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What Is a Rug Pull in Crypto and How Does It Work?
Key Takeaways
A rug pull is a type of crypto exit scam where developers drain funds from a project and disappear, leaving investors with worthless tokens.
These scams often involve draining liquidity pools, exploiting smart contract vulnerabilities, or abandoning the project entirely after generating hype.
Warning signs include anonymous teams, unaudited code, unrealistic promises, and liquidity that has not been locked or can be easily removed.
Doing your own research (DYOR) and staying alert before committing to any crypto project remains an essential line of defense.
Introduction
If you have spent any time in crypto, you have likely seen this play out: a new token launches, the hype builds quickly, the price climbs, and then everything crashes. The website goes dark, social media goes silent, and investors are left wondering what just happened.
This type of crypto exit scam is known as a rug pull, and it has led to millions in losses across the crypto space. Rug pulls are not limited to any single blockchain or category. They have hit everything from meme coins to projects that appeared legitimate with polished websites and active communities.
In fact, a 2025 incident involving the RKC memecoin saw developers cash out over $600,000 within hours, crashing the token by more than 90%. Like other common crypto scams, rug pulls thrive on trust and urgency. Let us take a closer look at how they work and what you can do to avoid falling for one.
What Is a Rug Pull?
A rug pull is a type of scam where the creators of a cryptocurrency project suddenly withdraw liquidity or abandon the project, leaving investors with worthless tokens. It is like being invited to a group dinner, asked to split the bill upfront, and then watching the host disappear before anything arrives.
Rug pulls share some similarities with traditional pump-and-dump schemes, but they often use the tools of decentralized finance (DeFi) to execute the scam. These incidents started becoming more common during the DeFi boom of 2020, when launching a token on a decentralized exchange (DEX) became fast, easy, and largely unregulated. With minimal checks in place, bad actors found ways to exploit the system and take advantage of unsuspecting investors.
How Do Rug Pulls Work?
Rug pulls can happen in several different ways. They may be technical (carried out through malicious code embedded in smart contracts), or non-technical (relying on social manipulation and centralized control). In some cases, a scam may use a combination of both.
Liquidity pool withdrawal
On DEXs, tokens need liquidity pools so people can trade them. These pools let users swap tokens directly without relying on intermediaries. Here is how a typical liquidity rug pull unfolds:
Token launch: A team launches a new token and pairs it with a base asset like ETH or USDT in a liquidity pool.
Price rises: Early buyers jump in, the token's price climbs, and the pool grows as more funds flow in.
Liquidity drain: Without warning, the developers withdraw all (or most) of the liquidity they originally added, using the LP tokens they control.
Price collapse: With almost nothing left in the pool, the market collapses and the token's price drops close to zero.
This is the most common type of rug pull. When the team controls the LP tokens, the drain can happen within hours or even minutes of a token launch.
Smart contract manipulation
In some cases, the rug pull is planned from the very beginning and the scam is embedded in the project's code. Developers may add hidden functions to the smart contract that allow them to:
Mint unlimited tokens, which floods the supply and crashes the price.
Block users from selling via honeypot contracts. These let people buy the token but prevent them from selling, making their holdings effectively worthless.
Transfer tokens directly from users' wallets without their consent, using malicious approval functions.
These scams are especially hard to spot without a proper code audit. Some honeypot tokens are even marked as "verified" to appear safe. The malicious code is often buried under complex logic or only activates after enough people have invested.
The social rug
Not every rug pull involves complicated code. Some are built on trust alone, which is exactly what makes them effective. These scams often start with a project generating excitement through social media, attracting a community, and earning shoutouts from influencers. It all seems legitimate, with a token or NFTs launch that draws in investors.
But once enough people have committed funds, the team disappears without a trace. The project's social media channels and website vanish along with the money. If the creators hold full control over the token supply, these types of rug pulls can also happen on vulnerable launchpads or centralized platforms. In the end, it comes down to social manipulation and empty promises.
How to Spot a Potential Rug Pull
While not every project with these traits is a scam, spotting a few of these signs should raise a red flag. Here is what to look out for:
Anonymous teams: While anonymity is part of crypto culture, projects with no transparency around their developers or founders are harder to hold accountable. That makes it easier for bad actors to disappear with investor funds.
No smart contract audit: Auditing or formally verifying a smart contract helps catch bugs, vulnerabilities, and unintended behavior before the code goes live. Without a smart contract audit from a reputable security firm, hidden risks may remain, such as functions that allow unlimited token minting or grant developers full control over the contract. Be cautious with audits from obscure or unknown security firms.
