What Is Rug Pull?

In the most common scenario, the team launches a new token, creates a liquidity pool on a decentralized exchange by pairing the token with ETH or a stablecoin, and promotes it heavily on social media. As investors deposit valuable assets into the pool to buy the token, the amount of ETH or stablecoin in the pool grows. The team then pulls its liquidity and takes these assets, leaving behind tokens that cannot be sold and are worth close to nothing.

There are different types. In 'hard' rug pulls, a hidden backdoor is added to the smart contract, such as code that only lets the developer sell (a honeypot) or the authority to mint unlimited new tokens. In 'soft' rug pulls, the team gradually sells its large token holdings or quietly abandons the project. In some cases, the team transfers the investor funds raised in the sale directly to its own wallet.

Signs that can be examined to assess the risk include an anonymous team, an unaudited contract, liquidity that is not locked, a token supply concentrated in a few wallets and unrealistic return promises. However, these checks do not offer full protection; losses can also occur when a liquidity lock expires or in audited contracts.