A brief guide on NFT rug pulls
In a sea of projects, there are always going to be bad ones. This article outlines some of the red flags that suggests a project will rug pull.
When the NFT space boomed back in February, NFT projects were largely being built with the intention of creating a community and bringing value. The hype of NFTs then led to a surge in profile picture projects, they became the staple of the space and they are still dominating the market to this day. However, since the space has matured and expanded there has been a significant change in the ways in which projects operate. Bad actors and rug pulls are becoming much more prevalent due to the amount of capital at stake.
Inevitably, teams have emerged from outside of the space, they market the collection excellently, drawing in unsuspecting collectors. But as soon as they sell out their drop, they disappear, leaving the collectors holding empty bags, and almost impossible to restore. It can be extremely difficult to decipher legitimate projects from those that are simply there to make money, especially for beginners and since scammers are becoming smarter.
So in this article, we will discuss the ways in which you can judge a collection, their cues, and the nature of ‘rug pulls’.
What is a rug pull?
Firstly let’s unpack the jargon, ‘rug pull’ is a term within the crypto and NFT world used to describe when a team/developer runs away from the collection, taking the gains with them.
NFT projects will promise a variety of utilities in their roadmap, without any real substance behind them, in reality, they are lies. But of course, expensive marketing and premade artwork are usually enough to entice communities into their trap, creating a fake bubble of hype and fomo. Projects will go to extreme lengths and costs to make their collection look authentic, despite the fact they are planning to rug pull from the beginning.
This is further enabled by the fact that within the NFT space, our attention span is minimal. We fail to research sufficiently and instead, we trust what we see on our timelines, using someone’s tweet as enough evidence to make a decision. Moreover, once the snowball effect starts, those who question it will quickly get censored, the team won’t allow anyone to burst the bubble, and even if they do, who will listen anyway.
Perhaps the most important enabling factor is their anonymity, given that they are anonymous they will not face any implications for committing such a scam, and it will allow them to quickly disappear without any real issue. Although true, in extreme cases, doxxed teams have similarly committed scams, such as the Big Daddy Ape club who were verified by Civic Key, yet still, this did not prevent them from scamming their collectors out of $1.2 million dollars. Evidently then, anyone can commit a rug pull, irrespective of whether they are anon or doxxed.
Although you can never be certain that a project will fulfill its roadmap, there are a number of ways you can assess the legitimacy of a project. Red flags can appear at any time, whether it be at the beginning, during the presale, or even during the mint. Below are some of the key indicators to watch out for.
1. The team. Who are the founders? If they have chosen not to identify themselves the likelihood that they are staying for the long term is doubtful. Before investing in a project ensure that you vet the team, and consider their reputation. Although teams have been successful anonymously, it is likely that they had a good reputation prior to launching, if a team comes in with 0 experience and reputation, as well as being anonymous, this is clearly risky.
2. Bots. More often than not, projects use fake accounts and more recently, using ape profile pictures to create the illusion that a project is supported by high calibre collectors. Taking this as evidence is not enough, you must research into who follows them, and who engages with their posts.
3. Communication. Social media management is key, how do they interact with the Discord and Twitter community? If they are failing to respond to questions or simply ignoring them, this is a serious red flag. If they are pushing for likes, follows and raids, and the entire conversations within the chat are seemingly artificial, this is also something to be wary of.
4. Promotion. It is something that all projects do, it is necessary for the marketing and reach of a collection. However, there is a difference between organic marketing and paid marketing. Often, collections will hire Twitter accounts with 100k plus followers to shill their collection to unsuspecting followers. If a collection is utilising this form of promotion, it is a key indicator of their intentions. Always check who is shilling a project, and why.
5. Effort. Website design is also something to factor in. Do all the links work correctly, where do the links take you, are they informative with content or are they dormant? What is the design like? If it is rushed there is only one clear end goal, and that is a swift exit. Although the website is not the deciding factor of whether a project is a scam, it is still something to keep in mind.
6. Contract. Is the contract open source? Legitimate projects will have no issue with allowing anyone to view the contract as there is nothing to hide. On the contrary, if a project decides to hide their contract, this serves as a stark warning of what is to come.
These are just examples of red flags, they do not necessarily mean that the project is a scam if they are found. The points discussed above are simply warnings to be aware of. You should always do your own research and form your own opinion before investing in anything.
If something appears too good to be true, then it probably isn’t true. Always prioritize organic growth over hype. For many, there is the idea that once you invest in any old project, you will soon get rich, and this could not be further from the truth. Investing in the right project is not an easy task, even for the most proficient and experienced traders. However, if you do your own research, and avoid collections with red flags, you can be sure to make a good start.
How to avoid being rugged
Always DYOR and never copy the activity of influencers or traders, everyone has their own reasoning for investing, and this is not the right way!
Vet their profiles, explore their Twitter, website, medium, discord. Always look out for bots and suspicious activity.
Find out who supports them, are the reputable names of the space aware of them? If there are no mutual connections this should be a concern.
Go to their discord and speak directly with the team/mods, get a feeling of their vision and ambitions and how they communicate with their community.
If they are promising audacious rewards and giveaways, this is something to be aware of. Never be lured in by numbers!
Review their Opensea, are they totally transparent about their activity and transferring of NFTs?
Finally, stay safe, be smart, take your time, assess the situation, step back if you need to, and only invest what you can afford to lose.
We are still so early and there are always going to be more opportunities!