What is a rug pull?

A rug pull is a scam in which the creators of a crypto token or project draw in buyers' money and then abandon it. The name comes from the phrase "pulling the rug out." It is most common among new tokens on decentralized exchanges, including many meme coins.

How does a rug pull work?

A new token usually trades through a liquidity pool, a pot holding the new token and an established coin such as ether. Buyers put the established coin in and take the new token out. As excitement builds, the pot of real money grows.

The people who launched the token often control that pot, and they usually hold a large share of the token's supply. A rug pull is the moment they cash out. They either withdraw the established coin from the pool or sell their own holdings into it all at once. Buyers are left holding a token that nobody will pay for.

Hard vs soft rug pulls

A hard rug pull is planned from the start. The token's code may contain hidden functions, for example one that stops ordinary buyers from selling, or the creators simply empty the pool. The Squid Game token, which collapsed in early November 2021, became a well-known case after buyers reported they could not sell.

A soft rug pull is slower. The team promotes the project, sells its own tokens over days or weeks, then stops work and goes quiet. Nothing in the code is broken, which makes intent harder to prove.

What are the warning signs?

None of these proves fraud, and their absence does not prove honesty. Commonly cited patterns include:

• The team is anonymous and cannot be checked.
• A handful of wallets hold most of the supply.
• The pool's funds are not locked, so the creators can withdraw them at any time.
• The code has not been published or independently reviewed.
• Buyers report that they can buy but not sell.
• The marketing promises guaranteed or very fast returns.

The guide on how to research a crypto project covers these checks in more detail.

Is a rug pull illegal?

It can be. A project that fails honestly is not a crime. Taking money through lies is fraud in most legal systems, whatever the technology.

In the United States, prosecutors have brought rug pull cases as wire fraud and money laundering. In March 2022, federal prosecutors in New York charged two men over the Frosties NFT project, alleging they abandoned it within hours of selling out and moved about $1.1 million to their own wallets.

Enforcement is difficult in practice. Creators are often anonymous and overseas, and stolen funds move quickly. Laws differ by country and change, and victims seldom recover much. Reporting routes are listed in what to do if you are scammed.