“Rug pulls” are a common scam in the NFT space and are no fun at all to be involved in. Here’s what they are and some tips on how you can avoid them.
There are bad actors in any industry and the crypto/nft space is no different. Fraught with scams, one of the best ways you can make money in the NFT space is by learning how to not lose money. Here are some helpful tidbits on what rug pulls are, some ideas on how to identify them, and how to hopefully avoid them all together.
Essentially, a rug pull is a crypto project (be it a coin or an NFT) where the founding team sells a decent amount of tokens and are then either unwilling or unable to fulfill the promises of the project. They essentially “quit while they’re ahead”. This inability to deliver can be intentional or unintentional, but in most true rug pulls, founders know exactly what they’re doing and then disappear with the cash, leaving would-be investors without an investment.
In the coin world, this often looks like the coin becoming worthless and holders being unable to get out due to liquidity issues, the founders selling their (majority) share of the coin causing it to plummet in value, or the creators simply locking the coin and making it impossible to sell.
In the NFT world, there are lots of projects with big promises (often bigger than they can deliver on). NFT commerce is fueled on hype, which can sometimes sell out a project that doesn’t have solid deliverables. Founders of a rug pull project then either disappear without delivering ANY NFTs, or they deliver something low-quality and shut down all avenues of the project (including Twitter, Discord, and any other outlets).
Imagine minting what you thought was a really cool NFT, going to bed content, and waking up to find the “community” that you’d just become a part of vanished: the “rug” literally pulled out from under you. Since NFTs are commonly viewed as digital “investments”, there tends to be an expectation of appreciation potential associated with them. When the rug is pulled, a project’s NFT assets usually fall to close to zero due to the fact that any promises made by the team become null and void.
Another version of a rug pull is where “an alligator mouth overloads a hummingbird back” so to speak. Some projects talk a huge game, but lack the technical ability to execute. A great example of this is the Pixelmon NFT Project that recently built up excellent hype and then let investors down with comically terrible art. Promising to be one of the best games ever (essentially a version of NFT Pokémon), their team was unable to deliver a visually appealing NFT asset, which shook confidence in their ability to deliver on the final promised video game production. They were able to raise an astonishing $70 million on their promises alone, but have been suspiciously quiet since their disappointing reveal.
Here are a few bullet points on how you can start to notice rug pulls in the wild and avoid them.
- IF IT SOUNDS TOO GOOD TO BE TRUE, IT PROBABLY IS
- Remember… Crazy things do happen, but they’re usually not because of a wild promise.
- ALWAYS DO YOUR OWN RESEARCH, DON’T BUY OFF HYPE
- Take some time to dig in and fact-check. Consider the source, and use your own common sense.
- VET THE TEAM
- Anonymous teams are common in the crypto world, but many times people provide SOME indication on whether they’re capable of delivering on their promises or not. Don’t be afraid to check ‘em out and ask questions.
Knowing what a rug-pull is half the battle. Now you know to keep your eyes peeled and ask questions. Don’t fall for the hype and get left holding the (empty) bag. Good luck!