What Is a ‘Rug Pull’ and How Is It Executed in a DeFi Protocol?
A 'rug pull' is a malicious maneuver in which cryptocurrency developers suddenly drain all the liquidity from a decentralized exchange (DEX) pool. This typically happens after the token has been hyped and investors have deposited significant funds into the liquidity pool.
Once the funds are removed, the token's price plummets to near zero, leaving investors with worthless assets. It is a form of exit scam often facilitated by smart contract backdoors or lack of lock-up periods.
Glossar
Exit Scam
Departure ⎊ An Exit Scam occurs when the creators of a cryptocurrency project or platform abruptly cease operations, liquidate project assets, and disappear with investor funds, often after a period of high-profile promotion.
Malicious Maneuver
Manipulation ⎊ These actions represent deliberate attempts to distort market signals or exploit protocol vulnerabilities for illicit gain, directly undermining fair price discovery in derivatives.
Liquidity Pool
Pool ⎊ A liquidity pool, within the context of cryptocurrency derivatives and options trading, represents a centralized reserve of tokens locked in a smart contract, facilitating decentralized trading and price discovery.
Token Vesting Schedules
Allocation ⎊ Token vesting schedules, prevalent in cryptocurrency projects and increasingly mirrored in options trading and financial derivatives, represent a contractual mechanism distributing a portion of an asset ⎊ typically tokens or equity ⎊ over a predetermined period.
Smart Contract Backdoors
Exploit ⎊ Within cryptocurrency derivatives and financial engineering, an exploit concerning smart contract backdoors represents a critical vulnerability where malicious code, intentionally or unintentionally embedded, allows unauthorized access or manipulation of contract state.
Decentralized Exchange
Architecture ⎊ A decentralized exchange (DEX) fundamentally diverges from traditional order book exchanges through its reliance on smart contracts and blockchain technology to facilitate peer-to-peer trading, eliminating the need for a central intermediary.