How Do Rug Pulls Work? | How Scams Drain Liquidity

A rug pull happens when insiders pull cash out of a token market, leaving buyers stuck with coins they can’t sell for anything close to what they paid.

Rug pulls sit at the messy intersection of hype, new tokens, and trading that runs on code. They can look harmless at first: a fresh coin, a shiny website, a “fair launch,” and a price chart that only seems to go up. Then the floor drops. The price collapses in minutes, or selling fails outright, and the people who built the token vanish with the money.

This piece breaks down how rug pulls work at the level that matters: what happens to liquidity, what the smart contract can allow, and what you can check before you buy. You’ll also get a practical checklist you can use on any token, even if you’re not a developer.

How Do Rug Pulls Work? A Plain-English Walkthrough

Most rug pulls follow the same money path. The details change. The flow stays familiar.

Step 1: A token gets created and paired for trading

On a DEX, a token usually trades inside a pool. A pool is a pair, like TOKEN/ETH or TOKEN/USDC. Traders swap one asset for the other, and the pool price moves based on supply and demand in that pool.

The pool needs liquidity. Liquidity is the pile of assets sitting in the pool, ready to be swapped. Without it, trades fail or price swings turn wild. A token can look “alive” while liquidity stays tiny, which is one reason charts can fool people.

Step 2: Liquidity is added and the chart starts moving

Creators seed the pool with some value. That value can be real, or it can be staged with borrowed funds and timed swaps. Early buyers see a rising price and think, “I’m early.” That feeling is the hook.

At this stage, marketing does most of the work: social posts, influencers, Telegram hype, “stealth launch” chatter, or fake screenshots of gains. The goal is simple: get more people to buy so the pool holds more valuable assets on the other side of the pair.

Step 3: The pool fills with other people’s money

In many launches, buyers aren’t adding “cash” the way a bank deposit works. They’re swapping ETH, BNB, SOL, or stablecoins into the token. That swap moves valuable assets into the pool and pulls the token out. A rising chart can happen while the pool quietly becomes a vault full of valuable assets that insiders can tap.

Step 4: Insiders remove liquidity or dump tokens

This is the rug. Two main paths show up again and again:

• Liquidity removal: The team controls the LP tokens (the receipt for providing liquidity). If they can redeem LP tokens, they can pull ETH/USDC out of the pool. The token price craters because the pool can’t support selling pressure.
• Token dump: The team holds a giant share of supply and sells into the pool. Buyers get crushed by a flood of tokens. The pool ends up holding tokens that no one wants and far less of the valuable asset.

Step 5: Selling becomes painful or impossible

After the rug, buyers face one of three outcomes:

• The price falls close to zero, and selling returns pennies.
• The token has a “sell tax” or fee so high that selling makes no sense.
• The token is coded so sells revert, so wallets can buy but can’t sell (the classic honeypot trap).

From the outside, it looks like “the chart died.” On-chain, it’s more direct: the pool lost the valuable side, or the rules block normal selling.

Common rug pull styles you’ll see in the wild

People use “rug pull” as a catch-all. It helps to know the flavors, since the warning signs differ.

Liquidity pull

Liquidity pulls happen when the team can remove liquidity from the pool. The fastest version is when LP tokens sit in a normal wallet controlled by the team. A slower version is when liquidity is “locked” for a short time, then removed the moment the lock ends.

Supply dump

Supply dumps hinge on ownership. If a small set of wallets controls a large share of tokens, they can sell into buy pressure. A chart can climb for days, then collapse in a single wave of sells.

Honeypot sell trap

A honeypot is a token where buying works and selling fails. The contract can restrict sells to a whitelist, block sells to the pool, or apply conditions that almost no normal wallet can meet. A honeypot can also hide behind a “tax” that makes sells fail due to slippage, so buyers blame themselves while the code does the blocking.

Hidden mint or unlimited supply

Some tokens let a privileged wallet mint new supply at will. Minting doesn’t need a loud announcement. New tokens can appear, get sold into the pool, and push the price down while the insider cashes out the valuable side.

Admin key change that flips the rules

Even if a contract looks fine at launch, a privileged key can change behavior later. Proxy patterns or upgradeable contracts let a team swap logic after the hype phase. A token can start normal, then become a trap once the pool holds enough value.

Why liquidity is the pressure point

Liquidity is where cash-out happens. In a DEX pool, price is not a magical number. It’s a result of how much of each asset sits in the pool. Pull out the valuable side, and the token can keep “existing” while turning into a dead end for sellers.

A clean mental model: buyers swap value in, insiders want value out. Liquidity is the pipe. Rug pulls either yank the pipe away (liquidity removal) or clog it with junk (mass token dumps, mints, sell traps).

If you only remember one thing, remember this: a rising chart is not safety. Liquidity control is safety.

