Rug Pull Is a Major Challenge in the Decentralized Finance World - How to Protect Yourself?

The blockchain and DeFi industries have opened new doors for investors, with countless profit opportunities. However, the shadow of rug pull always lurks, especially on decentralized exchanges (DEX). This is a real threat that anyone participating in the cryptocurrency world needs to be cautious of.

Understanding Rug Pull: From Definition to Reality

The term “rug pull” originates from the English phrase “pull the rug out from under (someone)” — a colloquial way to describe suddenly and unexpectedly withdrawing support. In the context of cryptocurrencies, a rug pull occurs when founders or large investors suddenly withdraw all funds from liquidity pools, causing the token’s value to plummet nearly to zero.

When the development team pulls liquidity from a pool, it triggers a chain reaction: the token loses its value, other investors rush to sell off, and ultimately, the token can drop to a value of 0. Projects like SquidGame, SnowdogDAO, or WhaleFarm have left deep scars within the crypto community.

Why Are Rug Pulls Rampant on DEXs?

Decentralized exchanges (DEX) are ideal venues for scammers because they allow anyone to list new tokens without any approval process. Coupled with the fact that creating tokens on open-source blockchains like Ethereum is completely free, it creates a “paradise” for scam plans.

Typical Scenario of an Illustrative Rug Pull

Usually, these scams follow a similar script:

Step 1: The project team sets up a new token and registers it on a DEX. To make the token “useful,” they create a liquidity pool and pair it with popular coins like ETH or USDT.

Step 2: To attract liquidity providers (LP), they advertise abnormally high yields — often several times higher than legitimate projects. They also spread news on Telegram, Twitter about large capital inflows, creating false community trust.

Step 3: After attracting enough investors to swap ETH, USDT for the DeFi token, the development team immediately withdraws all liquidity from the pools. These funds are transferred to other markets to hide tracks, while the DeFi token now has no liquidity and its value collapses to 0.

Warning Signs Investors Should Not Ignore

While each rug pull can have unique features, they often share common, easily recognizable traits:

Unreasonable high yields: When a project offers an APY exceeding 100% (while other pools only offer a few percent), it’s a major red flag. Scammers use this figure to stimulate greed and rush investors.

Anonymous team: Although there are legitimate reasons for maintaining anonymity, when combined with other factors — especially accounts created just hours or days before the project launch — this becomes a significant red flag.

Unsubstantiated price increases: If you can’t find a reasonable explanation for a sudden price spike, be cautious. Scammers often “pump” projects by raising funds through operational schemes or creating fake hype to trigger FOMO.

Lack of liquidity lock mechanism: Legitimate projects usually lock their liquidity for a predetermined period. This ensures two things: trading system stability and confidence that founders cannot suddenly abandon the project. If the liquidity pool isn’t locked, it’s a dangerous sign.

Defensive Strategies: How to Protect Your Assets

Check team information: Before investing, visit the project’s official website and learn about the members behind it. Projects that do not disclose information about founders or developers should raise serious doubts.

Require independent audits: Most reputable crypto projects undergo security audits by third-party firms. While the absence of an audit doesn’t necessarily mean it’s a scam, it warrants further investigation before committing funds.

Analyze token distribution: Use tools like Etherscan to examine how tokens are distributed. If a single or just a few wallets hold the majority of the supply, the risk of price manipulation is very high, as they can sell everything at any time.

Assess liquidity levels: When a new project is listed on a DEX, scrutinize its initial liquidity. An extremely low liquidity pool (under $100,000) could indicate a scam.

Check liquidity lock status: Major DEXs often have lock mechanisms to ensure founders cannot withdraw liquidity within a certain period. Always verify whether the project’s pool is locked.

Final Warning

As blockchain and DeFi continue to evolve, rug pulls are not only found in DeFi projects but are also spreading to other areas like NFT and GameFi. Before you decide to withdraw your funds, take time to research thoroughly, look for clear warning signals, and always maintain a skeptical attitude. Your money is valuable, and caution is your best weapon.