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NFT Rug Pulls – What Are They and How to Avoid Them?
A rug-and-pull is a typical fraudulent method of luring investors to a financial enterprise only to abandon the project and run away with the raised funds. Unfortunately, this scam has become increasingly popular in crypto. And with the emergence of non-fungible tokens (NFTs), the risk of NFT rug pulls becomes real.
This article examines how rug pulls work with NFTs and how to avoid them.
What Are NFT Rug Pulls?
An NFT rug pull happens when the developers of an NFT project abandon it by disappearing either with the investors’ funds or the pre-mined digital assets.
In recent months, several NFT rug pulls left investors high and dry. Collections that seemed destined for the moon in the beginning quickly turned out to be ruthless scams.
It is the case of the Baller Ape Club, an NFT series collection of 5,000 ape-inspired artworks. Shortly after their release, the stock sold out for 2 SOL each, raising over $2 million. However, as soon as the last sale was completed, the developers deleted their social media accounts, siphoned out the crypto funds, and disappeared. In return, the investors were left with worthless NFTs from a dead and buried project.
This is only one of the many recent NFT rug pull cases. And while the NFT craze is still in full swing, these scams have put many potential investors on guard. As a result, it’s evident that the sector requires a fresh coat of credibility, and smart contract audit and KYC companies may have the ideal brush for it. But before diving deeper into solutions for rug pulls in NFTs, let’s see how many variations of this scam exist.
Types of NFT Rug Pulls
Experts classify NFT rug pulls into the two categories below.
Hard rug pulls
This scam happens when a project’s founder uses malicious code to defraud investors. In other words, the developer hides specific terms in the project’s smart contract. These bugs activate after the investors pour their funds into it and steal them.
Soft rug pulls
This scam is “less illegal” than the hard rug pull because it doesn’t involve premeditation. In this case, the project founders don’t necessarily plan on defrauding investors when creating the NFT series. However, along the way, they turn to the dark side and run away with the funds. And they do so by dumping the assets, stealing donations, and even “disappearing” off the face of the earth.
How to Avoid Being Scammed in an NFT Rug Pull
Almost any NFT project could be a cover for a potential scam. It isn’t easy to pinpoint which, but rug pulls usually come with subtle red flags, such as:
- An anonymous development team
- A shady, rushed website
- Fishy social media accounts
- No LinkedIn accounts for the founders
- Outlandish promises or expectations from the development team
As an expert investor would advise, you should always research before investing in any NFT project. You can start by googling the development team and examining their social media profiles and contributions.
Usually, genuine project founders will engage with their followers and early adopters. They will organize AMA (ask me anything) sessions and participate openly in physical or virtual conferences. Simply put, they will come out into the open for you to talk to and see.
Nevertheless, the best way to avoid an NFT rug pull is to check if the project has successfully obtained a smart contract audit from an industry-leading auditor. Furthermore, reliable NFT creators have passed KYC verification from equally prestigious services. These credentials ensure the team’s legitimacy and trustworthiness.
Audit & KYC companies like SolidProof, Certik, PeckShield, or OpenZeppelin check a project’s protocol in depth. As a result, they can discover those hidden terms ready to trigger a rug pull. Moreover, they can run KYC screening procedures to verify the developers are identifiable people with reliable backgrounds. This diminishes the risk of them disappearing overnight with the people’s money.
Always check for these security standards before boarding a new NFT project. Also, take the developers’ claims with a pinch of salt, remain cautious, and do your due diligence without exception.