In the booming world of cryptocurrencies, where the promise of innovation and wealth creation draws millions, the "rug pull" has emerged as one of the most common scams. Crypto rug pulls are deceptive schemes where developers hype up a token, attract investors, and then run with their funds, leaving the project worthless. With the threat of rug pulls still present as we near 2025, it’s worth giving a brief overview of this common scam and providing insight into the behind-the-scenes of these operations.
What is a Rug Pull?
A rug pull occurs when developers of a cryptocurrency or decentralised finance project abruptly withdraw liquidity or funds, abandoning the project and leaving investors with worthless tokens. This scam is particularly prevalent in the crypto world due to the relative lack of regulation and the anonymity associated with crypto wallets and exchanges, with the only way of knowing who owns a wallet address is if they directly tell you.
Rug pulls are typically executed in two ways:
- Liquidity Pool Draining: Developers siphon liquidity from a token's pool on decentralised exchanges (DEXs).
- Code Manipulation: Malicious code allows only developers to sell their tokens, rendering them the sole beneficiaries.
Squid Game Token
The Squid Game token (SQUID) exemplifies the devastation of a rug pull. Inspired by the hit Netflix series, SQUID capitalised on its cultural relevance and skyrocketed in value, reaching $2,861 per token in October 2021. However, investors soon discovered they couldn't sell their holdings due to a deliberately coded mechanism. This code allowed the developers to sell off their tokens, and shortly after, the developers vanished, taking an estimated $3.4 million.
This scam highlighted several red flags, such as the absence of verified developer identities, no token code audits, and unrealistic promises of high returns. Additionally, using the Squid Game intellectual property (IP) as a part of the branding for the token gave false credibility, which lured in otherwise clueless investors, who assumed Netflix and the IP owner backed the coin.
Logan Paul’s CryptoZoo
Logan Paul’s CryptoZoo controversy shows how influencer-backed projects can lead to disastrous consequences. CryptoZoo, marketed as a play-to-earn blockchain game, promised investors a chance to breed and trade unique animal NFTs (non-fungible tokens). The project had a lot of support from the influencer’s followers, with Logan Paul having over 23 million subscribers to his YouTube channel as of December 2024.
By late 2022, allegations emerged that developers abandoned the project after receiving their payments, and many investors were left out of pocket. Amid public backlash, Logan Paul announced a $1.3 million opt-in refund plan in January 2023 for some affected investors. However, many argued that the scale of the refunds fell short compared to the losses incurred by investors.
This scheme has been under heavy scrutiny by Stephen Findeisen, known on YouTube as “Coffeezilla”, since the initial discovery of the abandonment of the project back in 2022. The CryptoZoo situation continues today, with Paul responding to Findeisen’s coverage of the scam by suing him for defamation.
The Role of Influencers in Crypto Rug Pulls
Cryptocurrency scams often gain traction through the involvement of influencers. These individuals, ranging from niche crypto enthusiasts to global celebrities, can unknowingly or wilfully promote fraudulent projects, lending them legitimacy and attracting unsuspecting investors.
Influencers are often incentivised to endorse new projects with free tokens or hefty payments. While some genuinely believe in the tokens they promote, others overlook due diligence, leading their followers into financial traps. Examples like CryptoZoo demonstrate how influencer promotion can amplify the scale and impact of crypto scams.
Some general advice to follow when considering investing in an influencer-backed token is to:
- Research influencers' motivations: Question whether their endorsement is backed by genuine investment, interest, or a paid promotion.
- Verify claims independently: Do not rely solely on influencers' assurances; investigate the project's team, technology, and objectives.
- Be sceptical of sudden hype: Projects with disproportionate media coverage and endorsements often warrant closer scrutiny.
The Legality of Rug Pulls
Rug pulls occupy a grey area in the legal landscape. While some actions, like outright fraud or misrepresentation, are illegal in most jurisdictions, the decentralised nature of cryptocurrencies complicates enforcement. Developers often operate anonymously and across international borders, making it challenging for authorities to track them down or prosecute effectively.
The high-profile case of Sam Bankman-Fried demonstrates the evolution of regulatory attention surrounding cryptocurrency. Following the collapse of FTX in 2022, a cryptocurrency exchange he founded, Sam Bankman-Fried was convicted of fraud and sentenced to 20 years in prison in 2024. His conviction serves as a landmark case, signalling that legal accountability is possible, even in the largely unregulated crypto space.
How to Spot and Avoid Rug Pulls
While rug pulls can be sophisticated, investors can take steps to mitigate risk:
- Research the Team: Check if the developers are transparent and have a proven track record in the crypto space. With scam coins, there are generally a few common bad apples at the core of the projects.
- Examine Liquidity and Locking: Ensure a token's liquidity pool is locked in a specified period, reducing the risk of sudden withdrawals.
- Audit the Code: Verify whether reputable third parties have audited the smart contract code to ensure that when the time comes, investors can sell their tokens
Conclusion
Crypto rug pulls, exemplified by schemes like the Squid Game token and Logan Paul’s CryptoZoo, highlight the risks of the decentralised and largely unregulated crypto space. The role of influencers in amplifying scams, combined with platforms like Telegram fostering unchecked communication, further complicates the landscape. For now, it may be worth it for the uninformed investor to stay away from cryptocurrency. Hopefully, as the industry matures, there will be increased safeguards that empower users and deter bad actors.