A rug pull, or Exit Scam, is a malicious act in which crypto developers abandon a project and either run away with project funds or sell off their pre-mined holdings.
Rug pulls are most common within the DeFi ecosystem, as DEXs allow malicious developers to list their tokens without any prior verification or auditing.
Rug pulls operate similarly to pump and dump schemes as they both take advantage of the lack of regulation in the crypto space, misinformation, shilling, and the fear of missing out (FOMO). The difference is that pump and dumps typically operate within a shorter time range, revolve around the price action of low-volume tokens, and do not require the involvement of the token’s developers.
On the other hand, rug pulls involve insiders taking off with the majority of user funds by pairing their token with another (valuable) token such as Bitcoin (BTC) or Ethereum (ETH). After investors have swapped their tokens for the scam token, the developers drain the liquidity pool of the valuable tokens, thereby “pulling the rug out” from under investors.