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Rug Pull (Crypto)




What is a rug pull in crypto?


A rug pull in crypto is a scam where the developers of a cryptocurrency project raise funds by selling tokens, then suddenly abandon the project and withdraw all the liquidity, leaving investors with worthless tokens. This is like "pulling the rug out" from under investors, causing the token's value to crash abruptly[1][4][7].


There are different types of rug pulls:


- **Liquidity Pulls:** Developers remove liquidity from a token pool, crashing its price[1][5].

- **Fake Projects:** Scammers create fake projects, collect investments, then disappear[1].

- **Pump and Dump:** Fraudsters hype the token to inflate its price, then sell off their holdings quickly[1][5][7].

- **Team Exit:** The project team suddenly disappears, leaving no support and collapsing the token[1][7].

- **Limiting Sell Orders:** Developers restrict selling so only they can sell, then dump tokens, leaving others stuck[5][7].


Rug pulls are common in decentralized finance (DeFi) and new crypto projects, often involving anonymous teams and unrealistic promises[4][7].


To avoid rug pulls, thorough research, checking for audits, community engagement, and spotting warning signs like anonymous developers or too-good-to-be-true returns are essential[1][4].


Citations:

[1] What is a rug pull and how to avoid it? - Coinbase https://www.coinbase.com/learn/tips-and-tutorials/what-is-a-rug-pull-and-how-to-avoid-it

[2] What is a rug pull? An explanation into what that actually means. https://www.reddit.com/r/CryptoCurrency/comments/t7xzo0/what_is_a_rug_pull_an_explanation_into_what_that/

[3] Rug Pull Scams - DataVisor https://www.datavisor.com/wiki/rug-pull-scams/

[4] Rug Pull: definition, meaning, examples - Bitpanda https://www.bitpanda.com/academy/en/lessons/rug-pull-definition-meaning-examples

[5] Rug Pulls: Your Complete Guide - Koinly https://koinly.io/blog/crypto-rug-pulls-guide/

[6] What is a rug pull and how to avoid it? - Coinbase https://www.coinbase.com/en-es/learn/tips-and-tutorials/what-is-a-rug-pull-and-how-to-avoid-it

[7] What Is A Rug Pull? | Bankrate https://www.bankrate.com/investing/what-is-a-rug-pull/

[8] Crypto Rug Pulls: What Are They & How to Avoid Them - CoinDesk https://www.coindesk.com/learn/crypto-rug-pulls-what-are-they-how-to-avoid-them






Types of rug pulls explained

Types of rug pulls in cryptocurrency are generally classified into several main categories, each with distinct methods of scamming investors:

1. **Dumping Rug Pulls (Pump-and-Dump)**
   - Creators hold a large portion of tokens and, after driving up the price through hype, sell off their holdings rapidly.
   - This massive sell-off causes the token's price to crash, leaving investors with worthless tokens.
   - This type is a classic pump-and-dump scheme.

2. **Liquidity Pulls**
   - The most common type of rug pull.
   - Developers create a token and pair it with a well-known cryptocurrency (e.g., ETH) in a liquidity pool on a decentralized exchange (DEX).
   - After attracting investments and raising the token price, they withdraw (pull) all liquidity from the pool.
   - This leaves investors unable to sell or recover funds, as the trading pair becomes illiquid.

3. **Limiting Sell Orders (Restriction Rug Pulls)**
   - Developers program the token’s smart contract to restrict or block selling for all holders except themselves.
   - Only the developers can sell their holdings while others are locked out.
   - An example of this was the Squid Game token scam.

4. **Hard Rug Pulls**
   - Developers intentionally insert malicious code or backdoors in smart contracts.
   - This can allow unlimited minting of tokens, instant draining of liquidity pools, or other rapid exploit methods.
   - These are usually sudden and illegal scams.

5. **Soft Rug Pulls**
   - Developers initially work on a project but then gradually abandon it.
   - They may slowly dump their tokens, stop updates, or reduce engagement, causing the token's value to slowly plummet.
   - This is often unethical but may not be overtly illegal.

6. **Exit Scams**
   - Developers create seemingly legitimate projects and gather investors' funds.
   - Suddenly, they shut down all communication channels and disappear with the raised assets.

Each type exploits different mechanisms within the crypto ecosystem, from liquidity management to smart contract code, to defraud investors and exit with their funds[1][3][6][2][4].

