What is a Rug Pull?
Rug pulls originated within the cryptocurrency environment. It’s when developers build a business model around the crypto token, engage in marketing and all the necessities to build hype around the project, but then abandon the project while taking the funds raised from investors who believed in the project.
You’re probably thinking that this sounds like a full-on fraud, and it is, but unfortunately many are getting away with these actions because of the decentralised nature of the blockchain environment.
Developers and project managers launch these projects without verifying their identity, ensuring that their face is hidden and they can’t really be tracked.
What is an NFT Rug Pull?
Rug pulls have swiftly made their way into the non-fungible token space. One of the epic benefits of NFTs, is that it’s a modern method to raise funds to build a dream project. Rather than pitching your business model to traditional investors, project managers and developers can share their project idea with the public via social platforms like Twitter, Discord, or Medium.
If the service and utility meet the desires of investors and general NFT collectors, they will purchase or mint an NFT and this will go to the project liquidity pool for further development and project growth.
This method for raising funds is awesome, but many see this as an opportunity to make a lot of money, quickly.
An NFT rug pull is very similar to a crypto rug pull, but just comes in a different form. The process is actually pretty simple, almost too simple, and that’s why we’re seeing it pretty often within the current ecosystem. Here’s how it goes down:
Step 1: The Idea
A group will get together and plan an NFT collection that offers utility that is unique and attracts the NFT community. These ideas can come from other projects - something we see often especially for rug pulls.
In fact, the chances are, if the idea for utility is completely unique and stands out amongst the crowd, there’s a high possibility that won’t be a candidate for a rug pill. Why give away a good idea, right?
The idea is then planned accordingly and this is set out just like any other legit project would. Details and the goal of the project will be laid out in a gitbook - a document where the overall plan of the project is outlined. This generally includes a whitepaper, a roadmap and the general mission and vision of the project.
It’s important to note that during this task, no personal identities will be verified and listed - one of the first things to look out for when eyeing out an NFT project. Prospective ‘ruggers’ wouldn’t want their name on a fraudulent project.
Step 2: Marketing
Once the foundation and plan are laid out, it’s time for one of the most important tasks - marketing. This is a key step in building awareness of the project and getting access to NFT collectors who are in the market to invest in projects they think might grow.
Building a Twitter and Discord community is the best way to get investors on board, but this can often be the most difficult task. The key is building trust within the community. Project managers will share project progress and keep their community in the loop - keeping them on board as investors for when the project is released.
Step 3: Minting
The moment everyone’s been waiting for (especially the project runners), the mint. This is where the community is able to purchase an NFT from the project and add it to their collection. Minting is the part of a project where most the lump sum of funding is raised - so it needs to be flawless.
The lead-up to minting is the most important part and if this is done correctly, selling out is imminent. Collectors are eager to get in on the project, and they will pay considerable amounts to get their hands on the NFT.
Step 4: Exit Strategy
It is now time for the rug. This is where the project owners will take what they’ve earned from the public sale and get the hell out.
If the mint was a success, they would leave a load of cryptocurrency in each member’s pockets. Investors and collectors will be left with a token that simply has no value because project growth and building are abandoned.
Minting prices are generally not too high, so no one necessarily loses life-changing amounts of money, but the project owners will have gained a little bit from each member of their community, and this can add up.
Social accounts such as Twitter and Discord will disappear out of nowhere, and no one is really held accountable. A slight flaw within the blockchain space right now.
Why are NFT Rugs Becoming a Regular Occurrence?
NFT rugs are growing in occurrence dramatically. Unfortunately, it isn’t too difficult to launch a collection that looks like it may bring benefits to holders. There is a common trend in the current utility within certain ecosystems.
For example, the Solana NFT space, a space where rugs are happening on a pretty regular basis, sees utility that is often repeated in projects. One form of utility is staking, a common seller amongst NFT traders.
Staking involves giving back your NFT after you buy it and earning a native token (cryptocurrency) in return. This serves as a form of passive income. Do nothing, earn money - who doesn’t like the sound of that?
The staking mechanism may work in various respected projects, but it’s also a recipe for disaster - but let’s not get into that.
The problem is that projects that plan to rug will simply add the term ‘staking’ within their roadmap and utility model and this gets the interest of investors as they see an opportunity to earn passive income.
Staking is just an example of a commonly used utility model.
Will We be Seeing Rug Pulls Forever?
Thankfully, the NFT community is starting to become more aware of projects that are potentially rug pulls. Past rugs have led to lessons being learned and it’s becoming more difficult to trick investors into buying NFTs that don’t provide real authentic value.
There are also numerous teams out there looking to remove rug pulls from the NFT ecosystem. RadRugs provides a service that fully audits an NFT project and provides fine details of the project to the NFT community. They look into aspects such as the team, utility, tokenomics, and so on.
RadRugs are there to provide confirmation that a team or project is true to its word and are genuine in their goals. Many investors will first look if RadRugs has done an audit on the project they’re looking to invest in before pulling the trigger and buying the NFT.
There are other projects like RadRugs that have clear goals in removing the occurrence of rug pulls, and these projects have crazy support.
I personally feel that rug pulls will slowly make their way out of the environment. There’ll still be many that try their luck, but the whole process is becoming a lot more difficult in my eyes.
How to Avoid Rug Pulls
There are many ways that one can stay clear of rug pulls and everyone should always take caution before jumping into just any NFT collection.
One of the most important tips is to really just do your own research (DYOR) before buying any NFT. Fear of missing out (FOMO) can be brutal in this space, and it can be easy to just buy an NFT because everyone else claims that it’s going to be the next big thing. Dive right into the project and really make sure you understand everything about the project.
The NFT community can also come in clutch when it comes to sniffing out a potential rug pull. Immerse yourself on Twitter and Discord and get the input and opinions from other prospective investors.
Momint looks to build confidence in collectors through having verified creators on the platform. This helps ensure that the NFTs purchased are from creators that have respected experience on the platform. Momint will also be introducing vetted business models which will be indicated with a symbol next to the account name.