What rug pull scams are and how to avoid them

In November 2024, a 12-year old trader made headlines after attempting a crypto rug pull on a memecoin he created, called Gen Z Quant (QUANT), during a live stream.

The trader launched QUANT on the popular Solana-based platform Pump.fun. The token quickly gained traction as its price surged. During a live stream, the trader expressed surprise at the growth before dumping his holdings — 51 million QUANT tokens — for 128 Solana (SOL), equivalent to $30,000.Despite his attempts to exit the market, the crypto community rallied behind the token, pushing its price up by an astonishing 77,000%. QUANT briefly reached a market cap of $82.3 million, peaking at $0.08 before retracing to $50 million. Ironically, the trader’s holdings would have been worth $4 million had he not sold them prematurely.

The incident sparked mixed reactions from the crypto community. Some thought the community’s actions were a kind of poetic justice for rug pullers, while others criticized the situation. They wondered how traders let a child trick them.

In any case, rug pulls are harmful to the crypto community, and create fear, uncertainty, and doubt (FUD). In this article, we’ll explore rug pulls in detail and detail how to keep your digital assets safe.

TL;DR

• Rug pulls happen when crypto project creators cash out and abandon the project, leaving traders with worthless tokens.

• Red flags of potential rug pulls include anonymous developers, lack of transparency or a clear roadmap, unrealistic returns, and poor liquidity.

• You can research development teams, analyze tokenomics, verify audits, and use reputable platforms to protect yourself.

• Scammers trap traders using pump-and-dump schemes, exit scams, and liquidity scams. They also often manipulate contracts to restrict selling.

• Use rug pull detection tools like TokenSniffer, Honeypot, and RugDoc to analyze token contracts, assess risks, and avoid scams.

What is a rug pull?

A rug pull is a deceptive maneuver where developers of a cryptocurrency project abruptly withdraw their support and funds, leaving traders with worthless tokens. Developers launch a new cryptocurrency or decentralized finance (DeFi) project, often accompanied by aggressive marketing to attract traders. They establish a liquidity pool on decentralized exchanges (DEXs) like Uniswap, Pump.fun or PancakeSwap, allowing traders to acquire the new token.

Enticed by promises of high rewards, traders purchased the token, increasing its value and liquidity. Once a substantial amount of money is pooled, the developers withdraw all funds, causing the token’s value to plummet and leaving traders with significant losses.

Rug pull examples

• OneCoin: Launched in 2014, OneCoin was promoted as a revolutionary cryptocurrency. However, the "blockchain" OneCoin was on was nothing more than an Excel sheet. It turned out to be a Ponzi scam, resulting in participants losing over $4 billion.

• Squid Game Token: In 2021, capitalizing on the popular Netflix series, developers introduced the Squid Game Token. The token’s value skyrocketed, but traders soon found they couldn’t sell their holdings. Eventually, the developers vanished with approximately $3.3 million, leaving participants empty-handed.

Recognizing red flags

• Anonymous developers: Projects with unknown or unverified team members can be risky.

• Lack of transparency: Absence of clear information about the project’s goals, roadmap, or tokenomics.

• Unrealistic returns: Promises of guaranteed high returns in a short period should be approached with skepticism.

• No external audits: Reputable projects often undergo third-party audits to ensure security and legitimacy.

Understanding and spotting rug pulls can help keep your crypto safe from scammers.

How does a rug pull work?

Rug pulls can manifest in various ways, primarily through pump-and-dump schemes, exit scams, and liquidity scams.

Pump-and-dump schemes

Scammers artificially inflate the token’s price through coordinated buying and spreading positive news. The surge in price creates a fear of missing out (FOMO) among traders, leading them to buy in at elevated prices. Scammers sell their holdings when the price peaks, crashing the price and causing new traders to lose money.

Exit scams

Developers launch a seemingly legitimate project, often with a detailed roadmap and whitepaper. They raise funds through token sales or Initial Coin Offerings (ICOs). After collecting substantial funds, the developers abandon the project and disappear with their own gains, leaving users stranded.

Liquidity scams

Scammers create a new token and pair it with a base cryptocurrency like Ethereum (ETH) on a DEX. They establish a liquidity pool, allowing individuals to trade the new token. Through aggressive marketing, they lure traders to buy the token, increasing its value and liquidity. Once sufficient funds are built up, the developers withdraw all liquidity, causing the token’s value to plummet and leaving traders with worthless assets.

DEXs platforms allow you to trade tokens without intermediaries. While this promotes freedom, it also enables scammers to list fraudulent tokens easily. That's why it’s important to do your own research before trading on DEXs.

