Rug Pulls with NFTs: How to Stay Protected?

By akohad Oct16,2022


Change is constant in marketplaces, and you have seen NFTs take on a variety of forms since their creation. Regrettably, while the growth is undeniable, this crypto industry has been plagued by various fraudsters attempting to take advantage of new entrants with their money-grab operations.

NFT rug pulls are a form of fraud, in which the team behind an NFT project vanishes with all the funds. Read on to find out how to identify a NFT rug pull and prevent yourself from being a victim of one.

In its most basic form, a rug pull refers to a business exit scam in which the founders or primary developers of a project split with investors’ cash after fundraising. These founders frequently provide tempting proposals but fail to implement the projects or assist investors in gaining a return on their investment. Rug pulls are not new in crypto, the most recent being the Squidgame token rug pull, which left millions of players in despair when the creators stole up to $3 million of their assets.

It usually goes something like this:

A team issues a modest number of NFTs with the promise of more enormous rewards, such as a blockchain game, goods, or particular advantages. The NFT release is frequently hyped up, and influencers are often paid to create even more enthusiasm.

People are enticed to purchase these NFTs as an investment, promising something more significant in the future. Then, the crew is suddenly gone, the project is cancelled, and all the money is gone. There are different types. It doesn’t always happen as rapidly, and the project gradually fades until there are no new updates.

Rug pulls can occur in a variety of ways using NFTs. First, these projects may offer presales of their NFTs, with lofty claims about how they are the next greatest thing and set release date. Following the minting of the tokens, frequent outcomes include:

  • Dumping occurs when the founder sells their stock at the height of the enthusiasm and then disappears. Some individuals can possess up to 40% of the NFT collection, and as one could imagine, prices will ultimately fall, leaving unwary traders with illiquid assets.
  • When developers enter the clever contract coding to restrict NFT holders from selling or provide backdoor access that permits only the developer to sell their tokens, this is called hard rugging.
  • The developers can also connect NFTs with a cryptocurrency, inflate the altcoin’s price, and remove liquidity.

Many individuals are uneducated and readily throw their money away for the chance to make fast cash. Scammers profit from this.

Do not think that only newcomers are defrauded; even seasoned users might be duped. When you evaluate some of the most incredible NFT rug pulls, it’s clear that anyone may become a victim of fraud. NFT rug pulls frequently come with early warning signs such as the following:

1. Unknown Founders

Although the issue of anonymity in crypto companies is still debated, it is always better to pitch your venture with established and reliable entrepreneurs.
Anonymity may incline people to rug pulls since no one can challenge them or seek legal action if things go wrong. As an NFT fan, you should investigate all accessible social media channels and websites to ensure that the founders’ names are genuine and not merely aliases.

2. Liquidity

The amount of money invested in a project might be another authenticity or rug pull measure. In general, you should look at the quantity, the length of time it has been there, and the percentage ownership of the tokens. It’s also a positive indicator if the liquidity is locked up. Good initiatives think in terms of years, not weeks or months.

3. Social Bot Engagements

Social media engagement today has multiple facets, with the accessibility of purchasing bots and sponsoring content through paid influencers. To begin, keep in mind that projects that will endure the test of time aim to produce high-quality work, solicit and evaluate input often, and make fewer mistakes.
Assume the project has considerable discord and telegram engagement. However, they only receive a small amount of involvement aside from the traction that comes with the promise of allowlists and other benefits. In such a situation, you should be cautious.

4. Unclear Motives

A certain level of quality is essential in a project that intends to last a long time. Many NFT rug pulls’ white papers frequently lack precise blueprints and may even contain plagiarised plans. A white paper is designed to be more than a promotional sheet, and every endeavor that uses one only attempts to captivate people. More focus should be placed on use cases, tokenomics, and benefits, with charts and statistics to back up these assertions.

Evolved Apes

The Evolved Apes NFT collection was a teaser for a planned play-to-earn game in which participants would battle for prizes using these NFT characters. The first NFT by Evolved Apes drop, sold out in five minutes, demonstrating how enthusiastic people were about it. Only one week after the first release and before the game’s promise was met, the creator took 798 ETH and vanished, erasing his social media accounts.

Big Daddy Ape

Big Daddy Ape Club is also one of the most popular NFT rug pulls. It resulted in $1.3 million in losses. This rug pull is notable since it occurred before the NFTs were even issued. Furthermore, Civic investigated the team behind it, demonstrating how difficult it may be to recognize fraud at times.

One of the most excellent methods to prevent being a victim of a rug pull scam is to conduct thorough research on the projects before investing. An NFT project’s comprehensive study should entail learning more about the community and investigating the team. Examine the entity’s social media outlets, such as Twitter, Discord, and Telegram, to better understand its progress. Are promises being fulfilled? Is their website professional?

Also, check liquidity; With a low liquidity NFT project, converting the token into cash or another asset may be challenging. Trading volume is a measure that can assist you in determining the liquidity of a project. A high trading volume suggests that many people are trading the collection. NFT ventures with limited volume, little liquidity, and a tiny group of excessively enthusiastic customers may indicate a rug pull scam.

With new NFT projects being released daily, it’s critical to watch classic scams, such as rug pulls. The first step to protect yourself form such scams is to understand how they function. NFTs will always carry some risk, but recognizing indicators that might point to fraud can help you significantly, keeping your finances and NFTs secure.

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By akohad

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