What is a Rug Pull? (NFT Terminology)

KEY POINTS

  • Rug Pulls are projects in the NFT space that are actually scams although on the surface they look legitimate. Some rug pull projects go through all the trouble of building what looks like a real project but the "team" behind it never had any intention of delivering on their promises. Once the sales period is finished they drain the project wallet of all the currency they collected leaving the buyers with nothing.

  • A Rug Pull could be considered illegal if they are deemed to be a form of fraud. However since NFTs, like crypto, are loosely regulated and many operators are anonymous, tracing rug pulls and holding the perpetrators accountable is no easy task.

  • Celebrities and other influencers may "shill" (promote) Rug Pulls without doing their due diligence on Web3 or NFTs. Don’t solely use celebrity backing as a means of project credibility.

  • "Soft Rugs" or "Slow Rugs" are a gray area within Rug Pulls where a project isn’t an outright scam but the team has overpromised and under-delivered rendering the project’s NFTs worth much less than their initial valuation based on the promises made during the initial sale period.
Rug Pull

What Is An NFT Rug Pull?

The term "Rug Pull" in the NFT space comes from similar scams in the cryptocurrency industry where projects market themselves as legitimate but are actually carefully disguised scams

Many Rug Pull projects go through great lengths to bill themselves as real projects and opportunities when in reality the "team" orchestrating the rug never had any intention of delivering on what they promised.

Usually rug pulls will go through an initial sales period and then the team will begin to act shady and begin the "ruggening". Typically when a project begins to rug their community they’ll do things like: 

  • Stop communicating updates
  • Lock their Discord channels
  • Ban all users / users who question the team
  • Drain the community wallet of all funds raised
  • Add malicious code in the smart contact that drains NFTs/funds from connected wallets in their mint site or Discord

Once a project "pulls" its rug, it’s over for anyone who was hoping to get a return on their investment. Usually there is a period of disbelief followed by a period of "cope" by the community who had completely bought in emotionally and financially to the project.

Rug Pulls are highly damaging to the NFT community financially, spiritually, and reputationally and it’s one of the more negative aspects to the space.

Despite this, the NFT industry has progressed a lot over the last year and the majority of projects are not outright rugs, but it is the few outrageous bad faith rug pulls that get talked about all over NFT Twitter and give every legitimate builder a bad name.

NFT "degens" will tell you that participating in a rug pull is part of earning your stripes in this space and to a degree they do have a point. Once you get rugged from a project you learn a hard lesson and it’s far less likely you’ll fall prey to one in the future (although it happens).

That all said, if the space is to mature, new entrants to the space need to be educated about Rug Pulls and how to avoid them. You shouldn’t need the battle scars to be successful in NFTs, but you do need the foresight to listen to the experience of others and follow some best practices with your investing.

This article will give you some basic guidance on how to avoid Rug Pulls and keep your funds and your spirits safe.

Why is it called a Rug Pull?

The term Rug Pull originates from well, the very act of pulling out a rug from underneath someone. The term has been used for years in various contexts in the same vein of "pulling a fast one" or "pulling the wool from your eyes". It simply meant to trick or scam someone out of their money or belongings

The crypto space began using the term for the various scams that perpetuated the industry in the 2014-2017 era and the term stuck around and has been adopted by the NFT scene as well. 

Are Rug Pulls Illegal?

Rug Pulls could be considered a form of fraud, which would be illegal, but they are difficult to prosecute due to the lack of transparency in the NFT space and the lack of clear regulations around NFTs and cryptocurrency (although this is beginning to change). 

Most Rug Pulls get away with it because the people perpetrating them are "anons" (anonymous). This is a big part of why "fully doxxed" teams have become a strong indicator of trust and legitimacy to a project. People who are willing to put their true names, faces, and identities out there are saying that they’re real people and will be held accountable for their actions. 

Usage Note: When "Rug Pull" isn't referring to a scam

Sometimes the term rug pull is used to describe projects that are actually "soft rugs", or "slow rugs" (see section on Soft Rugs/Slow Rugs below) and are not really out right scams but rather a project that doesn’t deliver on its promises.

This has led to a more broad usage of the term "rug pull" to describe anything and everything that doesn’t meet one’s expectations.

The first time you hear the term "rugged" may be in regards to a speaker getting kicked off a Twitter Space due to the app’s less-than-optimal service. That’s become a big part of the culture and parlance of the NFT space, so when you hear it in this context, don’t worry, no one’s lost their bags just yet.

In the next section we’ll outline some basic ways you can protect yourself from projects that are likely to be rugs. 

How to Spot a Rug Pull

While there is no surefire way of knowing one-hundred percent that you are dealing with a rug pull project or not, there are some best practices you can take on to lower your chances of becoming a victim of a rug.

DYOR - But For Real

First off, DYOR (Do your own research) and when we say DYOR we mean it!

Yes, there is a culture and almost pride around “apeing” into projects (Investing into an NFT on whim or without doing any research) but this can greatly increase your chances of making poor investment decisions in the space. 

Research the Founders and Devs

Investing in projects with anonymous founders and anonymous devs is a red flag when it comes to avoiding rug pulls. 

