The value of an 8,888 NFT collection under the Frosties project plummeted to almost zero almost overnight in January 2022, marking the year’s first major “rug pull”. The initiative, which generated $1.3 million from investors through its NFTs, is one of a growing number of crypto-related crimes detected worldwide in the last year.
We’ll go through how rug pulls work with cryptocurrencies and NFTs, as well as the various symptoms of a rug pull so you can recognize them and avoid getting misled.
What Is NFTs Rug Pull?
A rug pull is a prank that promotes a cryptocurrency on social media. After driving up the price, the fraudster sells, and the price usually sinks to zero. In 2021, there was a rumour of a “real” NFT rug pull. Non-fungible tokens (NFTs) are digital art links stored on the blockchain. Someone found a file and changed the contents with a rug image.
NFT Rug Pulls: A Highlight
NFT rug pulls have been a popular means of defrauding individuals of their money in recent months, with several fraudsters having great success doing so. Evolved Apes and Baller Ape Club are two of the most current and well-known NFT rug pulls.
Taking advantage of the success of the popular NFT collection Bored Ape Yacht Club, these two ape-themed NFTs made off with a total of $4.7 million in ETH and SOL, with Evolved Apes taking home $2.7 million.
It’s worth noting that both Evolved Apes and Baller Ape Club began as any other project, with a crew, a community, and investors. Although victims of these schemes admit to seeing red signals throughout the endeavour, they claim to have been blinded by the promise they saw and ignored them.
“Evil Ape,” the founder of Evolved Apes, deceived not only the community who supported him but also the artist who created the complete collection. After the official public mint, Evil Ape wiped his traces by deleting all of Evolved Apes’ social media channels and left behind the unrecoverable blockchain history of the 798 ETH transferred to him.
Victims of the Baller Ape Club collection, on the other hand, did not even receive an NFT. Instead, the Baller Ape Club designers sent hundreds of worried consumers a bogus link that claimed their transaction had failed after they attempted to mint their NFTs. Their transactions, on the other hand, always went through, and users were unwittingly giving their SOL to the developers for no reason.
The creators, like Evil Ape, promptly pulled the plug and destroyed all of their tracks.
Also Read: Top 5 NFTs Rug Pulls
How To Know If An NFT Project Is A Rug Pull
1. Liquidity Has No Time Lock:
A time lock on a token pool’s liquidity is the most reliable way for teams to gain public trust in their project because it prevents the prospect of them stealing funds from investors. It’s important to remember that the majority of the liquidity needs to be locked in (ideally 95-100 percent) over a long period. Unfortunately, evaluating whether liquidity is locked is too complicated for the ordinary cryptocurrency user.
Your best bet is to request proof of locked liquidity from the developer team in the Discord or Telegram channel. If they can, that’s a positive indicator, but don’t believe everything you hear. If you know someone with DeFi development experience, ask them to assist you in determining whether a project’s liquidity is adequate.
2. Anonymous or Fake Founders:
Anonymity provides a cover for unscrupulous developers, shielding them from accountability and allowing them to pull off several heists. While Satoshi Nakamoto may have remained nameless, he never asked anyone to buy Bitcoin; instead, he simply asked others to mine it. Projects in DeFi require you to entrust your hard-earned money to their hands, so their genuine names must be tied to the project.
You should look at the creators’ social media accounts to see if their identities are validated and that their records aren’t made up. Some teams use innovative techniques to conceal their identities, such as creating phoney LinkedIn or Twitter pages, which forces you to assess how solid and reliable their information is. It’s already a red flag if they have little to no contact with their followers/connections. Furthermore, if they have a very small number of followers, this could be a red flag.
3. Unaudited Projects:
A credible cryptocurrency project should have its smart contracts examined by a third-party security firm, preferably before launching its token or allowing investors to participate. Other projects may obfuscate the auditing process, yet include it somewhere in the roadmap to instil undue trust in investors. Unaudited smart contracts may contain vulnerabilities that allow the founders or others to steal user funds via a backdoor.
Investors should also examine the audit report for themselves. Some projects simply state that they have been audited, which might lead to investor confusion. If you investigate carefully enough, an audit report can indicate the con artist’s intended getaway path.
4. Stealth Mint:
A stealth mint occurs when an NFT project goes unnoticed until it is launched, making it significantly easier to generate FOMO in a short amount of time. While it has some advantages, it has also been exploited by a large number of malicious developers. To be safe, stay away from projects that use this method.
How To avoid Rug Pull
Although there is no 100% guarantee that you will not be scammed, there are steps you can do to reduce your risks. All of these suggestions have the same underlying message: “conduct your research.”
1. Get to know the team:
While not every NFT collection has a doxxed (publicly identified) team, many of the most popular ones do. Many large NFT collections are created by trustworthy members of the crypto community or their communities, such as a well-known artist venturing into the world of NFTs or artists who have worked on prior NFTs.
2. Investigate the community:
Are there any well-known individuals or a crypto-community? These individuals are typically more experienced and are aware of what to look for, so they may have a better understanding of what is going on. Don’t be fooled by large numbers; be sure the engagement is from actual people who know what they’re talking about.
3. Only mint on official websites:
Unless it’s a website like OpenSea or Mintable, don’t click on any link provided by the creators. Although these are not the only two safe websites to mint NFTs on, do your homework before purchasing.
4. Examine the road map:
Check to see if the plan is feasible. Many rug pull schemes include an exciting roadmap to get the community excited, but they are often too difficult to carry out, aside from the fact that they won’t happen.
5. Keep an eye out for red flags:
Some of these are: Detail inconsistencies, such as the quantity available to mint does not match the previously announced total mint number, the constant price, and the change in release date, a team that is unprofessional and unresponsive, responses to community questions that are confusing or illogical.
Also Read: Things To Consider Before Investing In NFTs
Now that we’ve covered the measures to avoid falling victim to crypto scams, it’s vital to remember that they don’t completely ensure the safety of your assets. There will always be surprises as technology advances, with hackers discovering new and more sophisticated ways to steal cryptocurrency funds.
Furthermore, these measures are ineffective when used alone. For example, even if you can verify that the team wallets are secured, they can still cheat you if more than 50% of the token supply is in the hands of an open external wallet. Similarly, sloppy background checks are ineffective. If you don’t conduct your due diligence, you won’t be able to invest at all.