down, social media pages are deleted, the website goes offline, and all forms of contact are closed.
The project, in just moments, is long gone, with investors rarely getting an explanation.
Depending on the stage of the project, this rug pull crypto scam may also coincide with a liquidity pull, fake crypto project exit, or pump and dump scams.
Now, let’s explore some real-life crypto rug pull examples.
5 Interesting Crypto Rug Pulls
Ruja Ignatova - OneCoin
Dubbed the “Cryptoqueen”, Ruja Ignatova used her OneCoin project to create a $4bn Ponzi scheme based on a multi-level marketing structure. Investors in 175 countries were promised lucrative rewards, but it was not to be. Ruja disappeared in 2017 with the funds.
She’s been on the FBI’s Most Wanted list ever since.
Victims speculate that she either orchestrated a perfect escape plan and new identity, or a victim of her scam sought vengeance…
Faruk Fatih Özer - Thodex
Thodex was a Turkish cryptocurrency exchange that mastered its own downfall in 2021. Özer, the CEO, claimed technical issues, before fleeing to Albania with $2bn in investor funds, after luring users with promises of free DOGE, among other things.
He was caught in August 2022, after a 15-month manhunt, in the Albanian seaside town of Vlorë. A judge in Turkey sentenced him to 11,196 years in prison.
Unknown Developer - AnubisDAO
Launched back in October 2021, AnubisDAO was a fork of OlympusDAO.
It lasted less than a day.
Despite its rapid rise and fall, it had raised $60m in ETH through sales of its ANKH token, before an unknown developer moved all of the funds (13,597 ETH) to a different wallet.
A word of warning - he has still not been apprehended.
On-chain analysis also revealed that, after a 3 year hiatus, this unknown developer returned in 2024 to perform another scam.
Uranium Finance
In April 2021, developers exploited a vulnerability in Uranium’s smart contract migration process that allowed them to steal $50m in investor funds during a protocol upgrade.
The project was billed as an automated market maker (AMM) and was growing in popularity in the Binance Smart Chain ecosystem before this rug pull took place.
Squid Game Token (SQUID)
Capitalizing on the extraordinary success of Netflix’s Korean hit series, SQUID launched and exploded too, surging 23,000% in its first week.
The token reached $2,861 before crashing to almost zero after the developers disabled selling features and disappeared with about $3.38m.
While this is quite a small amount by comparison with other scams, it was notable because the scam involved coding an “anti-dump” mechanism that meant investors couldn’t sell.
Ironically, mirroring the Netflix series, the criminal masterminds are yet to be caught.
How To Identify & Protect Yourself From Rug Pulls
Readers, by now you should have a fairly good understanding of rug pulls, their variations, some major examples, and are likely forming your own mental red flags to watch out for. Let us help you, and give you some more actionable information to work with.
DYOR - Do Your Own Research. Before you invest in a project, research everything, but especially the development team, the technology, and their goals. Try to find about them on Twitter, Reddit, or in TG/Discord channels. If red flags appear, there’s probably no smoke without fire, so be careful not to overlook things like a lack of transparency or sudden price surges.
Security Audits - If a project has passed a reputable third-party inspection, they’re going to be quite proud of it and make it known. When there are no security audits to speak of, be cautious.
Community Engagement - Active communities are a good signal of legitimacy, but even the best scammers have found ways around this by paying hired hands to make communities look active and buying fake followers.
Warning Signs - Unrealistic returns, excessive hype, and pressure to invest - these are just a few things that should put you on high alert, and while that might not make them a scam project, they are warning signs that should encourage you to do more research.
Reputable Exchanges - As we’ve mentioned, some DEXs are targeted by scammers as being vulnerable and exploitable. Therefore, stick to only the best and most trusted platforms if you’re going to invest.
Conclusion
Finally, and this is solid advice that will always serve you well…
Never invest more than you can afford to lose.
Safety is crucial. Investment is largely an independent activity and decisions will ultimately be made by you.
This means you don’t always have someone around to bounce ideas off or ask for a second opinion, so you’ll have to develop a nuanced understanding of crypto projects, scams, and when something seems too good to be true.
You’ll need to be able to trust your own intuition as well as know how to find answers to the difficult questions.
Good luck out there and stay safe!