A rug pull is an exit scam where a project’s creators abruptly drain liquidity or otherwise seize user funds—typically after attracting capital through a new token sale, liquidity pool, or DeFi protocol—leaving remaining holders with illiquid or worthless tokens. It commonly occurs on permissionless platforms where teams can create tokens, add liquidity, and remove it without oversight.
How it happens and how to reduce risk: rug pulls can be executed by removing LP tokens, transferring treasury funds, or exploiting privileged contract functions. Common red flags include anonymous teams, unverified or unaudited smart contracts, locked liquidity that is suddenly unlocked, unrealistic yields, and rushed token launches. Risk mitigations include checking audits and contract ownership status, verifying liquidity locks and tokenomics, using reputable platforms, and limiting exposure to newly launched, unaudited projects.