Rug pull explained: what it is, how it works, and common types

A new token can climb for days and then become close to impossible to sell within minutes. Sometimes the cause is a rug pull: the people behind the project remove what holds the market up and walk away.

Here’s what regulators and prosecutors mean by the term, how a liquidity rug pull works, the other common types, and how a rug pull differs from an ordinary failed project. This article explains how these schemes are built. It doesn’t name projects or say whether any particular one is fraudulent.

What a rug pull is

“Rug pull” is a colloquial term. The US Department of Justice describes it in its press releases as a scheme in which the creator of a crypto project solicits money from investors, then abruptly abandons the project and fraudulently keeps their funds, leaving investors with a worthless asset. The key feature is that the people doing it are insiders, the creators or developers themselves, not outside attackers.

The term has no legal definition of its own. In cases brought in the United States, prosecutors and regulators have used existing fraud laws, such as wire fraud and securities antifraud provisions, and whether a particular case is fraud is decided by investigators and courts.

How a liquidity rug pull works

Many new tokens trade through liquidity pools on decentralized exchanges. The SEC explains that someone who deposits a pair of tokens into a pool receives liquidity provider tokens, called LP tokens, and that, absent safeguards, whoever holds those LP tokens can withdraw liquidity without warning and sell large amounts into the pool, causing losses to other investors. The SEC says this behavior is commonly known as a rug pull. Once the liquidity has been taken out, there is little left for other holders to trade against.

“Locked” liquidity is the usual safeguard, meaning the LP tokens can’t be used by insiders to withdraw. But a claim of locked liquidity is only a claim. In one SEC case, the agency alleges that the team told investors that liquidity was locked while LP tokens stayed unlocked under one person’s control, and a US prosecutors’ case alleges similar misrepresentations about a locked pool. These are allegations, and the first was settled without the defendant admitting or denying them.

Other common types

Not every rug pull involves a pool. US prosecutors have described cases where creators sold tokens or NFTs, promised features or partnerships, then ended the project abruptly, deleted their social media accounts, and stopped responding, keeping the money raised. Others have alleged that insiders took tokens out of liquidity pools or traded their own holdings for personal gain while telling buyers they weren’t.

A related trick works through the token’s code. Ethereum’s guidance explains that whoever writes a token contract decides what it does, so a contract can forbid transfers, which leaves holders unable to sell. Another related scam is the impersonation token, which copies a real token’s name and symbol, though it can’t use the same contract address, and usually has a tiny liquidity pool, if any, because the scammers don’t want to risk real assets.

How a rug pull differs from a failed project, a hack, or a pump and dump

A falling price is not proof of a rug pull. A project can fail because its team ran out of money or its idea didn’t work, and that is a business failure, not fraud. What makes something a rug pull is intentional deception and the taking of funds, which comes down to conduct and intent that investigators and courts assess.

It also differs from a hack, where an outside attacker exploits a weakness, and from a pump and dump, where promoters push up a price and then sell. These can overlap in practice, but the defining feature of a rug pull is that the insiders themselves take the money or abandon the project.

What can be checked, and what can’t

A few checks are possible. Ethereum’s guidance says to take a token’s contract address from the organization that issues it, to look at the size of its liquidity pool, and to look for community scam labels on block explorers. It also notes that no label is an authoritative source of truth, because a decentralized network has no body that certifies legitimacy. A promise of locked liquidity, an audit, or a famous name is a claim to verify, not proof of safety.

WEEX Reminder: a rising price is not proof

WEEX reminds users that a climbing price, social media buzz, or screenshots of gains say nothing about who controls a token’s liquidity or code. Treat claims like “locked,” “audited,” or “backed by” as things to verify, and be careful about connecting a wallet or approving a token you don’t recognize. New tokens carry a risk of total loss. Never share a seed phrase or private key. Nothing here is financial advice.

Conclusion

A rug pull is a scheme in which a project’s creators raise money and then abandon the project or take its funds. The most common form removes liquidity from a trading pool, but it can also be an abandoned launch, a token that can’t be sold, or insiders quietly taking tokens for themselves. A collapse alone doesn’t prove one, and none of the available checks can promise safety.

FAQ

1. What is a rug pull in crypto?
It’s a scheme where the creators of a project solicit funds, then abruptly abandon it and keep the money, leaving investors with a worthless asset. The US Department of Justice has used this description in its cases.

2. How does a liquidity rug pull work?
Whoever holds the LP tokens for a trading pool can withdraw its liquidity and sell large amounts into it, causing losses for other holders. The SEC explains this is commonly known as a rug pull.

3. Is every token that collapses a rug pull?
No. A project can fail without fraud. Whether it was a rug pull depends on the conduct and intent of the people behind it, which investigators and courts decide.

4. What does “locked liquidity” mean?
It means the LP tokens can’t be used by the team or other insiders to withdraw liquidity. Because it is only as good as the verification behind it, regulators have alleged cases where “locked” claims weren’t true.

5. Can money lost in a rug pull be recovered?
Usually not. The FTC notes that crypto payments typically can’t be reversed, although authorities have charged people behind some schemes. Report what happened to local authorities and the platforms involved, and be wary of anyone who offers to recover your funds for a fee.