The name comes from pulling the rug out from under buyers. A team launches a token, attracts buyers into a liquidity pool, then withdraws the pooled funds or sells a hidden allocation all at once. The price collapses to near zero in minutes and the remaining holders are left with tokens that have no market to sell into.
There are two common shapes. A hard rug is coded in from the start: a mint function, a hidden owner permission, or a contract that lets the team drain the pool. A soft rug is slower: the team abandons the project, stops development, and quietly sells over time. Both end the same way for holders.
The signals that separate a rug from a real project are usually visible before you buy. Locked liquidity, a renounced or timelocked contract, a fair token distribution, and a team that does not hold an oversized share all lower the risk. An address that has approved an unknown token contract is one step closer to exposure, which is why an approval check is worth running first.