Unlocked liquidity: If a project does not lock its liquidity or has no clear vesting schedule for the team's tokens, there is a higher risk that funds could be withdrawn or dumped on the market at any time. Reputable projects often lock liquidity and implement vesting periods for team members, usually lasting between one and four years. While not a guarantee, this helps build trust and suggests the team is committed to the project's long-term success.
Unrealistic promises: Be cautious of projects that advertise exceptionally high returns or guaranteed profits. If a project claims support from well-known investors, companies, or influencers, those claims should be backed by credible proof, such as public announcements or confirmed partnerships.
How to Protect Yourself
While there is no guaranteed way to avoid every rug pull, there are steps you can take to lower the risk:
Do your own research (DYOR): Look beyond headlines, hype, or influencer promotions, and examine the project for yourself. A good starting point is reading the project's whitepaper to understand its goals, technology, and tokenomics. You can also use a block explorer, such as Etherscan or SolScan, to review the token's distribution, check whether smart contract ownership has been renounced, and scan the transaction history for suspicious activity.
Check liquidity locks: Look into whether the project has locked its liquidity and for how long. Many legitimate projects use third-party services to manage liquidity locks, making the process more transparent and verifiable for investors.
Look for audits: Check whether the audit report is publicly available and ensure it is up to date. Older reports may not cover recent changes to the code. While an audit cannot guarantee complete safety, it can help identify common bugs, vulnerabilities, and potentially malicious code.
Stick to reputable platforms: When exploring new tokens or NFTs, choose platforms with a strong track record and rigorous vetting processes. Reliable platforms like Binance Launchpool apply strict evaluation criteria and conduct due diligence on project teams before listing. This can significantly reduce the chances of encountering fraudulent or poorly managed projects.
FAQ
What is a rug pull?
A rug pull is a type of crypto exit scam where the creators of a project suddenly withdraw liquidity or abandon the project, leaving investors with worthless tokens. It is one of the most common forms of exit scam in the crypto space and frequently occurs on decentralized exchanges (DEXs).
How does a rug pull work?
Most rug pulls involve developers launching a token and pairing it with a valuable asset in a liquidity pool. Once investors buy in and the pool grows, the developers withdraw all the liquidity, crashing the token's price to near zero. Other variations use malicious smart contract code to block sales or mint unlimited tokens, while some rely purely on social manipulation (building trust and then disappearing).
What are the most common red flags of a potential rug pull?
Common warning signs include an anonymous development team, no smart contract audit from a reputable firm, unlocked or unverifiable liquidity, unrealistic promises of high returns, and a lack of transparency around tokenomics. Spotting several of these red flags together should prompt extra caution before committing any funds.
Can rug pulls be avoided?
While no method can guarantee complete protection, you can lower the risk by researching the project's team, checking for reputable smart contract audits, verifying that liquidity is locked for a meaningful period, and reviewing token distribution with a block explorer. Sticking to established platforms with vetting processes also helps reduce exposure to fraudulent projects.
Are rug pulls illegal?
Rug pulls that involve fraud or deception can be illegal in many jurisdictions, with law enforcement agencies increasingly pursuing crypto scammers. For example, Operation Level Up, led by US authorities in coordination with exchanges including Binance, recently froze $41 million tied to a $150-million Ponzi scheme. However, the pseudonymous and decentralized nature of crypto often makes it difficult to identify and prosecute bad actors, which is why personal caution remains so important.
Closing Thoughts
Rug pulls remain an unfortunate reality in the crypto space, especially in fast-moving areas like DeFi, where new projects launch daily. While many development teams are building with good intentions, the lack of regulation and oversight in certain corners of the industry continues to create opportunities for bad actors to take advantage of unsuspecting users.
With the growing availability of tools, audits, and educational resources, identifying potential scams is becoming more accessible. However, it is still important to conduct thorough research and approach every new project with caution and a critical mindset. Staying informed and skeptical before committing funds is the best defense against falling victim to a rug pull.
Further Reading
How Binance Fights Financial Crime
What Are Airdrop Scams and How to Avoid Them?
5 Ways to Improve Your Binance Account Security
How to Spot Scams in Decentralized Finance (DeFi)
5 Common Cryptocurrency Scams and How to Avoid Them
Disclaimer: This content is presented to you on an "as is" basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Where the content is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Binance Academy. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. For more information, see our Terms of Use, Risk Warning and Binance Academy Terms.
