A rug pull is a crypto scam where a project's creators collect investors' money, then abandon the project and keep the funds. Buyers are often left with a token that has lost almost all its value and may be impossible to sell. Checking who runs a project, and who controls its funds, before you buy lowers the risk.
How a rug pull works
A rug pull usually starts with a new token or NFT collection. Its creators promote it with big promises, and buyers pay with other crypto. In DeFi, that money often sits in a liquidity pool on a decentralized exchange (DEX), where the token trades. The creators then drain the pool or walk away with the funds, and the price collapses, often to near zero.
It differs from a pump and dump, where promoters hype a coin, then sell their coins at the higher price. In a rug pull, the project’s own creators take the money and leave.
Example
In March 2022, U.S. prosecutors charged two people over the Frosties NFT project. According to the charges, the pair sold out the collection in January 2022 after promising holders rewards and early access to a game. Within hours, they abandoned it, shut its website and moved about $1.1 million in crypto to wallets they controlled. Prosecutors called it a “rug pull”. Charges are allegations, not proof of guilt.
Why it matters when you buy crypto
Money lost in a rug pull is hard to recover, because crypto payments typically cannot be reversed. They are also common: in December 2021, Chainalysis estimated that rug pulls had taken more than $2.8 billion from victims that year, 37% of all crypto scam revenue. It found them mostly in DeFi, where new tokens can be listed on a DEX without a code audit. Coinmama’s guide to common scams in the crypto industry covers more warning signs.
Risks and red flags
Rug pulls are built to look real until the money is gone. Watch for:
- Anonymous developers and no clear website or white paper.
- No independent audit of the token’s smart contract.
- A few wallets, often the creators’, holding most of the supply or control of the liquidity pool.
- Promises of profits, rewards or giveaways, especially with celebrity endorsements or influencer hype.
If you were caught in one, stop sending money and report it to the police.