Fast checks that catch many rug pulls before you buy

You don’t need a dev background to spot a lot of bad setups. You need a habit of checking a few items every time, in the same order, before emotions kick in.

Check 1: Liquidity lock and who holds LP tokens

Ask: are LP tokens locked, and for how long? A long lock is not a shield on its own, yet it does remove the easiest instant rug path.

Also ask: if liquidity is locked, where is it locked? Some “locks” are marketing text with no contract proof. If you can’t verify the lock on-chain, treat it as unlocked.

Check 2: Top holders and team supply

Look at the largest wallets. If a few wallets hold a big chunk, the supply dump risk jumps. It can still be fine if those wallets are locked, vested, or clearly labeled exchange or burn wallets. If it’s a pile of unknown wallets, you’re trusting strangers with the power to crush the chart.

Check 3: Trading taxes and sell rules

Some tokens charge a tax on buys and sells. Taxes can fund development or liquidity. Taxes can also be a trap. Watch for taxes that can be changed by a privileged wallet or taxes that spike on sells.

Check 4: Contract privileges

Many rugs rely on owner powers: pausing trading, blacklisting wallets, changing fees, changing router addresses, or upgrading contract logic. Owner powers are not always bad. The question is whether those powers are constrained.

Look for signs like multi-signature control, timelocks, or a published plan to remove ownership. Without constraints, you’re betting on trust alone.

Investor warnings from regulators often stress that fraud in crypto markets is common and that social hype is a frequent entry point. Read the warnings straight from sources like the FINRA crypto asset risk overview and treat them as a baseline reality check, not doom talk.

Signals that usually mean “walk away”

Some setups are so lopsided that skipping them is the smart move, even if the chart looks tempting.

“Locked liquidity” with no proof

If a token claims “locked liquidity” yet can’t show a verifiable lock transaction, that’s not a lock. That’s a slogan.

Owner can change fees at any time

A token can start with a low tax, then flip to a giant sell fee once enough people buy. A contract that lets an owner raise fees without limits gives them a direct dial to trap exits.

Upgradeable contract with quiet admin control

Upgradeable logic can be used for legit fixes. It can also be used to swap in a sell trap after launch. If a project uses upgrades, look for timelocks and public upgrade processes, not silent switches.

Supply distribution that makes one wallet the market

If one wallet can dump enough to wipe out liquidity, the token is not a market. It’s a hostage situation with better branding.

Pressure to buy now

Time pressure is a classic trick. If you feel rushed, that’s data. Slow down. Check the contract, the holders, and the liquidity setup. If the project punishes that pause, that’s also data.

Rug Pull Pattern	What Happens Under The Hood	What You Notice As A Buyer
Liquidity removal	LP tokens redeemed; valuable assets pulled from pool	Price drops fast; selling returns near nothing
Team supply dump	Large holder wallets sell into the pool in waves	Candles turn red; rebounds fail; chart collapses
Honeypot sell block	Contract blocks sells or restricts who can sell	Buy works; sell fails or reverts
Fee trap	Sell tax spikes, or fees change with owner controls	Sells “work” but you receive scraps
Unlimited mint	Privileged wallet mints new tokens and sells them	Slow bleed or sudden crash after a mint wave
Blacklist or pause switch	Owner flags wallets or pauses trading at will	Some wallets can’t sell; rumors spread fast
Fake lock narrative	Marketing claims a lock; on-chain data shows none	Everything feels fine until liquidity vanishes
Upgrade swap	Upgradeable contract switches logic after launch	Rules change overnight; exits get blocked

How rug pull scams drain liquidity in DeFi pools

“Drain liquidity” sounds abstract until you trace the swap flow. Here’s the plain version.

When you buy, you push value into the pool

Say you buy TOKEN with ETH. You send ETH into the pool and receive TOKEN out. The pool now holds more ETH. That ETH is what insiders want. If they can pull liquidity, or if they can dump a large token stash into that pool, they can pull out the ETH that buyers pushed in.

When insiders pull liquidity, the pool loses its floor

Liquidity providers get LP tokens as proof of their share of the pool. If a team holds most LP tokens, they hold the keys to the vault. Redeem LP tokens, receive the pool assets, and the pool becomes shallow or empty. A shallow pool can’t absorb sells. Price collapses as soon as sellers show up.

When insiders dump tokens, they pull the valuable side out by trading

Dumping is just a series of sells. Every sell swaps TOKEN into the pool and takes ETH/USDC out. Over many sells, the pool becomes stuffed with TOKEN and drained of ETH/USDC. Buyers are left holding a token that can’t be sold for real value.

U.S. regulators and law enforcement have warned about crypto fraud tactics that lean on hype and fast-moving markets. The CFTC’s digital asset frauds hub is a useful starting point for common patterns that show up across scams, even when the token branding changes.

