Level 4: Risk & Safety

Rug Pulls Explained

How to identify and avoid exit scams in crypto.

6 min read

Rug Pull

A type of exit scam where cryptocurrency developers abandon a project and run away with investors' funds. Named after 'pulling the rug out' from under investors.

Scale of the Problem

In 2021 alone, rug pulls accounted for 37% of all crypto scam revenue — over $2.8 billion stolen. Most rug pulls target new, inexperienced investors attracted by promises of massive gains.

Types of Rug Pulls

Liquidity Rug

Creator adds token to DEX with liquidity, pumps price, then removes all liquidity leaving tokens worthless.

How it works:

1. Create token → 2. Add liquidity → 3. Hype/pump → 4. Remove liquidity → 5. Token becomes unsellable

Sell Limit Rug

Smart contract coded so only the creator can sell. Buyers can purchase but never sell.

How it works:

Hidden code prevents sells or charges 99% tax on non-whitelisted addresses.

Team Dump

Team holds majority of tokens, builds hype, then sells everything crashing the price.

How it works:

Often disguised with vesting schedules that get broken or hidden wallet connections.

Case Study: Squid Game Token (2021)

$3.3M

Stolen in 5 minutes

99.99%

Price drop

40,000+

Holders affected

Token capitalized on Netflix show hype. Code prevented anyone except developers from selling. Price pumped to $2,800, then developers drained liquidity. Holders' tokens became worthless instantly.

Red Flags Checklist

Anonymous team with no verifiable history

Liquidity not locked or locked for short period

Unaudited or self-audited smart contract

Promises of unrealistic returns (100x, 1000x)

Heavy focus on marketing, little on product

Pressure to buy immediately ("launch in 5 minutes")

Majority of tokens held by single wallets

Disabled or limited selling functionality

Copy-pasted whitepaper or website

Fake partnerships or team member credentials

How to Protect Yourself

Check the Contract

Look for audits from reputable firms. Check if contract is verified on block explorer.

Research the Team

Verify identities, check past projects, look for red flags in history.

Check Token Distribution

Use tools like Etherscan to see if few wallets hold most supply.

Verify Liquidity Lock

Liquidity should be locked for extended period (1+ years) through verified locker.

What Beginners Should Remember

If it seems too good to be true, it almost certainly is
New tokens are extremely high risk — most fail or are scams
Stick to established cryptocurrencies until you have deep experience
Never invest money you can't afford to lose in new projects
FOMO (Fear Of Missing Out) is exactly what scammers exploit

Related Concepts

Common Scams What Gives Crypto Value Safety Checklist

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Safety Checklist

Comprehensive checklist to protect your crypto