# Rug Red Flags (NFTs) By [Origins Research](https://paragraph.com/@origins-research) · 2022-10-25 --- Non Fungible Token (“NFT”) rug pulls involve fraudulent activity and typically occur when developers create a new project, then extract as much value as possible before abandoning it. There is some level of subjectivity in determining what a rug pull is, and hence the types of red flags that exist when evaluating NFT projects. This article will examine typical NFT rug pulls and detail several red flags, to avoid falling victim to these bad actors. Article Outline --------------- * Background * What is a Rug Pull? * Hard Versus Soft * Red Flags * Real Case Studies * Closing Remarks (TL;DR) Background ---------- ### What is a Rug Pull? Rug pulls happen when an investor is deliberately defrauded of their initial capital outlay. In the context of NFTs this is typically when project founders, or developers, walk off with the mint funds leaving the NFT holder as exit liquidity. There are several types of rug pulls, but these shouldn’t be confused with project failure. If a project team execute everything as set out on their roadmap, and gave no indication of additional utility, then this is not technically a rug pull. Many art NFT project extinguish their responsibilities once the project has been launched. The utility in this instance is the artwork itself. If utility is then added, such as access to gallery events then new expectations are set, and complexities arise around legal responsibilities. ### Hard Versus Soft Rug (“Rugs”) A hard rug is an obvious attempt to defraud investors from their funds through deceptive means. Malicious code in the contract or disappearing with zero communication are examples of hard rugs. Whereas, a soft rug refers to a slow sell off of an asset, making promises of roadmap delivery with less frequent communication over time until the project team disappear. Soft rugs are the most common in the NFT space as it becomes difficult to hold the team accountable for “rugging”. Incompetence is not a criminal offence unless there is negligence involved. The NFT space is not a well regulated sector, and so pressing charges against project teams for failing to deliver can be challenging. Now we’ve outlined the background on the severity of rugs, let’s take a look at some red flags. Red Flags --------- ### 1/ Doxxed Teams Reduce Risk * Doxxed (known) teams tend to reduce the risk of a project rugging. * The founders’ reputation is on the line so there’s a lower risk they will walk off if they are known to the public. * This would limit the opportunities for them to launch future successful projects if they had rugged previously. ### 2/ Team Expertise, Skills and Behavior * The team’s expertise should be reviewed. Do they have sufficient qualifications to deliver on the roadmap? This can be difficult to assess, but an example of a red flag would be if the project is launching a game but has no experience in building games. It would be a red flag on both a potential rug, or just higher execution risk. * Discord activity and moderator behavior can be an indicator of project health. If people are being banned for asking penetrating questions then this could be a red flag that the team is hiding something. AMAs are also good ways for people to ask questions of the team, to ensure what they are planning to deliver makes sense and is feasible. ### 3/ Social Media * Twitter account age and engagement is a good indicator of project health. Twitter accounts can become “botted”, and have thousands of followers with low engagement. Twitter is notorious for having a high percentage of bots as we know from the [Elon Musk acquisition media coverage](https://www.theverge.com/2022/7/7/23199137/elon-musk-twitter-spam-account-bot-data-breakup). Monitoring the number of likes or comments on each of the posts is a good method of verifying the level of real activity on the project account. ### 4/ Team Incentives and Remuneration * Reviewing how the team is incentivized can be a good indicator of how much risk you are taking on up front. * If it’s a high mint price, then one would expect the project to be developing something that requires significant up front capital to build. For instance game development is expensive so would need the funding, but a PFP collection may not require the same level of funding. * There’s also a risk of the founders walking off unless the funds are locked in a [multi signature wallet](https://101blockchains.com/multisignature-wallets/). * If it’s a free mint, with the founders being allocated royalties and some NFTs for the project treasury, then this is an indicator that the team intend to continue working on the project, given the vested interest. We’ve covered optimal royalty and mint fee structures [here](https://twitter.com/OriginsNFT/status/1571153562029391882?s=20&t=MVyCyjUkwSsxKXFH4YfXow). ### 5/ Verified Contract / Audited Code * Check [Etherscan](https://etherscan.io/) to see if the NFT contract is verified or audited. If not then this is a red flag. ![Source: Etherscan](https://storage.googleapis.com/papyrus_images/b167f96d94e6c8fe572fae1ed290932eb05bf504caa9be79d9be55d37df6d6b0.png) Source: Etherscan * There could be malicious code that prevents the sale of the NFT thus making the acquirer the ultimate exit liquidity. An example of this in fungible tokens is a [honey pot](https://cointelegraph.com/news/what-is-a-honeypot-crypto-scam-and-how-to-spot-it). The attacker drains the Ether from the token contract, while the victim is restricted from doing the same. ### 6/ Token Distribution and Wash Trading Indications * Reviewing the token distribution of the project is important. If the NFTs are allocated amongst a small group of people and there are high value sales above floor on secondary then this could be an indicator of [wash trading](https://twitter.com/jumpmanft/status/1574583173085728768?s=20&t=YwTaKPtUl9ryMIDGowfE3Q). This is fake volume to lure investors in to purchase items in the collection above the market value. * It’s akin to fake interest, then