Smart contracts with the terms directly written into code can be manipulated by malicious developers. For example, they might include functions that prevent traders from selling the token, trapping their funds. This is also known as a honeypot scam.

What are the red flags of a potential rug pull?

It’s important to be aware of the red flags when it comes to rug pulls. Not only will this spare you the stress of having to deal with losing your tokens, it can also make you a better trader.

Anonymous developers

Projects led by unidentified or pseudonymous teams can be risky. Transparency about the team’s identity and experience builds trust. For instance, the Squid Game token scam involved anonymous developers who vanished with traders’ money.

Lack of a clear roadmap

Legitimate projects provide a detailed plan outlining their goals and development stages. The absence of a roadmap or unclear goals can be a red flag. A clear roadmap typically indicates a project’s commitment to long-term success.

Unrealistic returns

Be careful of promises of high or guaranteed returns. Scammers often lure traders with the prospect of quick gains. Remember, if it sounds too good to be true, it probably is.

Poor liquidity

Low liquidity means difficulty in buying or selling tokens without affecting their price. Scammers may create tokens with limited liquidity to control the market and execute a rug pull. Always check the liquidity pool of a token before committing funds.

No external audit

Reputable projects undergo third-party audits to validate the security and integrity of their code. The absence of an audit or reliance on an unknown auditor can be a red flag. An audit provides an extra layer of security for participants.

Suspicious tokenomics

Pay attention to the token distribution. If developers hold a significant portion of the tokens, they could dump them, causing the price to plummet. Balanced tokenomics are essential for a project’s stability.

Marketing hype with low substance

Excessive marketing without a working product or clear utility can be a warning sign. Scammers often use hype to quickly attract traders. Look for projects that focus on development and community engagement over flashy promotions.

How to protect yourself from a rug pull

Keep these steps in mind to protect yourself from rug pulls.

Conduct thorough research

• Investigate the team: Make sure the project’s developers are transparent about their identities and have credible backgrounds. Anonymous teams can be a red flag.

• Analyze the whitepaper: A comprehensive whitepaper should clearly outline the project’s goals, technology, and roadmap. Vague or poorly written documents may indicate a lack of substance.

Examine tokenomics

• Distribution: Assess how tokens are allocated. If a small group holds a large percentage, they could potentially control the market.

• Liquidity: Check the liquidity pool. Low liquidity can make it difficult to sell tokens and may be a tactic used in rug pulls.

Verify external audits

Projects should undergo third-party audits to ensure the security of their code. The absence of an audit or reliance on an unknown auditor can be worrying.

Use trusted platforms

Engage with well-established exchanges and platforms known for their security measures. These platforms often have vetting processes that can help filter out fraudulent projects.

Be wary of unrealistic promises

If a project guarantees high returns with minimal risk, approach it with caution. Such promises are often used to lure unsuspecting traders.

Check out the community engagement

Active and transparent communication from the development team is a positive sign. Engage with the community to measure the project’s legitimacy.

Start small

When exploring new projects, consider starting small with your initial commitment of funds. This approach limits potential losses if the project turns out to be fraudulent.

What are some tools to detect rug pulls?

Besides spotting red flags, there are rug pull detection tools you can use. These tools help analyze token contracts, assess risks, and provide insights that protect you from scams.

TokenSniffer

This tool lets you quickly and easily check smart contracts. Enter a token’s contract address and get a detailed analysis. It spots suspicious code patterns, similarities to known scams, and issues like locked liquidity or excessive token ownership. This helps traders to know the risks before getting involved in a project.

Honeypot.is

Scammers sometimes create tokens that you can buy but can’t sell, known as honeypots. Honeypot.is tests smart contracts by simulating buy-and-sell transactions to make sure there are no hidden restrictions. This tool is handy for spotting projects designed to trap your tokens.

RugDoc

RugDoc reviews crypto projects, giving risk ratings. It offers tools like a Honeypot Checker and educational guides to help you understand scams and make informed decisions.

De.Fi Scanner

The De.Fi Scanner is a multi-chain tool that scans smart contracts for risks. It provides a security score so traders can evaluate project risks.

The final word

Rug pulls are one of the most harmful scams in the crypto world, leaving traders with worthless tokens and significant losses. These scams exploit the nature of DEX platforms, letting malicious developers make fake tokens, inflate their value, and take the money.

To protect yourself, watch for red flags like anonymous developers, unrealistic promises, lack of audits, and poor liquidity. Remember to do your research, check the project's tokenomics, and verify its credibility. And, always do due diligence before adding a new token to your wallet.