Citations:
[1] Crypto Rug Pulls: Complete Guide - Koinly https://koinly.io/blog/crypto-rug-pulls-guide/
[2] What Are NFT Rug Pulls? How To Protect Yourself From NFT Fraud? https://www.kaspersky.com/resource-center/preemptive-safety/nft-rug-pulls
[3] Rug Pull Scams - DataVisor https://www.datavisor.com/wiki/rug-pull-scams
[4] Rug Pulls Explained: How to Spot a Crypto Scam Before It's Too Late https://flipster.io/en/blog/rug-pulls-explained-how-to-spot-a-crypto-scam-before-its-too-late
[5] A Deep Dive into the Phenomenon of Crypto Rug Pulls - Bitquery https://bitquery.io/blog/crypto-rug-pulls-rise-fall-deep-dive
[6] What is a rug pull and how to avoid it? - Coinbase https://www.coinbase.com/learn/tips-and-tutorials/what-is-a-rug-pull-and-how-to-avoid-it
[7] RPHunter: Unveiling Rug Pull Schemes in Crypto Token via Code ... https://arxiv.org/html/2506.18398v3
[8] Pump-and-Dump Schemes & Crypto Rug Pulls Explained - Britannica https://www.britannica.com/money/pump-and-dump-schemes
[9] Learn About Rug Pulls And How To Identify Them - Bitso's blog https://blog.bitso.com/security/what-is-rug-pull
[10] Detecting Rug Pulls in Decentralized Exchanges: The Rise of Meme ... https://www.sciencedirect.com/science/article/pii/S2096720925000636




Liquidity pool drain mechanics

Liquidity pool drain mechanics involve the process by which malicious actors or developers extract all the liquidity from a liquidity pool, typically on a decentralized exchange (DEX), causing the pool to collapse and leaving other investors unable to trade or withdraw their assets. Here’s how liquidity pools work and how they can be drained:

### How Liquidity Pools Work
- Liquidity pools are smart contracts containing paired tokens (for example, ETH and USDC) deposited by liquidity providers (LPs).
- These pools enable token swaps without the need for traditional order books by using automated market makers (AMMs).
- Prices are determined by formulas such as the constant product formula $$ x \times y = k $$, where $$ x $$ and $$ y $$ are token quantities, and $$ k $$ remains constant after each trade.
- Traders swap one token for another, changing the token ratio and thus the price automatically.
- LPs earn fees from trades and get liquidity pool tokens representing their share of the pool.

### Mechanics of Draining a Liquidity Pool (Liquidity Pool Drain)
- In a liquidity pool rug pull, creators or attackers remove all the liquidity they initially provided, which often consists of a significant portion of the paired tokens.
- By withdrawing liquidity, they take out all the tokens locked in the pool, often along with the investments of other users, causing the market for that token pair to become illiquid.
- Once the pool is drained, investors cannot sell or trade the token because the liquidity for buyers or sellers disappears.
- Attackers may use techniques like flash loans to borrow large sums temporarily, manipulate prices, and then drain the pool quickly within the same transaction.
- Some drains occur due to exploited vulnerabilities in smart contracts or price oracles, where attackers manipulate prices or transaction mechanics to maximize the withdrawal in their favor.
- This exit scam is sudden and irreversible, leaving investors with worthless tokens.

### Summary of the Drain Process
1. Liquidity providers deposit tokens into the pool.
2. Traders use the pool to swap tokens, changing token ratios and prices.
3. The attacker or scammer builds hype to get deposits and raise token value.
4. The attacker withdraws/drains liquidity by pulling out tokens from the pool, often using smart contract permissions.
5. Pool liquidity goes to zero or becomes insufficient, and investors are stuck with tokens that can't be sold.

This draining causes a catastrophic loss for LPs and traders relying on that pool's liquidity, and it is one of the primary mechanisms behind liquidity pool-related rug pulls in DeFi.

The mechanics rely heavily on smart contract control, price manipulation, and liquidity management within the pool’s AMM system[1][2][3][4].

Citations:
[1] How do crypto liquidity pools work? https://liquidityfinder.com/insight/liquidity/how-do-crypto-liquidity-pools-work
[2] What is a Liquidity Pool? Simple Guide - Paybis Blog https://paybis.com/blog/glossary/liquidity-pool/
[3] The role of liquidity pools in cryptocurrency markets - Kraken https://www.kraken.com/learn/crypto-liquidity-pool
[4] Liquidity Pools: Drained in Seconds: How Flash Loan Attacks Target ... https://www.fastercapital.com/content/Liquidity-Pools--Drained-in-Seconds--How-Flash-Loan-Attacks-Target-Liquidity-Pools.html
[5] Liquidity Pools in Crypto: A Beginner's Guide to Earning Passive ... https://www.risein.com/blog/liquidity-pools-in-crypto-a-beginners-guide-to-earning-passive-income
[6] Liquidity pools and impermanent loss for dummies : r/CryptoCurrency https://www.reddit.com/r/CryptoCurrency/comments/167yiti/liquidity_pools_and_impermanent_loss_for_dummies/
[7] What is a Liquidity Pool? - CertiK https://www.certik.com/resources/blog/technology/what-is-a-liquidity-pool
[8] Liquidity pools and LP tokens - Matcha – Blog https://blog.matcha.xyz/article/liquidity-pools-and-lp-tokens



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