What “safe” looks like in a token setup

No checklist can promise safety. Crypto markets carry real risk. Still, you can stack the odds in your favor by focusing on setups that reduce rug mechanics.

Liquidity locked with clear proof and a sane timeline

A lock that’s visible on-chain, tied to the correct pool, and set for a meaningful duration reduces instant liquidity pulls. A short lock that expires next week does little. A lock that lasts long enough for the project to build real usage is more credible.

Team tokens vested or time-locked

Vesting spreads out access to team supply. That reduces the sudden dump risk. It also aligns incentives: a team can’t cash out everything on day three.

Owner controls constrained by multi-sig or timelocks

Owner powers can be held by a multi-signature wallet that needs multiple approvals. Timelocks can add delay before a change takes effect, giving buyers time to react if rules shift. Without these controls, a single key can flip the token from normal to trap without warning.

Clear, verifiable contract and audit details

Audits are not a magic shield. Some audits are shallow. Some are fake. Still, a real audit from a known firm, linked directly, plus a contract that matches the audited code, beats “audited” text pasted into a landing page.

If you want a plain warning about crypto investment fraud patterns and what to do if you’re targeted, the FBI cryptocurrency investment fraud page lays out common scam flows and reporting steps.

What to do if you suspect a rug pull is starting

Speed matters once a rug starts. You may have minutes.

Watch for sudden liquidity changes

If liquidity drops sharply, slippage spikes and exits get ugly. If you can still sell, acting fast can limit losses. If sells revert, you may already be trapped by contract rules.

Stop adding funds

Some rugs try to lure victims into “averaging down” with claims like “buy the dip” or “tax issue, devs fixing it.” If the core issue is liquidity removal or a sell trap, adding funds feeds the same pipe the insiders are draining.

Capture proof while it’s fresh

Save the token contract address, the pool address, transaction hashes, and screenshots of claims made by the project team. This won’t recover funds by itself, yet it can help when you file reports or warn others.

Report through official channels

In the U.S., victims can file complaints through IC3. The 2024 IC3 Annual Report shows how large online crime losses have become and includes crypto-related fraud trends drawn from complaint data.

Pre-Buy Check	What To Verify	Red Flags
Liquidity status	Pool size, LP lock proof, lock duration	LP tokens held by a team wallet with no lock
Top holders	Largest wallets and whether they’re labeled or locked	One or two unknown wallets hold a huge share
Sell behavior	Small test trade to confirm buy and sell both work	Sell fails, or proceeds are near zero
Fees and taxes	Current buy/sell taxes and whether they can change	Owner can raise sell tax without limits
Owner privileges	Pause, blacklist, mint, upgrade permissions	Single wallet can pause or blacklist at will
Upgradeable logic	Proxy pattern, admin address, timelock presence	Upgradeable with silent admin control
Team transparency	Public identities, past projects, verifiable track record	Anonymous team with no verifiable history
Claims and marketing	Claims tied to verifiable facts and on-chain data	Big promises, time pressure, no proof
Audit and code match	Audit link, contract address matches audited build	“Audited” badge with no real audit page

A clean way to think about risk before every token buy

Rug pulls win when buyers treat a token like a lottery ticket and skip the setup checks. You can break that pattern with a simple routine that takes a few minutes.

Use a fixed sequence

Do the same checks in the same order each time: liquidity, LP lock, top holders, owner powers, taxes, upgrade controls, sell test. A fixed routine reduces impulse buys and makes it easier to spot odd details.

Set a personal “no-trade” threshold

If any one red flag is severe, skip the trade. Not “maybe.” Skip it. There will always be another token. A single wallet controlling liquidity with no lock is enough to walk away. A sell function that fails is enough to walk away.

Keep position sizes small for new tokens

New pools are fragile. Even honest projects can suffer from thin liquidity and wild swings. Small sizing keeps mistakes survivable. It also keeps greed from driving decisions.

Rug pulls vs. normal crashes

Not every collapse is a rug pull. Some tokens fall because hype fades, whales take profit, or the market shifts. A rug pull has a structural element: liquidity gets pulled, sells get blocked, minting inflates supply, or a privileged wallet dumps a huge share.

If you’re unsure, check for these markers:

• Liquidity drop that lines up with a single wallet action
• Contract rules that prevent normal sells
• Sudden fee changes that punish exits
• Fresh minting followed by large sells

When you separate “market drop” from “structural trap,” your decisions get clearer. You stop blaming yourself for slippage when the code was rigged. You also stop treating every dip as a scam when it’s just a thin market.

The simple takeaway

Rug pulls work by pulling value out of a token’s trading system once enough buyers have pushed value in. Most rugs lean on one of two levers: control over liquidity or control over token rules. If you check those two areas first, you’ll dodge a large share of bad trades without needing to read code line by line.

Build the habit. Run the checklist. If the setup feels foggy, skip it. Clarity beats hype every time.