DEFI SECURITY 101 • INVESTOR’S GUIDE

“Rug Pull” vs. “Exploit”: Understanding the Key Dangers in DeFi and How to Spot Them

By CyberDudeBivash • October 13, 2025 • V7 “Goliath” Deep Dive

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Disclosure: This is an educational guide for investors and developers in the Web3 space. It contains affiliate links to relevant training. Your support helps fund our independent research.

Definitive Guide: Table of Contents

Part 1: The Executive & Investor Briefing — The Two Faces of DeFi Risk

In Decentralized Finance (DeFi), there are two primary ways to lose all of your money: **Exploits** and **Rug Pulls**. While the outcome is the same—a catastrophic and irreversible loss of funds—they are fundamentally different threats. Understanding this difference is the first and most critical step for any investor, developer, or CISO operating in the Web3 ecosystem.

An **Exploit** is a **technical failure**. It is an attack by an external party that takes advantage of an unintentional bug or flaw in a smart contract’s code.
A **Rug Pull** is a **social failure** and outright fraud. It is a theft by the project’s own, often anonymous, developers who have intentionally built a backdoor into their own system.

Part 2: A Deep Dive into DeFi Exploits — When Good Code Goes Bad

A DeFi exploit is the weaponization of a smart contract vulnerability. These are often incredibly complex attacks that happen at machine speed. As we saw in our analysis of the **“Gone in 13 Seconds” heist**, a flash loan attack that exploits a reentrancy bug can drain a protocol of hundreds of millions of dollars in a single, atomic transaction.

Part 3: A Deep Dive into Rug Pulls — When Bad People Write Code

A rug pull is simply a scam. The code works exactly as the malicious developers intended. They create a legitimate-looking project, generate hype on social media to attract investors, and then use a hidden function or their administrative control to steal all the funds.

The Most Common Technique: Liquidity Pool Draining

In this scenario, the developers create a new token and pair it with a valuable cryptocurrency (like ETH) in a liquidity pool on a decentralized exchange. After many investors have swapped their ETH for the new token, the developers use their administrative keys to withdraw all the ETH from the pool, leaving the investors holding a now-worthless token.

Part 4: The Defender’s Playbook — A Masterclass in DeFi Due Diligence

Defending your investments in DeFi requires a new kind of due diligence, split into two distinct categories.

Spotting an Exploit Risk (Technical Due Diligence)

**Check for Audits:** Has the project been audited by multiple, reputable smart contract security firms? Read the audit reports. Were any critical vulnerabilities found? Were they fixed?
**Check for a Bug Bounty Program:** Does the project have a well-funded, public bug bounty program? This shows a commitment to ongoing security.

Spotting a Rug Pull Risk (Social Due Diligence)

**Is the Team Anonymous?:** If the developers are not public and doxxed, the risk of a rug pull is exponentially higher.
**Is the Liquidity Locked?:** For a new token, the developers must use a “liquidity locker” to prove that they cannot simply withdraw all the funds from the pool.
**Are the Returns Unrealistic?:** If a project is promising a 1,000,000% APY, it is a scam.

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About the Author

CyberDudeBivash is a cybersecurity strategist with 15+ years in application security, smart contract auditing, and DevSecOps, advising CISOs in the FinTech and Web3 sectors. [Last Updated: October 13, 2025]

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