Ragpools in DeFi: What They Are and How Hypervault Identified $3.6 Million in Critical Risks

Rugpull is one of the most dangerous forms of fraud in decentralized finance, where project creators illegally siphon off user funds, leaving them with worthless tokens. The incident with Hypervault, where investors lost $3.6 million, vividly demonstrates how vulnerable the DeFi ecosystem is to coordinated attacks on user trust. Analyzing this case helps identify systemic issues and develop effective protection mechanisms.

Rugpull is a form of fraud: definition and mechanism

The term “rugpull” refers to deliberate actions by developers who withdraw liquidity or accumulated investor funds from a protocol, leaving participants unable to withdraw their assets. Such fraud becomes possible due to a combination of factors: lack of smart contract audits, false information about the team, and promises of unrealistic returns.

The rugpull mechanism involves several stages. First, the project attracts attention with promises of high rewards and creates an appearance of legitimacy through fake audits. Then, once sufficient funds are accumulated, administrators withdraw liquidity and hide stolen assets via crypto mixers or transfer them to untraceable addresses.

The Hypervault story: how the $3.6 million theft happened

The Hypervault case exemplifies all the typical features of a classic rugpull. The project attracted investors with an unprecedented offer of 90% annual percentage rate (APR) on staking the HYPE token. For inexperienced DeFi participants, this prospect seemed incredibly attractive, but it was actually the first warning sign of potential fraud.

The theft occurred as follows. Administrators withdrew $3.6 million of user funds from the Hyperliquid blockchain to the Ethereum network. Afterwards, the stolen assets were sent to Tornado Cash—a privacy crypto mixer specializing in transaction trace obfuscation. This operation made recovery of the funds nearly impossible. Simultaneously, the project’s website and all official social media accounts were deleted, confirming the developers’ intent to disappear.

Fake audits: trust tools in the hands of scammers

A particularly cynical aspect of schemes like Hypervault is the falsification of audit documents. The project claimed to have its code verified by reputable companies Spearbit, Pashov, and the Code4rena platform. However, community investigations revealed that no real audits took place—these were entirely fabricated.

This highlights a critical problem: investors often do not verify audit information directly with the auditing firms and rely solely on project claims. Scammers exploit this trust by using the names of recognized auditors for marketing purposes.

Dangerous signals of DeFi projects: red flags for investors

When evaluating a new DeFi project, it’s essential to watch for several warning signs. The first and most obvious is promises of unrealistic returns. If a project offers 80-90% APR, it should raise serious suspicion, as such reward levels are economically unsustainable in the long term.

The second signal is the absence of verified audits from reputable firms. Legitimate projects always provide public audit reports with independent verification. The third sign is team opacity. If creators are unwilling to disclose their identities and professional backgrounds, doubts are justified.

The fourth factor is rapid development. Projects that gain enormous value within days or weeks are often prepared scams designed for quick fund withdrawal.

Unaudited smart contracts as open doors for scammers

Most DeFi scams are rooted in the lack of professional smart contract audits. Unverified code theoretically allows developers to implement hidden functions enabling administrators to freely seize user funds.

The role of third-party verification is crucial. Reputable auditors like Spearbit and Code4rena conduct in-depth logic analysis, look for vulnerabilities, and confirm that the code functions as claimed. The absence of such checks is equivalent to entering a secure building without verifying its structural safety.

From Tornado Cash to chain of fraud: how stolen assets are hidden

Tornado Cash played a key role in the success of Hypervault’s rugpull, enabling scammers to conceal the source and movement of funds. This crypto mixer operates as a “black box”—users deposit cryptocurrency, which is mixed with assets from other participants, then withdraw to new addresses, breaking the cryptographic link between sender and receiver.

While Tornado Cash has legitimate uses for privacy protection, its widespread use in scams has attracted regulatory attention. Various jurisdictions have begun blocking access to the service, but the technology remains accessible through alternative channels, and scammers continue to exploit it.

