A rug pull is a type of crypto scam where the project developers unexpectedly abandon their work and drain the project’s funds, causing losses to project investors. The term’s origin comes from the phrase, 'pulling the rug out from under someone,' indicating sudden withdrawal of support.
In the crypto industry, rug pulls are most commonly experienced in the decentralized finance (DeFi) space, where tokens listed on DEXs suddenly experience draining liquidity from them. A crypto project typically lists its token on a decentralized exchange (DEX) as an IDO (initial DEX offering) or as part of a pair in a liquidity pool.
Once investors buy the token or provide liquidity to its pairs, a project’s developers could access the funds to camp off with them. Rug pulls can happen if developers excite a project and cause its token price to surge, then sell their tokens at high prices, resulting in its value crashing.
They can also drain out all liquidity in the token from the liquidity pools or use back doors to exploit smart contracts to steal investors’ funds from the project. All methods employed cause severe losses to investors as they cannot get their funds back from such projects.
To avoid falling prey to a rug pull scam, investors should perform due diligence before investing in new tokens on DEXs. Invest in projects with sound backing instead of following false promises of high returns to minimize losses via rug pulls and other crypto scams in the market.