A rug pull is a type of crypto exit scam where developers drain funds from a project and disappear, leaving investors with worthless tokens.
These scams often involve draining liquidity pools, exploiting smart contract vulnerabilities, or abandoning the project entirely after generating hype.
Warning signs include anonymous teams, unaudited code, unrealistic promises, and liquidity that has not been locked or can be easily removed.
Doing your own research (DYOR) and staying alert before committing to any crypto project remains an essential line of defense.
Introduction
If you have spent any time in crypto, you have likely seen this play out: a new token launches, the hype builds quickly, the price climbs, and then everything crashes. The website goes dark, social media goes silent, and investors are left wondering what just happened.
This type of crypto exit scam is known as a rug pull, and it has led to millions in losses across the crypto space. Rug pulls are not limited to any single blockchain or category. They have hit everything from meme coins to projects that appeared legitimate with polished websites and active communities.
In fact, a 2025 incident involving the RKC memecoin saw developers cash out over $600,000 within hours, crashing the token by more than 90%. Like other common crypto scams, rug pulls thrive on trust and urgency. Let us take a closer look at how they work and what you can do to avoid falling for one.
What Is a Rug Pull?
A rug pull is a type of scam where the creators of a cryptocurrency project suddenly withdraw liquidity or abandon the project, leaving investors with worthless tokens. It is like being invited to a group dinner, asked to split the bill upfront, and then watching the host disappear before anything arrives.
Rug pulls share some similarities with traditional pump-and-dump schemes, but they often use the tools of decentralized finance (DeFi) to execute the scam. These incidents started becoming more common during the DeFi boom of 2020, when launching a token on a decentralized exchange (DEX) became fast, easy, and largely unregulated. With minimal checks in place, bad actors found ways to exploit the system and take advantage of unsuspecting investors.
How Do Rug Pulls Work?
Rug pulls can happen in several different ways. They may be technical (carried out through malicious code embedded in smart contracts), or non-technical (relying on social manipulation and centralized control). In some cases, a scam may use a combination of both.
Liquidity pool withdrawal
On DEXs, tokens need liquidity pools so people can trade them. These pools let users swap tokens directly without relying on intermediaries. Here is how a typical liquidity rug pull unfolds:
Token launch: A team launches a new token and pairs it with a base asset like ETH or USDT in a liquidity pool.
Price rises: Early buyers jump in, the token's price climbs, and the pool grows as more funds flow in.
Liquidity drain: Without warning, the developers withdraw all (or most) of the liquidity they originally added, using the LP tokens they control.
Price collapse: With almost nothing left in the pool, the market collapses and the token's price drops close to zero.
This is the most common type of rug pull. When the team controls the LP tokens, the drain can happen within hours or even minutes of a token launch.
Smart contract manipulation
In some cases, the rug pull is planned from the very beginning and the scam is embedded in the project's code. Developers may add hidden functions to the smart contract that allow them to:
Mint unlimited tokens, which floods the supply and crashes the price.
Block users from selling via honeypot contracts. These let people buy the token but prevent them from selling, making their holdings effectively worthless.
Transfer tokens directly from users' wallets without their consent, using malicious approval functions.
These scams are especially hard to spot without a proper code audit. Some honeypot tokens are even marked as "verified" to appear safe. The malicious code is often buried under complex logic or only activates after enough people have invested.
The social rug
Not every rug pull involves complicated code. Some are built on trust alone, which is exactly what makes them effective. These scams often start with a project generating excitement through social media, attracting a community, and earning shoutouts from influencers. It all seems legitimate, with a token or NFTs launch that draws in investors.
But once enough people have committed funds, the team disappears without a trace. The project's social media channels and website vanish along with the money. If the creators hold full control over the token supply, these types of rug pulls can also happen on vulnerable launchpads or centralized platforms. In the end, it comes down to social manipulation and empty promises.
How to Spot a Potential Rug Pull
While not every project with these traits is a scam, spotting a few of these signs should raise a red flag. Here is what to look out for:
Anonymous teams: While anonymity is part of crypto culture, projects with no transparency around their developers or founders are harder to hold accountable. That makes it easier for bad actors to disappear with investor funds.
No smart contract audit: Auditing or formally verifying a smart contract helps catch bugs, vulnerabilities, and unintended behavior before the code goes live. Without a smart contract audit from a reputable security firm, hidden risks may remain, such as functions that allow unlimited token minting or grant developers full control over the contract. Be cautious with audits from obscure or unknown security firms.
