NFTs are the talk of the town these days, and there are a lot of scams involved when it comes to NFTs. One of the known scams is called an NFT rug pull.
We’ll explain what an NFT rug pull is in the cryptocurrency world, how they happen with NFTs and cryptocurrencies, and different signs of a rug pull to help you notice and avoid getting defrauded.
NFT Rug Pull Overview
An NFT Rug Pull is a term used in the crypto community to describe a scam where an NFT project disappears suddenly, taking all the funds raised with it. This type of scam is often orchestrated by the project’s creators, who quietly sell off their own NFTs before exit-scamming. As a result, investors are left holding worthless tokens, and the entire project collapses.
Rug pulls have become increasingly common in the NFT space as the market for NFTs has grown. With little regulation and many investors’ newbies blindly throwing money at any new project, rug pulls have become an unfortunate reality in crypto. It’s estimated that over 80% of all NFT projects are scams.
For savvy investors, the best way to avoid a rug pull is to do your due diligence before investing in any NFT project. That means reading up on the team, studying the code, and investigating whether there’s anything fishy going on behind the scenes. If something smells rotten, it’s probably best to steer clear.
Ultimately, rug pulls are just another sad reality of the crypto world. However, investors can protect themselves from being scammed by being vigilant and informed.
Ways In Which Developers and Founders Can Conduct Rug Pulls
There have been a few incidents in which developers or founders have “rug pulled” or scammed people by withdrawing all the money from a crypto project. In most cases, the scammer will create an NFT (non-fungible tokens) and sell it to unsuspecting investors.
The NFT will be advertised as backed by a valuable asset, such as real estate or art. However, the NFT will be worthless, and the creator will disappear with the money.
There have also been cases in which NFT creators have the rug pulled by selling NFTs that do not exist. The NFTs will be listed on a smart contract, but the actual NFTs will never be created. As a result, the buyers will never receive their NFTs and will be left with nothing. The vast majority of rug pulls are perpetrated by developers or founders who are looking to make a quick profit.
However, there have also been a few cases in which rug pulls have been carried out by malicious actors looking to harm the crypto community.
How To Tell If An NFT Project Is A NFT Rug Pull
In the world of cryptocurrency, NFT scams have become increasingly common. With the rise of platforms like Ethereum and the popularity of digital assets, scammers have found new ways to prey on unsuspecting investors. If you’re thinking about investing in an NFT project, it’s essential to do your research to avoid being scammed.
One red flag to watch out for is a project that doesn’t have a clear roadmap or doesn’t seem to be making any progress. Another warning sign is a team’s reluctance to share information about their project. Be wary of secretive projects that won’t answer questions about their plans.
Of course, not every NFT project is a scam, but it’s important to be cautious when investing in space. With so many scams, doing your research and only investing in projects you believe in is crucial.
Signs A Cryptocurrency Will Be A NFT Rug Pull
One red flag is a project focused on NFTs or non-fungible tokens. These unique tokens cannot be traded or sold like other cryptocurrencies. While NFTs have some legitimate uses, they are often used in scams because they are easy to create and don’t require any real underlying value. This means that investors can be easily duped into buying NFTs that are essentially worthless.
Another warning sign is a project based in a country with lax regulation of cryptocurrencies. This can be a haven for scammers, as there is little to no oversight of how the money raised by the project is being used. Often, these projects will claim to be doing important work such as money laundering or terrorist financing, but they are simply funnelling money into their pockets.
Finally, be wary of any project that seems too good to be true. If a project guarantees high returns or claims to have developed some revolutionary technology, it’s likely a scam. Remember, there is no such thing as a free lunch; if something sounds too good to be true, it probably is.
Best Practices for Spotting a Rug Pull
Suppose a person aims to spot rug pulls before they happen. In that case, it is recommended to keep a few practices in mind, as these, while not foolproof, will give the investor as much information as possible so they can make a well-educated decision.
Analyzing the Project’s Goals
First, it is recommended to always look at a project’s goals. Remember, just because a project has outlined goals does not mean the team will execute them according to the roadmap, and this should just be seen as a list of ideas.
However, a rug pull project will do things that might seem fishy to the trained eye. Specifically, they will convince investors that their project is the ultimate one and that its value can reach the moon in terms of height once the project is released.
