Decentralized finance (DeFi) has been one of the most transformative trends in cryptocurrency. By replacing banks and brokers with smart contracts, DeFi promises open access, innovation, and financial independence. But along with opportunity comes risk, and one of the darkest risks is the rug pull — when developers drain funds from a project, leaving investors with worthless tokens.
In recent years, a new variation has emerged: rug pulls disguised as upgrades. Instead of abruptly disappearing, some developers present a supposed “protocol upgrade,” “token migration,” or “liquidity improvement,” convincing users to move their funds or swap tokens — only to seize control and vanish with the assets.
What Is a Rug Pull?
Traditionally, a rug pull happens when the team behind a DeFi project suddenly withdraws liquidity or exploits admin privileges to drain user funds. Because smart contracts are often immutable, users have little recourse once funds are stolen.
In the “upgrade” version, the scheme is more subtle. Developers claim they are making legitimate improvements: launching a new version of the contract, introducing yield farming changes, or migrating liquidity pools. Investors, trusting the team, willingly participate — and in doing so, hand over their assets to a malicious contract.
How “Upgrade Rug Pulls” Work
The anatomy of these scams typically follows a pattern:
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Announcement of a new version. Developers announce on social media and community channels that an upgrade is needed for better security, lower fees, or higher returns.
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Token migration. Users are told to swap old tokens for new ones through a provided smart contract.
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Liquidity shift. Liquidity providers are urged to withdraw from one pool and deposit into a new pool controlled by the developers.
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Drain and exit. Once a large portion of funds is moved, the developers use backdoors or simply abandon the old token, leaving users with worthless assets while they abscond with real liquidity.
By disguising the rug pull as a community-approved upgrade, scammers buy time and legitimacy, making it harder for users to detect red flags.
Notable Examples
Several DeFi projects have collapsed under the guise of upgrades:
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Fake token migrations. Scammers have launched “V2” versions of tokens, promising stronger tokenomics, but the migration contracts were coded to send all user funds to the attacker’s wallet.
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Liquidity migration traps. Users were told to move liquidity into new pools. Once enough capital was concentrated, the project team drained the pools and disappeared.
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Governance abuse. In some cases, teams proposed “protocol upgrades” that included hidden functions allowing unlimited minting of tokens, which they later dumped on the market.
Each case reinforced the same lesson: upgrades without transparency are fertile ground for manipulation.
Why Users Fall for It
Several factors explain why these schemes succeed.
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Trust in developers. Many projects build loyal communities through constant updates and flashy promises, making users less skeptical.
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Hype culture. DeFi investors often fear missing out on higher yields or improved features, so they rush into migrations without due diligence.
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Technical complexity. Few users audit smart contracts themselves, leaving them reliant on developers’ explanations.
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Familiar pattern. Real DeFi protocols often release legitimate upgrades and migrations, making it difficult to distinguish scams from genuine improvements.
The Role of Governance
One reason upgrade rug pulls thrive is weak or manipulated governance. In theory, decentralized autonomous organizations (DAOs) are supposed to review and approve major changes. In practice, many projects still rely on small developer teams with admin keys, or governance tokens concentrated in the hands of insiders.
When a handful of wallets can push through a “community-approved upgrade,” users may not realize they are voting for their own losses. This raises deeper questions about whether DeFi governance is truly decentralized or just a façade.
Protecting Against Upgrade Rug Pulls
The industry is learning painful lessons about how to guard against these schemes. Best practices include:
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Independent audits. Any upgrade contract should be audited by reputable third parties before users are encouraged to migrate funds.
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Timelocks. Protocol changes should include time delays to allow the community to review and react before execution.
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Multi-sig controls. Upgrade authority should rest with multiple independent signers, not a single developer wallet.
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Community scrutiny. Investors should demand full explanations of why an upgrade is needed and how it will be implemented.
Even with these safeguards, vigilance is key. DeFi is still experimental, and opportunists exploit every gap.
Regulators Weigh In
Regulators have also begun to notice. While DeFi projects often claim decentralization, rug pulls disguised as upgrades highlight how centralized developer control can be abused. Law enforcement has investigated several high-profile cases, but jurisdictional challenges make enforcement uneven.
These incidents add to the narrative that DeFi is risky and prone to scams, fueling calls for stricter oversight. Yet many in the community worry that regulation could stifle innovation and push developers toward more closed systems.
The Bigger Picture
Upgrade rug pulls reveal the paradox at the heart of DeFi. On one hand, the industry thrives on rapid innovation and continuous improvement. On the other, every upgrade creates an opportunity for abuse. The same openness that allows anyone to build and launch a protocol also allows scammers to cloak fraud in the language of progress.
For DeFi to mature, it must find ways to separate genuine innovation from malicious upgrades. That means better governance, stronger audits, and a culture of questioning every promise — no matter how polished it looks.
Conclusion
Rug pulls disguised as upgrades are among the most insidious scams in DeFi. They exploit the community’s natural excitement about progress, using trust and hype as weapons. While the industry is adapting with audits, governance reforms, and stronger standards, the responsibility ultimately falls on users to remain cautious.
The lesson is simple but hard to practice: in DeFi, not every upgrade is an improvement. Sometimes, it’s just a rug pull in disguise.
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