becomes purely speculative and the victims may not be able to sell the asset on unless they are not the final link in the “greater fool” theory chain. * Wash trading is illegal in traditional finance markets. ### 7/ Dynamic and Unique Scamming Techniques * Check recent rug pulls for new iterations of scams. The NFT sector is dynamic and so scammers change tactics quickly. Assessing recent scams could set alarm bells off with new, similar projects. * Keep clued up on the latest social engineering methods to realize when someone is trying to extract information from you. * Crypto, specifically NFT, Twitter is a good source of awareness around scams as they arise. Typically when a rug becomes apparent the community retweets and shares the information to spread awareness. Staying engaged or searching a project name can gather real time sentiment of the project. ### 8/ Data Analysis is Your Friend * Use the NFT tools to your advantage. [Zachxbt](https://twitter.com/zachxbt) tracks fund flows via wallets using proprietary software, but other tools like Nansen allow reasonable analysis of wallet activity. ![Source: https://twitter.com/zachxbt/status/1497381321127170055?s=20&t=MVyCyjUkwSsxKXFH4YfXow](https://storage.googleapis.com/papyrus_images/7b97b8b8c418ee652db25c3916dcc16b21423aba45d8060eae050a8120ab20d3.png) Source: https://twitter.com/zachxbt/status/1497381321127170055?s=20&t=MVyCyjUkwSsxKXFH4YfXow * The OriginsNFT terminal will provide the ability to filter wash trades on projects and the broader market to facilitate a better interrogation of data. ![Source: OriginsNFT](https://storage.googleapis.com/papyrus_images/929773cc9d68a6e8d977f8887699c017165ac757616d13ad1d1ca420dfda3b03.png) Source: OriginsNFT ### Other Considerations In traditional finance there are other means of protecting investors. Rug pull insurance or protection against execution risk (using a Surety Bond) is a solution that we could see in the NFT space. We touched on this in the [OriginsNFT article](https://mirror.xyz/origins-research.eth/eUQdzkuc17TtuWFHaEfj5dh-7FEX4tnXOeVd5w5a8SE). Real World Cases ---------------- ### 1/ Frosties The Frosties website, Twitter and Discord were deactivated. Scammers exited with $1.3 million before the [successful prosecution of two individuals](https://www.justice.gov/usao-sdny/pr/two-defendants-charged-non-fungible-token-nft-fraud-and-money-laundering-scheme-0). ### 2/ Big Daddy Ape Club Big Daddy Ape Club was one of the few projects that failed to even deliver an NFT. The team background checks were [performed by Civic](https://twitter.com/hartcb?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1481001393980776448%7Ctwgr%5Ef674464bd75ea23914db6e8f555e8a8b5caabc2b%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fnftnow.com%2Ffeatures%2Fthe-biggest-rug-pulls-in-nft-history%2F), making this an even more difficult project to vet. Typically if an accredited third party performs checks it providers a reasonable level of assurance over the credentials of the team. ### 3/ Pixelmon Pixelmon appears to be making a comeback from the FUD earlier this year. The project raised [$70 million, then revealed questionable art that experienced rendering issues and lacked variation in traits](https://twitter.com/zachxbt/status/1497370216690503687?s=20&t=MVyCyjUkwSsxKXFH4YfXow). [Kevin became an NFT meme](https://nftevening.com/we-need-to-talk-about-kevin/) with 8Ξ sales “for the culture”. While there were concerns over the project being a rug, it was no technically a rug by definition given the continued drive to deliver on its roadmap. ![Source: Pixelmon](https://storage.googleapis.com/papyrus_images/d9472b04b328cfcf0be09c43ff643a7942cd496e1249860e14b36d85e2953467.png) Source: Pixelmon The project has since seen volume return, recently hitting “very high” on the OriginsNFT FOMO meter and a 0.69 Ether floor (nice). Nonetheless this is down 77% from the mint price, consistent with the broader NFT & crypto markets. The recent VC backing may bolster the expertise, but can the project shake the initial FUD and perform? Time will tell, but a lesson in performing sufficient due diligence was learned. ![Source: OriginsNFT](https://storage.googleapis.com/papyrus_images/f384d85c19432702844cbeda98a44704c285f41cc4ef4f6b1e36acb227a2be78.png) Source: OriginsNFT Closing Remarks --------------- ### (TL;DR) * Do your due diligence on the project team, expertise and whether there is high execution risk. * Review team incentives and remuneration to assess self interest or alignment of interest between project team and NFT holders. * Assess whether there are any red flags and ask those challenging questions of the team prior to minting. Attend AMAs, they’re a useful tool. * Check social media activity and verify engagement. * Check for verified NFT contracts and code audit results. * Keep abreast of NFT news to ensure you are on top of the latest scam methods and social engineering techniques. * Learn to analyze data and use market tools to spot unusual trends / activity. Ultimately if something doesn’t feel right, it probably isn’t. Check information through a third party, verified, trusted and legitimate source. If the information doesn’t add up, then think twice about going through with it. Never click links from direct messages. At [OriginsNFT](https://originsnft.io/) we leverage data-driven decision making, educational resources, and proprietary analytics to remain ahead of the curve with respect to blockchain tech and specifically NFTs. To find out more, please visit our [website](https://originsnft.io/) or [Twitter](https://twitter.com/OriginsNFT?s=20&t=32UYETa5iiqxkDBj0NcVrg). To purchase a pass, please visit our [Opensea page](https://opensea.io/assets/ethereum/0x495f947276749ce646f68ac8c248420045cb7b5e/63763212585141476199723449601564140078511354041472126739157516503384422613942). ![](https://storage.googleapis.com/papyrus_images/e12f880845d6a12d90110640422b60ce7f517cccf703763cacc8661b5d793176.png) --- *Originally published on [Origins Research](https://paragraph.com/@origins-research/rug-red-flags-nfts)*