Scams are abundant in the NFT space. And whether you are a novice or even a seasoned vet, anyone can fall victim to a rug pull scam.
A rug pull is a malicious attempt to lure consumers to buy an NFT. Then, once the scammers have made their money, they quickly abandon the brand and its consumers with no warning. The most common sign of a rug pull is a lack of both execution and commitment to brand development.
NFT rug pulls are arguably one of the most difficult scams to detect. That’s why in this article I am going to explain exactly what it is and how to avoid this scam.
What Is an NFT Rug Pull?
This scamming method is common with both cryptocurrencies and NFTs. Ultimately, a rug pull occurs when the creators suddenly stop backing it. As a result, the price of the asset falls to zero and causes a big loss for investors.
Generally, scammers will abandon the project in a couple of ways:
- Take off with their profits once the project sells out.
- Sell all their pre-minted NFTs and take the additional profit. Ensuring that they squeeze every last bit of liquidity from investors before ditching the brand altogether.
A rug pull is the ultimate scam. It can seem very convincing at first, but all it takes is for a creator(s) to abandon the brand completely without any major warning signs.
How Does a Rug Pull Work?
There are different ways by which a developer/developers do Rug pull.
NFT developers will perform a rug pull by building hype around their NFTs in order to to create demand. Once investors buy into their project and the developer(s) make their money, the developer(s) will then completely abandon the project and any accounts associated with the project.
Developers of NFT projects might turn to spend a lot of money on exciting projects, whereas deep down within them, the intent is to do rug pull.
The hype system could either be paying influencers to talk about the projects or giving out expensive items. Even though the developers will spend a lot to make the project look real, they will still receive enough profit from the scam to make up for their investment in hyping the project.
How to Spot a Rug Pull
As a consumer, it’s wise to take some time to research an NFT project first before investing your money. Below are some ways to detect, and ultimately avoid a rug pull scam.
1. Look at the project goals
It’s important to note that just because an NFT project has goals, that doesn’t mean that the team will execute according to the roadmap. A roadmap is simply a list of ideas, only execution of these ideas can lead to any kind of real value or utility for consumers.
A rug pull project usually has to convince investors that their NFT is the holy grail of NFTs. Developers do this by telling potential investors that the project will moon (increase in price) if they share the project on social media and tell everyone they know about it.
They may disguise this behavior by giving away NFTs to some of the people who share the project, making the project seem better than it really is. This is known as the pump.
A pump will drive demand and increase the market value of the NFTs. Be aware that a pump will almost always lead to a dump. A dump is when the creator pulls the rug and drives both demands a value to zero by completely abandoning the project.
Throughout my journey in the NFT space, I have learned that generally, a creator who is building a brand for long-term success has no reason to perform this pump and dump tactic, as they are not concerned with making so much money in a short amount of time.
Rather, they are focused on providing real value to their consumers and building a respectable brand name for themselves and their business.
2. Research the human behind the brand
Before trusting anyone with your hard-earned money, you should always take the time to do your own research. Entrepreneur and web3 enthusiast recommends 40 to 60 hours of research before investing in any NFT project.
Just like you wouldn’t trust giving your money to a random person on the street, you shouldn’t trust giving your money to a random person, or team of people, over the internet.
Generally, a team that is planning a rug pull will not reveal their true identities. This means that they may have social media accounts, but their accounts won’t reveal their real identity as a human. This tactic is generally only used when a team has something to hide.
To learn more about investing in a reputable NFT, check out this article covering how to buy a good NFT.
3. Check their social media management and engagement
Many rug pull scammers turn to foster trust by creating accounts on various social media platforms. The most common social platforms where you will find NFT projects are Twitter and Discord. However, scammers will utilize any social platform that is currently trending and has the most attention from consumers.
With that being said, scammers do not usually manage their accounts well. Below are some red flags that a scammer may be in charge of a social media account.
Generally speaking, if a scammer is in charge of running a social media account, very little effort is going to be put into actually formulating well-thought-out content that fosters a community and provides any sort of value. If you notice an account promoting NFTs and that’s all they do, then the project may be a scam.
I’ve noticed that many scam accounts will simply request that people share their brand in exchange for a chance to win a free prize. So, if you notice an NFT project that only pushes their brand and asks others to share their project without giving back any kind of value to the community, this should raise an instant red flag.
Additionally, if you see that there is very little interaction on an NFT project’s social media posts, this is a huge red flag as well. This may mean that the account’s followers are either bought or that the creators behind the brand simply don’t care enough to respond to people who are interested in their NFTs. Run the opposite direction if you see this!
4. Spend time in the community
Spending time with others in the community who have either invested in the NFT project or who are also considering investing can allow you to gain a good feel as to what everyone else’s thoughts are.
If you notice an overall negative vibe with people talking down to each other, as well as a lack of moderation from the team behind the NFT project, this may be a tell-tale sign that the project is a rug pull.
A good community is often full of members who are willing to help you out, answer any questions you may have, and not leave you in the dark about anything concerning the details of the project. If you find that you have a hard time getting a straightforward answer from anyone, you may just have stumbled upon a rug pull.
5. Look at the project as a whole
Overall, you should really strive to take a step back and look at the project as a whole. If you have any sort of inclination that an NFT project may be a rug pull, then it’s even more likely to be true.
This is especially true if you find that many of these common red flags pop up during your research. This is the point of doing the research in the first place. If you feel uneasy about something because you catch a bad vibe, then don’t go through with it.
It’s okay to stumble upon a scam, we all have, but to be aware that something may not be right and still fall for the scam is no one’s fault but our own. With that, if you do happen to find a scam or become the victim of a scam, do your part and make others aware of the scam as well.
Also, please be aware of other common NFT scams and how to avoid them.
Overall, NFT rug pulls are all too common to not be aware of. Any time you are considering investing your money and trust into an NFT project, always do your own research and come to your own conclusion of whether or not you feel that a project is right for you.
If you find an NFT project doesn’t feel right to you, that is completely okay. Don’t let anyone talk you into buying something you don’t feel comfortable with, because at the end of the day it’s not only your money, but it’s your life. You have the power to make your own choices and say NO.