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Rug Pull Meaning

A rug pull is a malicious maneuver in the crypto industry where developers abandon a project and run away with investors' funds. This typically happens in Decentralized Finance (DeFi), where a developer creates a new token, pairs it with a valuable asset (like ETH or USDC) in a liquidity pool, pumps the price through marketing, and then suddenly drains all the value from the pool.The technical Rug can happen in several ways.

The most common is the Liquidity Drain, where the developer owns the majority of the Liquidity Provider (LP) tokens and simply withdraws them, leaving holders with a token that has zero market value. A more sophisticated version involves a Backdoor in the smart contract code, such as a hidden Mint function that allows the developer to create billions of new tokens and dump them on the market, or a Proxy contract that can be changed after investors have deposited their funds.To protect against rug pulls, savvy investors look for Liquidity Locks-where the developer sends their LP tokens to a Timelock contract that prevents them from being withdrawn for a set period (e.g., one year).

They also use Audit Reports from firms like CertiK or Hacken to ensure there are no malicious functions in the code.

Despite these tools, rug pulls remain the most common form of theft in the DeFi space, often targeting retail investors chasing high-yield memecoins.

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