There’s no denying that scams are running rampant in the NFT space. Global NFT volume has surged making it attractive to both scammers and hackers. It can be intimidating, I know. But this article will help you understand what exactly a rug pull is and how to avoid them. Without further ado, let’s dive right in.
In this article:
A Quick Overview
What is a rug pull? This is a common scam whereby a project does not fulfill its promises after taking the user’s funds. Malicious developers mint a new NFT pumping up the price. Then while extracting as much value as possible they abandon the project and the price crashes.
This is especially prevalent in the NFT space as there is no intermediary to moderate the situation. Not only that but the team is often anonymous and therefore can disappear without a trace.
Is it Illegal?
Well, that depends. If it’s a soft rug pull then no, if it’s a hard rug pull then yes. So what’s the difference? Essentially a soft rug pull refers to developers selling their NFTs quickly. This leaves investors holding a worthless token. Although not illegal this is extremely unethical as developers build trust while simultaneously dumping the token.
On the other hand, hard rug pulls are illegal. Developers code in exploits which can then be used to extract liquidity from the NFT collection. One example is developers of an NFT removing the ability for users to sell.
How to avoid NFT Rug Pulls?
Although the space is rife with scams there are many ways to avoid rug pulls in the NFT space. If you want top-level security from scams then I recommend you use a hardware wallet. You can check out my review of the best hardware wallets here. Now let’s get to the top 5 ways to avoid rug pulls:
- Research the Team – You can avoid rug pulls by picking established cryptocurrencies with a strong team and proven track record. Avoid anonymous teams at all costs as they can quickly abandon the project without any backlash.
- Look at the roadmap – What do the developers have planned? Look on their website for upcoming developments. Look for roadmaps that looked detailed and realistic. If the developers are lacking execution or commitment to these goals then it might be time to move on.
- Check the website – ask yourself if it looks well developed. If it’s slow, poorly written, or lacks depth then the NFT will likely have bad utility and fail to deliver on its promises.
- Check Social media – look for projects with a strong social media presence and avoid projects with a large number of bots. See if reputable crypto influencers are following and supporting. A red flag would be a shady influencer known for previous scams promoting it.
- NFT distribution and on-chain activity– You can look at the distribution of the NFTs by the top wallets. If it’s not fairly distributed and the top wallets hold most of the supply then that could also be a red flag. These wallets could be related to the team and they will sell once the opportunity arises. You can also look at selling patterns. For instance, if there are a select number of users buying before announcements and then selling straight after this could be linked to insider trading.
Infamous Rug pulls
Now let’s look at a couple of examples.
- Bored Bunny – jumping on the hype of Bored Ape Yacht Club this project had huge backing from the likes of YouTuber Jake Paul and boxing legend Floyd Mayweather. Launching in 2021 this project netted the developers over 2000 Ethereum alone. It had lofty promises of “2x, 5x, or maybe even 10x the value of your investment within a few days”. But ultimately the project now sits at a floor price of less than 0.01 Ethereum. All in all, over $20 million was stolen.
- Frosties – This was one of the biggest scams NFT scams of 2022 with over $1 million stolen. Founded by Ethan Nguyen and Andre Llacuna this project is a collection of over 8000 ice cream-themed avatars. At launch, the project sold out in hours. However quickly after, the project’s website and discord disappeared. The founders ceased supporting the project. Thankfully 2 months later they were found and charged with conspiracy to commit fraud.
The NFT industry has seen incredible development over the past few years but this has not stopped the scams. Shady projects continue to steal and rug pulls are one of the most popular ways to do it. From Bored Bunny to Frosties millions have been lost in these schemes.
Sadly you can never guarantee that a project won’t rug pull, but hopefully, some of these tips will help you avoid them. If you want to know some other ways to protect yourself then you might like my previous article Top 5 NFT Wallets for Beginners.