What is a crypto rug pull? How to stay safe from rug pulls

Many people work hard for their favorite airdrops in return for a healthy chunk of tokens. Some manage to find the perfect bottom entries on tokens that pump very hard, but guess what? All of this hard work goes away when a crypto rug pull happens!

In this article, we’ll discuss the type of rug pulls in crypto, how you can remain safe from them, and the overall impact of rug pulls in the crypto world.

What is a rug pull in crypto?

What happens when you’re standing on a rug and someone suddenly pulls it? You fall, right? That is exactly what a crypto rug pull is!

Typically it happens when the people who created the cryptocurrency token a.k.a the developers, abandon the crypto project, running away with the investor funds. This results in the token price taking a nose dive and leaving investors with tokens of no value.

Usually, there are signs before a rug pull in any crypto coin is about to happen but for that, it is important to learn where and how exactly rug pulls happen.

Where and how do rug pulls happen?

Typically, a classic rug pull usually happens on decentralized exchanges and NFT projects due to a lack of regulation and pseudonymity of crypto developers. This is because anyone can create a token, supply liquidity to it, and launch it on decentralized exchanges like Uniswap, Pancakeswap, and some degen platforms like pump.fun. 

Now what happens is that scammers hide behind fake identities as there is no KYC and launch a token on decentralized platforms. Next, they market it on social media platforms like X, Facebook, Instagram, Telegram, Discord, and others. 

Typically, scammers launch meme coins as new investors get easily trapped in them, all of this happens of course with the use of fake partnerships with influencers and promises of high returns. Unfortunately, in the end, the rags-to-riches dream of retail people becomes dust as the shady developers close the project abruptly and run away with the funds, leaving investors hopeless with no hope of recovery in the unregulated market space of cryptocurrencies.

Types of crypto rug pulls

The typical rug pull in crypto is what we described above, as it involves launching, marketing, and eventually shutting down the project, leaving investors with nothing. In the end, it all boils down to two categories, either a project can do a hard rug pull or a soft rug pull, let’s find out the key differences between them.

Hard pull vs. Soft pull

A hard pull requires lots of effort and some technical knowledge of how a smart contract works This is because a hard pull requires writing and entering malicious code in a project’s smart contract, which stops users from withdrawing their tokens. The StableMagnet rug pull is a classic example of a hard pull as the developers of the project hid a backdoor in their smart contract that allowed them to pull off this hack.

On the other hand, a soft pull is simply a way for project developers to sell their token holdings in batches without announcing it publicly. In this way, the token doesn’t fall directly, rather it falls in stages, and then completely becomes worthless. Animoon NFT project is a great example of a soft pull where developers got away with $6.3 million.

Examples of notable rug pulls

Rugging crypto tokens is not a small event, as when it happens, especially for a big project, everyone in the crypto community starts talking about it. Here we will list some of the most notable rug pulls in the cryptocurrency world so far in 2024 (at the time of writing):

Thodex (2021)

Thodex was a Turkish cryptocurrency exchange that was responsible for stealing over $2 billion from its users. An excuse for maintenance was made by its founder who then ran away with the funds.

Squid Game Token (2021)

The Netflix series known as Squid Game was the main catalyst behind the popularity of this token as it rocketed to $2800 in a short period. However, this massive price surge was short-lived as the anonymous project developers drained all liquidity from the project and the price crashed to almost zero in no time.

LUNA (2022)

The crypto bear market came along with many bad news but accepting the DeFi token’s LUNA downfall was the hardest thing. While allegations against the owners of the LUNA project haven’t been proven, this crypto project is responsible for giving an estimated loss of $40 billion to the cryptocurrency market.

Fintoch (2023)

Last year, the promise of high yields lured many users to Fintoch which later vanished with $31 million. All of this happened mainly with the help of fraudulent marketing and endorsements, which further goes to show that all that glitters is not gold.

Impact of rug pulls on crypto adoption

A rug pull in crypto doesn’t just affect the investors who lost their money, it becomes a dark spot in the crypto world forever. 

Unlike legacy markets which have been live for many decades, the cryptocurrency market has barely completed a decade. This means that major investors and institutions are still skeptical about cryptocurrencies and such events that involve rugging crypto tokens only increase strict rules for entry, which means less liquidity for the crypto market as a whole.

However, in the end, this negative impact of regulations is short-lived as industry-wide regulations become more user-friendly and tighter for such crypto rug pulls become a rare occurrence.

How to spot a rug pull?

While it can be hard for everyone to spot a rug pull, by following the tips below you can be saved from the majority of rug pulls in the cryptocurrency world.

Token supply: Take a closer look at the token supply of the project. If one or a handful of wallets have the majority of the supply then avoid that project.

Unrealistic promises: High returns are a sign of early scams in not just crypto but in every financial market.

Security audits: Almost every crypto project is audited by a 3rd-party so make sure the crypto project in which you want to invest is properly audited by a reputable company. 

Teams info: Anonymous developers with no online information is a big red flag, and while some successful meme coins do have anonymous owners, the majority of tokens with anonymous owners have turned out to be scams in the end.

How to avoid rug pulls?

Spotting a rug pull is the first half of the picture, but how can you avoid them? Here are some practical steps you can take:

Use blockchain explorers

Evaluate the token’s smart contract and transaction history using applications like Etherscan or BscScan. Developers may be able to alter transactions or create an infinite number of tokens through contracts with “mint” or “owner control” features, so keep an eye on these parameters and avoid those tokens.

Look for projects with explicit use cases

Reputable projects frequently provide original technology solutions or address pressing issues in the real world. Avoid tokens that have no real use other than manipulating prices, as they can easily run their users.

Conduct Extensive Research

Research the project in detail, taking note of its roadmap, whitepaper, and token’s purpose. Uncertain objectives or a dearth of thorough documentation are frequently indicators of a hoax.

Read user reviews on sites like Telegram, Twitter, and Reddit. A robust, active, and upbeat community is frequently a sign of success.

Keeping Up with Scam Patterns

Keep abreast of typical cryptocurrency scams and their strategies. Websites such as CoinGecko and CoinMarketcap offer tools to assist you in spotting fraudulent schemes.

Resist FOMO Driven by Hype

Avoid making an investment based only on celebrity endorsements or social media excitement. Influencers and bots are frequently used by scammers to fabricate excitement about their ventures.

Regulations and oversight

Rug pulls have brought attention to the pressing necessity for regulatory supervision to safeguard investors and preserve confidence in the Bitcoin marketplaces. To reduce the anonymity that scammers take advantage of, numerous governments are enacting laws such as required to Know Your Customer (KYC) procedures and Anti-Money Laundering (AML) standards. Although it is still difficult to apply these rules to DeFi, they are specifically enforced on centralized platforms.

International initiatives aim to create cross-border regulations to combat cryptocurrency fraud, such as those led by the Financial Action Task Force (FATF). Enforcement is still a major problem, though, particularly in DeFi ecosystems. A safer atmosphere for the adoption of cryptocurrencies is being created by improved investor education and open auditing procedures, which are developing as supplementary tactics to regulatory activities.​