The scale of the problem: other rugpuls that shook DeFi

Hypervault is not an isolated case. The DeFi history contains numerous examples of large-scale scams exposing systemic vulnerabilities.

MetaYield Farm resulted in a loss of $290 million of user funds. This incident shocked the community with the scale of theft and showed that even projects with some reputation can fall victim to fraud.

Even more devastating was the Mantra case, with losses totaling $5.5 billion. This figure demonstrates that rugpuls can reach scales affecting the entire ecosystem and undermining overall user trust in DeFi.

Beyond direct rugpuls, the Hyperliquid ecosystem faced other serious security issues. In 2025, the platform suffered losses of $13.5 million due to token manipulations and code exploits. Such incidents create a cumulative effect of distrust.

The community’s role in preventing fraud

Members of the DeFi community often serve as the first line of defense against potential scams. In the Hypervault case, user HypingBull raised early warnings about suspicious project claims, especially regarding audits. However, as is often the case, these voices were ignored by most investors eager for quick profits.

This underscores the need to foster a culture of skepticism and critical thinking within DeFi communities. Participants should actively discuss suspicious aspects of projects, verify information, and share findings. An informed and vigilant community can serve as an effective counterweight to fraud.

Practical protection: how investors can avoid rugpuls

To minimize the risk of falling victim to a rugpull, investors should adopt a systematic approach to project evaluation.

First rule – verify audits. Do not trust project claims alone. Contact the auditing firms directly (Spearbit, Code4rena, Pashov, etc.) to confirm they conducted the review. Public audit reports should be accessible on independent websites.

Second rule – research the team. Ensure that team members have verifiable reputations in the crypto space. If founders hide their identities or lack a DeFi track record, it’s a serious risk. Check their social media, previous projects, and public statements.

Third rule – participate in the community. Join the project’s Discord server, review GitHub repositories, and study discussions. Fraud signs are often revealed through communication patterns—such as lack of responses to critical questions or avoidance of technical debates.

Fourth rule – maintain healthy skepticism about high yields. If APR seems too good to be true, it probably is. DeFi can generate good returns, but 80-90% annually indicates an unstable or outright fraudulent scheme.

Fifth rule – diversify investments. Do not concentrate all funds in one project. Distributing assets across multiple platforms (preferably with different teams and audits) reduces potential losses in case of fraud.

Sixth rule – start with small amounts. When testing a new DeFi protocol, invest minimal funds until you confirm its security.

Regulation and self-regulation: restoring trust in DeFi

Incidents involving rugpuls and misuse of privacy tools have attracted close regulatory attention worldwide. Increasingly, jurisdictions are developing frameworks for overseeing DeFi protocols, especially regarding audit requirements and transparency.

However, a balance must be struck between regulation and preserving DeFi’s innovative potential. Heavy-handed regulation can hinder development, while complete lack of oversight creates an environment ripe for scams.

The optimal path involves self-regulation by the community supported by best practices. Mandatory public audits, transparent team disclosures, and verification mechanisms should become standard, not exceptions. DeFi platforms adhering to these principles gain a competitive advantage through increased investor trust.

Conclusion: restoring trust through accountability

Rugpuls in DeFi, as demonstrated by the Hypervault case, remain a serious threat to investors until systemic protective measures are implemented. Losing $3.6 million is not just a financial disaster for victims but also a blow to the reputation of the entire decentralized finance ecosystem.

Restoring trust requires a comprehensive approach: mandatory independent audits, full transparency of teams, investor education, and collective community vigilance. DeFi holds enormous potential to revolutionize financial services, but this potential can only be realized through responsible management and user protection.

By applying critical analysis principles and following security recommendations, DeFi participants can significantly reduce the risk of fraud and contribute to a more sustainable ecosystem.

Disclaimer

This information is provided for educational purposes and does not constitute investment advice, recommendations, or an invitation to trade. Cryptocurrency and digital assets carry high risks. Conduct your own research and consult professionals before making financial decisions.