They might give away NFTs to some of the people who promote the project, and this is a method called a “pump.” This pump will drive demand and increase the market value.
However, it almost always leads to what is known as a “dump,” a point in time when the creator executes the rug pull and drives demand and value to zero, after which they abandon the project.
Authentic developers will focus on providing real, authentic customer value and building a respectable brand and business model. As the saying goes, if it is too good to be true, it likely is, so always look for projects with realistic goals.
Research the Development Team
Second, each investor must research the project’s development team. Pouring at least 40 hours into researching a project before investing in it is recommended.
A team that might plan a rug pull will remain anonymous, but there are exceptions to this rule.
It is always, however, a better idea to trust a team with a successful project history and a well-established social media presence, not just some random team connected to accounts that will not reveal their identities.
Track the Social Media Activity and Get Engaged with the Community
Third, look at social media activity and engagement. Remember, bots exist, so you should not specifically look at the numbers. Visit their Telegram group or Discord channel and see if authentic people are having enthusiastic discussions about the project at these locations, as this will give you an insight into what the accurate picture looks like. If 50,000 members are active but only 20 are active, you are likely dealing with a pumped profile. Scammers will typically put little to no effort in running a social media account.
See the Big Picture
Fourth, and last but not least, look at the project from the perspective of the overall big picture and end goal.
Always ask yourself, does the project seem realistic regarding its execution, and can the team, based on their experience level, genuinely pull it off?
If you run into anything that looks fishy or have even a single ounce of doubt that the project might be a rug pull, reevaluate it from the ground up. If you feel uneasy or have a bad feeling about the project, look elsewhere.
Some of The Biggest NFT Rug Pulls in Crypto History
One of the best ways to get practice in analyzing rug pulls is by looking at projects historically proven to be rug pulls.
This means you can research these projects’ resources, such as their teams, social media channels, if active, and overall whitepapers if they exist, to see what they did wrong and what phrases and methods they used to trick investors.
Some of the most notable examples that you need to be aware of here include the following:
- Big Daddy Ape Club: This was a purported collection of 2,222 ape-themed NFTs, designed to be minted on the Solana (SOL) blockchain. The project enticed investors with high-value promises but abruptly ceased operations post-funding, leading to substantial losses for investors.
- Azuki: Azuki consisted of 10,000 digital avatars, offering owners entry to “The Garden.” This virtual space was envisioned as a hub for artists, builders, and crypto enthusiasts to collaborate on decentralised projects. However, the project failed to deliver on its commitments, leaving investors with worthless assets.
- Frosties: Owners of Frosties NFTs were promised exclusive benefits and rewards. This collection quickly gathered attention and funding. However, the creators withdrew all funds shortly after the sale, abandoning the project and its community.
- Baller Ape Club: Touted as a collection of 5,000 unique NFTs, each sold at a value of 2 SOL on the Solana Blockchain, Baller Ape Club gained quick traction. Yet, following the sale, the project’s developers vanished, taking the invested funds and leaving investors with valueless NFTs.
- Evil Ape: Similar scam to the above.
Study each project’s history, presumed team, and goals in-depth, as this will enable anyone to figure out any future rug pull projects more easily.
Different Kinds Of Rug Pulls
There are two kinds of rug pulls: Hard rug pull and Soft, hard pull.
The Hard Pull Explained
Hard rug pull is when the founder of a project maliciously uses coding to trick investors.
In this case, the smart contract’s code has hidden terms to trick investors and steal their money. The code shows that the main goal was to trick investors and steal their money, usually by locking them into an asset with no real direction or goal.
The Soft Pull Explained
On the other hand, soft rug pulls are not technically “illegal,” but they are very unethical.
The code for smart contracts isn’t made to trick investors, but that doesn’t mean it can’t be used.
Most of the time, this happens when the founders and their teams quickly sell their assets, which lowers the token’s value and makes investors more likely to buy the cryptocurrency itself.
For example, think about a crypto project that says it will donate money but then keeps it for whatever reason.
NFT rug pulling is a severe problem in cryptocurrency, and investors need to be aware of the risks before investing in any project.
Be sure to do your own research and only invest in projects you believe in. If you see any red flags, looking at alternative projects and avoiding the ones you are considering is recommended. With so many scams, it’s essential to be cautious when investing in cryptocurrency.