Easy to fall for... And hard to spot!
So... You've taken the leap and invested in an upcoming NFT project. Everyone in the community is bullish about the future of the project and the hype continues to build until mint day finally arrives. The mint goes well and everyone is waiting to see when the team will start executing the next steps of their plans.
And then... the excuses start piling up!
The projects team suddenly starts backtracking on all of their promises, going silent for prolonged periods of time, or outright ghosting the projects Social Media. You have just been rugged! This happens so often in the Web3 space that finding a genuine project with a competent team has become a necessary skillset for investors who dare to venture into it. So what steps can you take to protect yourself? Are there signs that scream out and tell you the project may indeed be a rug? Let's have a quick discussion about it.
Before we go any further, we should probably have a more concrete definition around the parameters that constitute a "rug pull" so we are all on the same page. In the Web3 space, a rug pull is when a team deliberately liquidates the funds raised for their project with no intention of fulfilling any of the plans they originally set out. This leaves investors in the project out of pocket - with a common Web3 example of this manifesting itself in having a non-fungible token (NFT) that has no inherent value due to the projects abandonment.
This is so commonplace in the NFT space that almost all individuals within it have experienced a rug pull themselves - and may even still be holding onto some of their rugged NFTs as a result. And due to the pseudonymous nature of the space, it's very difficult to enforce any sort of punishment for the projects responsible. So we must be responsible for our own safety.
The real question now becomes "what can we do to protect ourselves?"
Here are a few things you should consider in order to maximise your chances of avoiding malicious projects or teams. Please note: this isn't 100% foolproof nor an exhaustive list - it's just a few things to bear in mind when you are choosing a project that you're potentially considering investing your hard-earned money into!
The Team Behind the Project
A well-known, experienced and highly credible team are big indicators of a solid project. When a project is started by an individual, or team, that has a track record of success and credibility in their chosen space - it's unlikely that they would risk their reputation just to make a quick buck! Doing research into the team behind a project would be, in my personal opinion, the foundation in which I would begin to determine whether or not a project is worth investing in.
Even if a team isn't fully doxed (i.e. publicly known by their real identities) that doesn't necessarily mean that the project is sketchy... But the acronym DYOR exists for a reason! Dive deep into the teams history and community to determine for yourself if the project is sound enough for you to take a chance on. One caveat to this point is to beware of influencers. Occasionally, people can (and will) take advantage of any status or clout they have in their given community to earn money at the expense of others. Just make sure that the projects you choose to invest in are doing things the right ways!
Roadmaps, Whitepapers and Media
How many projects in the space have the same generic roadmaps and whitepapers? From staking to liquidity pools, raffles and raiding rewards... This lack of originality has saturated the Web3 NFT space with projects that were never intended to grow beyond their mints.
Spotting a generic project is pretty simple: a basic roadmap that sounds all too familiar (or no roadmap at all), inflated Social Media Engagement, a basic whitepaper (or no documentation or ANY kind) are all signs that the team isn't looking towards the long term! Are these always indicators of a rug? No... But these are very strong indicators to be aware of. One indicator that is give very little attention is genuine Social Media Engagement statistics - botting is quite commonplace (on Twitter, Instagram and Discord) as a means of inflating the perceived hype of upcoming NFT projects. And it's getting harder to determine the real engagements from fakes! Tools like Moonly have built in systems to give you more info on data like this - so start becoming familiar with it!
This section might be slightly biased because this is a personal pet peeve of mine! A project, or NFT, being a "derivative" is one of the most notorious signs that it has no future. Legitimate derivatives of "blue chip projects" exist of course, but for the most part they are created by bad actors wishing to financially capitalise off the successes of an established projects hard work.
My biggest tip for this is simple... DON'T GET INVOLVED! Unless the derivative in question is officially endorsed by it's original counterpart project - your best bet to protect yourself is to walk away! If you genuinely like the art style of the derivative in question, and aren't worried about the teams intentions after the mint, then by all means buy that JPEG. But as a general rule of thumb derivatives are one of the biggest red flags of a project that is highly likely to rug!
Other Things to Consider
Firstly, while there are plenty of projects out there that have bad intentions - sometimes a projects team genuinely tries and fails to execute their vision. Lumping these "failed projects" in with actual "rugged projects" isn't fair or cool - no matter how bad you feel about the outcome!
Next, don't become too attached to a project (or an NFT) unless it's something you know you'll love no matter what or it's a narrative you know will change the space. Try practicing compartmentalisation and remove your feelings from the equation - especially when it comes to making a profit in the Web3 or NFT spaces!
Lastly, be very clear on your parameters for taking risks - and how much risk. All investments are risky, but as discussed in this post there are steps you can take to minimize the risks to more acceptable levels. While I know that everyone's risk appetite and/or risk aversion varies from person to person - try and refrain from being a complete degen where possible (unless you like the prospect of consistently losing money). Long story short: make 100% sure you DYOR!
There's practically no avoiding a rug pull when you venture into the NFT space... You might even say it's a right of passage that helps people learn some necessary lessons. Remember, the most important aspect of avoiding (or minimizing) your exposure to potentially malicious projects is to do your own research thoroughly!
Make sure that the team has the experience and means to carry out its plans - as they are likely the biggest indicator of a projects success. Do some digging and get the necessary information (Whitepaper, Roadmaps, Media, etc.) and determine exactly how they plan on executing their ideas while being weary of generic roadmaps and low effort whitepapers. And where possible, do your best to avoid derivative projects! They often have no intentions of carrying out any of their stated plans - it's just a quick way to waste a few bucks!
At the end of the day - we are the ones who should be holding ourselves accountable for our financial decisions. This is especially true in the "Wild Wests" that are the Web3 and NFT spaces - where pseudonymity is the norm. You're probably sick of hearing this... But I don't care since it's for your own good...