What Is An NFT Rug Pull? 3 Red Flags To Look Out For To Avoid Getting Scammed
In 2021, global interest in NFTs (non-fungible tokens) went off the scale, with total NFT sales reaching a massive $25 billion dollars that year. When we compare those statistics to the state of affairs one year earlier – when the market hit just $90 million dollars in trading value globally – NFTs are clearly one of the fastest growing markets ever documented.
These mind-blowing rises in trading volume went hand in hand with a plethora of news reports about traders making life-changing amounts of money in NFTs. Essentially, the media poured gasoline onto an already stoked fire.
“Generational wealth for all!”, “WAGMI!” (We’re All Gonna Make It), and “LFG!” (Let’s F***ing Go!) cried every NFT aficionado on Twitter. Rocket emojis and pound signs littered NFT-adjacent social media platforms. But while the boom certainly saw lots of people get rich quickly, it also opened up a darker side of the industry.
What is an NFT rug pull?
A rug pull is essentially a project where founders have run away with investors’ funds and failed to deliver on their promises, or the project roadmap. The name refers to the colloquial phrase “getting the rug pulled from underneath you”.
Put simply, being rugged means getting scammed. In most cases, rug pulls happen quickly, but there have also been cases where scams slowly unfold – with the founders or community managers quietly abandoning the project, perhaps by being increasingly absent in the community Discord channel or by slowly slipping away from social media platforms.
It’s one thing investing your own money into a project that turns out to be a flop. But actually being misled by project founders whose sole intentions are to steal your money – well, that’s a whole different story.
What we will say is that you shouldn’t feel silly if you make a mistake. Web 3.0 isn’t the easiest space to stay safe in.
The number one key to any investment is to research, research, and then research some more. To help you on your way, we’ve put together a list of red flags – signs you can look for that might indicate that juicy-looking project is, in fact, a rug pull.
Warning signs! How to recognize an NFT rug pull
1. “We’re going to the moon!”
The success of most rug pull projects will depend on whether the founders or developers can convince investors that their NFT is THE next big thing – the holy grail of NFTs. Developers do this by shouting loudly from the rooftops about the project’s potential to “go to the moon” – if everyone gets on board by sharing the project on social media and generating hype.
This is red flag number one! It constitutes the “pump” element of “pump and dump”.
So what happens next? Drum roll, please… The dump. The dump is when the creator/project founder “pulls the rug” and abandons the project – exiting with investors’ money and driving the project’s value to nothing.
Of course, promoting projects loudly and proudly doesn’t automatically constitute a pump and dump scenario. But those building brands for long-term success don’t need to hype, hype, hype their project. When every man and his dog are making huge amounts of noise about an NFT drop, we’d advise to always keep your wits about you.
2. Doxxed versus undoxxed teams
Most commonly, rug pull schemes are perpetrated by an anonymous person or group. Disappearing without a trace tends to be easier if nobody knew who you were in the first place. To be anonymous in NFT world is what’s called being undoxxed. A good idea with any projects you might be considering buying into is to check who the folks at the helm are.
Are the founders doxxed? Do they have a track record of delivering? What do they do day-to-day? All of these are great starter questions that can help you weed out the bad apples. In the same way that you probably wouldn’t trust giving a stranger you met in a bar your money for “safekeeping”, we’d say you similarly shouldn’t trust handing over your hard cash to a random stranger on the internet, either.
A perfect example of the risk of trusting undoxxed founders is the controversy that enveloped “blue chip” project Azuki in May 2022.
It all began when the anonymous founder of the project, Zagabond, published and tweeted a blog post that disclosed his previous involvement with CryptoPhunks, CryptoZunks, and Tendies – all projects that turned out to be rug pulls. The announcement sent shockwaves through the entire NFT community. If Zagabond had abandoned all of these other projects, surely he could do the same with Azuki? Panic selling ensued, and Azuki’s floor price tumbled by almost half its entire value in a matter of hours – wiping hundreds of millions of dollars off of the project’s market cap.
Despite there being a ton of concern at the time, Azuki’s floor price has held steady since the tumble, with Zagabond staying firm – for now. But the debacle exposes the roots of the issue: nobody really knew who the founder of a project worth hundreds of millions of dollars really was.
3. Social media engagement (or lack thereof)
Often, accounts that are planning a rug pull or another form of scam will often push a certain type of social media interaction. If an account consistently offers “free giveaways” in exchange for shares, but makes little other effort to interact with the community or give back value in terms of content, we’d say that’s a whopping red flag.
A second key indicator when it comes to socials is the general engagement an account sees. Ten thousand followers but two likes on a post? Hmm… It isn’t a hard and fast rule, but statistics like this can often indicate that an account has bought followers, potentially to give an impression of a captive audience that doesn’t actually exist. Yeah, it’s a hard no from us.
Stay safe out there in the NFT world, investors – keep your eyes open for red flags and your feet firmly on rug-free ground!
Featured image by GDJ on Pixabay