Unlocked liquidity: If a project does not lock its liquidity or has no clear vesting schedule for the team's tokens, there is a higher risk that funds could be withdrawn or dumped on the market at any time. Reputable projects often lock liquidity and implement vesting periods for team members, usually lasting between one and four years. While not a guarantee, this helps build trust and suggests the team is committed to the project's long-term success.
Unrealistic promises: Be cautious of projects that advertise exceptionally high returns or guaranteed profits. If a project claims support from well-known investors, companies, or influencers, those claims should be backed by credible proof, such as public announcements or confirmed partnerships.
How to Protect Yourself
While there is no guaranteed way to avoid every rug pull, there are steps you can take to lower the risk:
Do your own research (DYOR): Look beyond headlines, hype, or influencer promotions, and examine the project for yourself. A good starting point is reading the project's whitepaper to understand its goals, technology, and tokenomics. You can also use a block explorer, such as Etherscan or SolScan, to review the token's distribution, check whether smart contract ownership has been renounced, and scan the transaction history for suspicious activity.
Check liquidity locks: Look into whether the project has locked its liquidity and for how long. Many legitimate projects use third-party services to manage liquidity locks, making the process more transparent and verifiable for investors.
Look for audits: Check whether the audit report is publicly available and ensure it is up to date. Older reports may not cover recent changes to the code. While an audit cannot guarantee complete safety, it can help identify common bugs, vulnerabilities, and potentially malicious code.
Stick to reputable platforms: When exploring new tokens or NFTs, choose platforms with a strong track record and rigorous vetting processes. Reliable platforms like Binance Launchpool apply strict evaluation criteria and conduct due diligence on project teams before listing. This can significantly reduce the chances of encountering fraudulent or poorly managed projects.
FAQ
What is a rug pull?
A rug pull is a type of crypto exit scam where the creators of a project suddenly withdraw liquidity or abandon the project, leaving investors with worthless tokens. It is one of the most common forms of exit scam in the crypto space and frequently occurs on decentralized exchanges (DEXs).
How does a rug pull work?
Most rug pulls involve developers launching a token and pairing it with a valuable asset in a liquidity pool. Once investors buy in and the pool grows, the developers withdraw all the liquidity, crashing the token's price to near zero. Other variations use malicious smart contract code to block sales or mint unlimited tokens, while some rely purely on social manipulation (building trust and then disappearing).
What are the most common red flags of a potential rug pull?
Common warning signs include an anonymous development team, no smart contract audit from a reputable firm, unlocked or unverifiable liquidity, unrealistic promises of high returns, and a lack of transparency around tokenomics. Spotting several of these red flags together should prompt extra caution before committing any funds.
Can rug pulls be avoided?
While no method can guarantee complete protection, you can lower the risk by researching the project's team, checking for reputable smart contract audits, verifying that liquidity is locked for a meaningful period, and reviewing token distribution with a block explorer. Sticking to established platforms with vetting processes also helps reduce exposure to fraudulent projects.
Are rug pulls illegal?
Rug pulls that involve fraud or deception can be illegal in many jurisdictions, with law enforcement agencies increasingly pursuing crypto scammers. For example, Operation Level Up, led by US authorities in coordination with exchanges including Binance, recently froze $41 million tied to a $150-million Ponzi scheme. However, the pseudonymous and decentralized nature of crypto often makes it difficult to identify and prosecute bad actors, which is why personal caution remains so important.
Closing Thoughts
Rug pulls remain an unfortunate reality in the crypto space, especially in fast-moving areas like DeFi, where new projects launch daily. While many development teams are building with good intentions, the lack of regulation and oversight in certain corners of the industry continues to create opportunities for bad actors to take advantage of unsuspecting users.
With the growing availability of tools, audits, and educational resources, identifying potential scams is becoming more accessible. However, it is still important to conduct thorough research and approach every new project with caution and a critical mindset. Staying informed and skeptical before committing funds is the best defense against falling victim to a rug pull.
Further Reading
How Binance Fights Financial Crime
What Are Airdrop Scams and How to Avoid Them?
5 Ways to Improve Your Binance Account Security
How to Spot Scams in Decentralized Finance (DeFi)
5 Common Cryptocurrency Scams and How to Avoid Them
Disclaimer: This content is presented to you on an "as is" basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Where the content is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Binance Academy. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. For more information, see our Terms of Use, Risk Warning and Binance Academy Terms.
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