NFT Rug Pulls – How To Avoid Them?
The NFT realm, like the actual world, is plagued with scammers looking to play dirty for money and profit. What’s worse for victims is that blockchain technology keeps scammers anonymous, making it more challenging to catch them.
NFT frauds have become so prevalent that it costs the industry hundreds of millions of dollars each year. While there are different scams, this article discusses one particular type- rug pulls. Let’s find out what is an NFT rug pull and how to prevent them.
What is an NFT rug pull?
The term “rug pull” was first used in 2021 when a fraudster discovered the NFT files on the blockchain and converted the actual file to an image of a rug. In the crypto world, “rug pulls” are a type of fraud where NFT initiatives are created explicitly to con investors.
Like the Ponzi scheme, the NFT creators shut down the project once the NFTs are sold and run away with investors’ funds. This deception can occur in three ways- creators selling all of their shares, simply removing the option to sell, and restricting liquidity.
In most instances, even if the founding team wants to execute a rug pull, they would still spend a lot of money to hype up the project because they know that their return on investment would be significantly higher. They generally pay influencers to talk about the initiative or hold giveaways and contests to generate buzz around their collection. Therefore, making it difficult for buyers to determine whether the NFT project is worthwhile or a scam.
Are NFT rug pulls illegal?
In terms of legality, hard rug pulls are illegal. Hard rug pulls are when the project’s creator launches the project with the intention of misleading investors. The smart contract code is designed to steal investor funds in such scams. The code is prima facie evidence in such circumstances. Furthermore, fake collections used in rug pulls have no real direction or purpose.
In contrast, soft rug pulls are not illegal though they are unethical. The smart contracts of such scams differ from hard rug pulls in that the programming is not meant to mislead investors; however, it does not preclude investor theft or deception.
How do you tell if an NFT project is a rug pull?
Fake NFT collections usually have red flags, but not always. Being hyper-vigilant is the only way to detect NFT scams. Before investing in an NFT project, you must be responsible and conduct thorough research. Participating in online NFT communities can help you check the integrity of new NFT releases from artists. This is especially vital if you are purchasing crypto assets from an unknown vendor. Collectors who are cautious only invest what they are willing to lose.
If the founding team of an NFT project is anonymous, this is grounds for serious concern. Moreover, if your research shows that the project’s activities like giveaways, website, and social media are suspicious, they may be attempting to make quick cash. You can reduce the likelihood of fraud by conducting a Google search and finding everything you can about the NFT project. A comprehensive investigation will reveal whether the creators are anonymous figures or verified artists using a pseudonym.
Famous NFT rug pull cases
Here is the list of the top NFT rug pulls to be recorded:
The creators of Frosties, a non-fungible token collection, vanished in a probable “rug pull” after purchasers invested $1.3 million in the digital collectible. According to news reports, on January 9, the mysterious developers vanished after all of their 8,888 tokens were sold less than an hour after the cartoon ice cream collection was released on OpenSea.
According to their wallet, the creators earned $1.3 million in Ethereum. The tokens had a floor price of 0.04 ETH (about $135), and it had dropped to 0.002 ETH (about $7). The Frosties incident may be one of 2022’s first documented rug pulls.
On OpenSea, a crypto artist under the Twitter profile name “Neitherconfirm” published 26 NFTs on March 2021. Things quickly took a turn when the creator altered the digital images connected with each token, from computer-generated portraits to pictures of actual carpets. The art pieces, which initially depicted people and animal faces in a stained-glass style, are valueless.
Iconics, an NFT project built on the Solana blockchain, was supposed to be 8,000 randomized 3D artworks. Out of these, 2000 pieces were sold in the pre-sale for 0.5 SOL apiece, which was approximately $140,000 at the time. Instead of the artwork promised, investors discovered a random collection of emojis in their wallets.
The mastermind behind this fraud is supposedly a 17-year-old artist who immediately deactivated the Iconics’ Twitter account and blocked the Discord server’s chat feature once the NFTs were sold. Due to the anonymity of cryptocurrencies, it’s unlikely that the creator will be apprehended and held accountable for their rug pull.
- Big Daddy Ape Club:
The Big Daddy Ape Club turned out to be a $1.3 million scam. The founders of this NFT collection made 9,136 SOL and then vanished, marking the biggest “rug pull” in Solana blockchain history. This rug pull is one of the notable instances of fraud because the NFT project was verified by Civic, a decentralized identity verification company.
The company revealed that it had “confirmed” the Big Daddy Ape Club NFTs through its ‘Verified by Civic Pass’ program. However, on January 11, after 2,222 ape-themed NFTs had already been minted, the creators simply vanished. Following that, they disabled their Twitter, Discord, and the collection’s official website.
- Evolved Apes:
Evolved Apes was supposed to be a 10,000-piece NFT project, similar to BAYC, that promised collectors access to a game in which the characters would battle each other for rewards. However, the developers abruptly vanished following the transaction and removed the project’s social media profiles.
The unknown developer, known simply as ‘Evil Ape,’ took off with almost $2.7 million, including funds assigned to project-related expenses such as game development and marketing. It was eventually discovered that the competition winners had not received their NFT prizes, nor had the artist been paid. On secondary markets, the values of these NFTs have plummeted far below their minting price, and trade activity has largely ceased.
How to prevent rug pull NFT?
Cyber vigilance is the only way to prevent online scams, including NFT-related fraud. Here are a few precautions you can take to prevent rug pull:
- Consider engagement rather than follower count:
Usually, people fall into the trap of being dazzled by an NFT project’s follower count. Discord and Twitter are the first social media channels that NFT investors look at because they are popular for NFT ventures. However, some NFT makers buy fake followers to make their projects appear authentic, increase demand, and attract innocent investors. That’s why you mustn’t judge the credibility of an NFT project only on the number of followers. Rather you should examine the project’s engagement across all its channels.
- Check the legitimacy of the artist/development team:
As mentioned previously, you should always research the founding team of an NFT collection before you invest in them. Realistically, a big NFT project has more than one creator. Because publishing a collection of high-quality NFTs requires more than one person’s hard work and technical expertise. So, if a single creator is launching a big project, it’s possible that they would abandon the project midway.
Another crucial thing you should do is to look at the social media accounts of the NFT development team. You find them on LinkedIn, Twitter, and other social media accounts if they’re genuine. If you feel there is something dubious about their social presence, they are most likely fake accounts meant to mislead collectors.
- Review the project roadmap:
A genuine NFT project is always created with a roadmap in mind. If a small team of developers promises to create hundreds of in-game characters or distinctive illustration-based NFTs in a short period of time, they are most probably trying to scam you. So, before bidding on an NFT collection, make sure their project’s road map appears practical.
- Pay attention to small details:
Paying attention to little things can sometimes help you avoid an NFT scam. When investigating an NFT project, look for the following details:
- Is the announced minted amount consistent with the minted amount on the website?
- Is the token numbering consecutive or random?
- Does the collection have locked or unlocked liquidity? Fake developers usually prevent collectors from selling the token.
- Is the website well-designed? Is it well-planned?
- Is the dev team anonymous or using a pseudonym?
Unfortunately, crypto rug pulls are common in the NFT space. Most new NFT projects turn out to be fake, as morally bankrupt scammers are always hunting for their next prey. As an ordinary person, you cannot always determine whether a project is likely to result in a rug pull. However, the general rule is to look at a project’s viability rather than get swayed by the social media frenzy. Moreover, nothing can compensate for thorough research when considering an NFT investment.
Whether you wish to learn about NFT, Blockchain, Web3.0, Metaverse, or other emerging technologies, we have the vital resources that will enlighten and help you make an informed decision.
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