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What is a Rug Pull and How to Spot One

Extreme growth in the NFT space has been fueled by amazing projects backed by talented people, but that same growth has also flooded the market with scams looking to capitalize on investor's FOMO.

Luke Himmelsbach by Luke Himmelsbach
March 30, 2022
in Guides, NFTs
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NFT Rug Pulls and How to Avoid Them
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When you enter the world of NFT’s, you must understand that it’s currently like the Wild Wild West. While there are amazing people in this space, there are also those who are out for a buck and will take advantage of you at every turn. Being a “crypto cowboy” definitely has its ups, but you may find your wallet cleaned out if you aren’t careful.

What is a Rug Pull?

A rug pull (or rug, for short) is based on the saying “to pull the rug (out from (under) someone).” Essentially, it’s when a project sets itself up to seem legitimate, and when the mint day arrives, they take your money and run, rarely to be found again.

It is also important to note that in the current NFT space, there are two main types of rug pulls. One is set up as a cash grab, while the other is far more malicious and aims to take everything from your crypto wallet.

Cash Grab Vs. Rug Pull

The cash grab aspect of a rug pull is when a project sets everything up to seem legitimate, and upon getting everyone their NFT, they take the money and abandon the project, leaving holders with a worthless asset. While very simple in concept, this scam has happened dozens of times in the NFT world and will continue to happen so long as new, uninformed investors enter the space.

While no matter what, getting scammed is a pain and a letdown, the secondary rug is far more malicious. This type of rug pull involves smart contracts that utilize investors’ lack of knowledge in the crypto world. To put it simply, instead of signing the contract and paying the amount to “mint” the project, the contract that you sign is set up to drain the max amount of contents of your wallet. From crypto to NFT’s, if you’re not careful, you could quite literally be handing over all of your assets.

With NFT projects popping up left and right, it’s easy to get lost in the mad dash to get in early. It’s in this mad dash that allows you to let your guard down and get into a project that doesn’t have good intentions. While some projects are clearly a front for something more sinister, others are incredibly advanced and far harder to spot. So, what are these red flags?

Red Flags

Some of the biggest things to look out for when researching an NFT are the project’s engagement, timeline, and team.

Suppose you find a project with a considerable number of followers on social, but their engagement is low in comments and on their Discord. In that case, that is a point where you should begin to raise your eyebrows, get a little skeptical, and look deeper into the project.

You may think to yourself, “oh, they have over 100k followers; this seems legit!”. What you need to be aware of is the fact that many projects will purchase follower bots to make themselves look more legitimate.

With a little bit of digging and attention, you will find that in these scams, the engagement from their “community” is slim to none.

Another tell-tale sign is by checking into their Discord. Suppose they have 100k followers on Twitter and only a few hundred or thousand discord members, or again, the engagement is low or nonexistent. In that case, that is reason to be suspect and continue to research further.

Another red flag to look out for is the project’s timeline. Did this project just pop up? Are they constantly rushing the community, making them think they need to act fast? Do they throw around a lot of FOMO (fear of missing out)? Many recent rugs in the NFT space have been carried out quickly.

A project will pop out of the woodwork only to tell everyone, “hurry up before you miss out!”, this creates an atmosphere of demand, making people invest in the project without thinking or doing research. While legitimate projects like to pop up and build hype quickly, a legitimate project will not rush you to make a purchase. In fact, many times, a legitimate project will give minters multiple hours or even days to make their final decision to purchase.

Never rush into a project without doing your research first; It will rarely be worth the headache.

Another red flag to look out for is the team and how they engage with the community.
While many projects won’t dox their team members for anonymity purposes, far more legitimate projects provide high levels of transparency. Though many educated investors like to ensure the team is honest and can carry out the promised deliverables, an un-doxxed team isn’t necessarily a reason to flag something as a rug right away.

Doxxed or un-doxxed, professionalism is the key point in identifying a rug. A project is only as good as its team, and if you find the team retaliates or is threatened by questions, there is likely a reason for that. And that reason would be because you are scaring off others who they could take advantage of. If moderators of the project are taking things personally, threatening or kicking users who ask questions, or just ignoring blatant holes in the project, it’s probably best to run.

Takeaway

While this article may serve as a general guide to warn and inform, there is definitely more research to carry out, and scammers are getting better at what they do every day.

Be safe out there and always remember; if something sounds too good to be true, it probably is. And on top of everything else, do your own research (DYOR) and do your necessary due diligence (DD).

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Luke Himmelsbach

Luke Himmelsbach

Luke Himmelsbach is a long-time writer, editor, and podcast producer in the crypto and NFT space. He got into the space after being rugged (as is a right of passage in the NFT space) and now specializes in finding and analyzing new and exciting NFT projects.

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