There are a ton of great investment opportunities in NFTs. But because it’s such a new industry, it’s difficult to tell which projects will pay off and which ones might flop. And while there are several different reasons to buy NFTs, if investment is your main objective, being aware of the risks involved, is crucial.
NFTs gained tremendous popularity in the past year, so NFT rug pulls are a fairly new concept. However, crypto rug pulls have been around for a while – and they’re pretty similar in nature. In crypto, a rug pull usually happens shortly after a token is released. Buyers jump in to scoop up tokens during the launch, using a more established form of crypto (usually Ethereum) to purchase them. Once the tokens are sold off, creators distribute the established crypto amongst themselves and abandon the project, rendering the tokens worthless.
Early on, this was a fairly easy scam. Nobody understood what they were investing in, so releasing new tokens, building some hype, and jumping ship was a quick way for scammers to get in and out with a profit pile. The lack of regulation in the space made it even easier. But as crypto becomes more regulated, law enforcement is stepping in to hold those behind rug pulls accountable.
So how do you avoid becoming a victim of an NFT rug pull? Mainly, it’s about doing some digging into the project and looking into the background of its creators.
Here is a quick guide to help with your research:
What Is an NFT Rug Pull?
A rug pull can come in different forms. The first and simplest is a wallet drainer – this happens when a user clicks on a minted NFT that has a built-in scam script. The script pulls the balance information from the user’s wallet and requests the total amount as payment. The buyer clicks to accept, and the entire balance of their wallet is sent to the scammer’s wallet.
A wallet drainer is common during huge NFT airdrops. With everyone in a rush to claim their NFT during a drop, users often fail to review the details of the transaction closely. Buyers can avoid a wallet drain by reviewing the details of the transaction before accepting the NFT into their wallet.
A more complicated rug pull is when a buyer is sold a duplicate NFT. In this scenario, a copy of a popular NFT is created, minted, then sold or airdropped on a new chain. The new asset appears to be the original on the front end, but if the buyer looks at the attached smart contract and sees that the original creator is not connected to the work, it’s a fake – rendering it completely valueless.
As NFTs grow in popularity, these scams will continue. At this point, it seems that regulation is the answer, but this is also a tricky concept because the whole philosophy behind blockchain technology is that it’s free from regulation. However, without regulation, investors have little to no protection. So, for now, if you’re buying NFTs, the ball is in your court. Do your due diligence.
Here are some tips to help guide you:
Avoiding a Rug Pull
It’s usually safe to say that you probably don’t need to go through this whole process if you’re buying an NFT simply because you like it. But for those looking to drop a good amount of crypto on a project that appears to show promise, research is critical. This is also the case for savvy collectors who come across airdrops that seem too good to be true. In these cases, some of the things to look at before opening your crypto wallet include:
- Founders and team
- Social presence
Founders & Team
Transparency around NFT project creators is essential. Rug pulls are common when the teams behind NFT projects remain anonymous. Knowing who is behind a project can help you understand if there is a goal or if the creators of the assets are just in it to make a quick buck. Look into the founding team by checking the website and the online presence of the team members before adding any NFT to your collection.
Check popular social media sites like LinkedIn, Instagram, and Facebook. Are they legit humans with real profiles and solid networks? How far back do their interactions go with others? How deep is their presence online? They’re unlikely to pull the rug out if they seem like trustworthy people with a lot to lose if their project goes south.
When you’re on the project website, it’s a good idea to look at the roadmap. Established projects will always have a roadmap. The roadmap should include targets or milestones that the team aims to achieve. This can also help give you a sense of whether the project’s timeline makes sense for your investment goals. There is no guaranteed return on investment in NFTs. However, a solid roadmap can provide insight into whether or not the risk is suitable for you.
Utility is something that adds value to your NFT. Some NFT projects have a clear utility baked in when you purchase them; some don’t (but may or may not add one down the line). In the case of art NFTs, the utility may simply be aesthetic. But, if you’re dropping a significant chunk of crypto on an NFT and expecting it to have some rewards attached, you need to investigate the utility behind the project. Some examples of utility might include:
- Merchandise or other physical items
- Shared ownership of something valuable
- Exclusive access to an event, portal, or other space
- Status in social circles
- Membership in a group
A quick LinkedIn, Instagram, and Twitter search to check out if the creator is legit is important. They’re probably okay to purchase from if they’ve got a decent social following with solid connections and a history of interactions. Make sure you’re buying from someone who isn’t trying to hide something. One of the biggest things to look for is a low following on Twitter. A low Twitter following but an enormous following on Discord or Telegram, is a red flag.
A strong community is one of the most important factors behind any successful NFT project. One of the best ways to gauge the strength of a community is to join its Discord channel. Passionate and engaged members in a channel signify a strong community. If a project lacks this engagement, the likelihood of the project’s success is low.
Research is crucial to decreasing your chances of being burned in an NFT rug pull. Double-checking transactions is a good thing to integrate into your best practices in crypto in general. The entire market is still so new, and with little support from the exchanges and platforms, things can get brutal for victims of crypto schemes — often leaving investors empty-handed with nowhere to turn for help. At OIX, safety and security are our top priority. We have a reporting functionality built into the platform to protect our users. When a user reports fraud or a scam, we take immediate action against it. Our process helps minimize the risk of being taken advantage of via a rug pull or other NFT scam-related activities.
Again, get to know the community that you are engaging with – whether it’s creators or collectors. This can dramatically minimize your risk of being scammed. Any good project or platform has community managers to address your concerns, so test that out before committing to anything.