Even if the founders are doxxed the devs may not be and this is something you should scrutinize. I have known projects where even the founders were rugged by their devs and locked them out of their own smart contract. (This is a rare circumstance but it does happen.)

Luckily the damage was minimal in this situation and the founder and community were able to recover from this rug and relaunch the project with a new (and doxxed dev) shortly afterward.

When you research into a project, a doxxed team will give you plenty of information about who the founders are, what their relationship to the project is, their skill set and past experience, and some basic personal information too. Getting to know a team and community goes a long way to building trust and goodwill.

However just because a team is doxxed, it doesn’t mean they will be able to deliver on the promises of their project. (See the section of Soft & Slow Rugs below.) If the founders are inexperienced then it’s likely they will have to move the goalposts on their promises so scrutinize their public roadmap and project structure.

Research The Community

As you research the team and their track record, look at the community they’ve built as well. See who has been publicly supporting them on Twitter and in their Discord. Do they have a crowd of well known people from Crypto Twitter? 

Don’t just rely on numbers because those are easy to fake. Check out the action in their Discord and see whether it looks legitimate or if it’s all bots trying to build false hype.

Avoid Shady Website, Links and NFT Collections

Malicious code on websites, Discord Links, and Spoofed Collections are a big source of "rugs" and other NFT scams. Many times popular projects will be spoofed by scammers hoping people will ape in based on hype and not realize they are actually clicking on a fake version of the actual project.

This is why legit projects spend a lot of time communicating to NOT click on unknown Discord Links or respond to phishing attempts in the DM from scammers acting as team members.

Related: Discord for NFT Beginners

However when a project itself is pulling the rug usually everything appears legit before they initiate any shady behavior. 

It can be hard to spot rugs when everything within the project seems above board.

Monitor The Projects' Comms

Usually when projects are in active sales mode, they are communicating updates frequently, but when they go dark and the leads stop responding to community inquiry, it's a sign of trouble. Sometimes these are just part of a project’s growing pains as things move fast in NFTs but if they become unresponsive for days or longer, then usually it’s a sure sign of a rug.

Be Wary Of "Too Good To Be True" Promises

Finally, be wary of any project that is making promises about the future valuation of their NFTs or guaranteeing any type of specific return. Any language from a project that feels "too good to be true" almost always is. Please don’t fall prey to these types of pie-in-the-sky promises and attempts to lure you into a quick rich scheme. 

What are Soft Rugs and Slow Rugs?

As mentioned above, not all projects that get labeled "rug pulls" are outright scams. Some projects are actually soft rugs or slow rugs where the team simply fails to deliver on what they promised during their launch

This has become more typical in the NFT space where projects promise everything and the kitchen sink to sell out their collection but feature animation to video games and more. 

Then once they raise their funds they realize that delivering on these promises is much easier said than done and they don’t have the experience, team, or bandwidth to accomplish anything close to what they laid out in the timeframe they announced

Pixelmon is a great example of a soft rug that raised an obscene amount of money with a 3 ETH mint price and promised a fully-finish NFT P2E game based on their NFT characters only to reveal subpar art that hardly justifies their massive 75 Million dollar raise. 

After the lackluster Pixelmon art was revealed, confidence in the project and team evaporated. Crypto Twitter was publicly roasting the team and those who invested 3 ETH based on promises from a largely anonymous team. This was a big lesson for the NFT community although it’s one we seem to repeat every few weeks. 

Pixelmon Kevin

Screenshot from OpenSea showing a "Kevin" from the Pixelmon collection

Slow Rugs are similar but the team’s inability to deliver is stretched out over time, as is their enthusiasm to move the project forward. I’ve heard some knowledgeable NFT investors comment how many projects in the space will actually turn out to be slow rugs simply based on the statistics around how many new businesses fail within the first 5 years

There is likely some truth to this statistic within the NFT space but we're so early we don’t have the data yet. We have no idea what the space will look like in even a year or 6 months, but one thing I’d guess is that it’ll remain as competitive as ever. 

Some Recent NFT Rug Pulls and Their Aftermath

Rugs are so common that we can even break down some of the most recent NFT rug pulls and explain how they were pulled off, where the signs of the project being a rug began to appear and what the fallout was for the community and space at large.

The Evolved Apes - A Community Fights Back

A notable rug from last fall was Evolved Apes which sadly scammed collectors out of 2.7 in ETH. This was a standard PFP collection with an ape character. They promised a P2E game that would launch shortly after the collection sold out. Obvious red flags were ignored from the beginning - the main dev of the project was only known through the pseudonym Evil Ape. (Maybe the "evil" should have tipped them off?) 

After the public sale wrapped up, the communications from the project’s Discord started getting spotty. The announcements were unprofessional and the community leaders disappeared. 

When the community started asking questions they uncovered more serious signs of a rug pull. None of the winners of the community ETH giveaways had been compensated, nor had they received the prize NFTs. These are all pretty bad signs, especially without any communication from the team.

Then it was revealed that the artist who did the PFP art for the project had not been compensated either. This is a mega red flag! The community then got together an appointed one member to act as their spokesperson, @Mike_Cryptobull.

It was a clear and obvious rug pull at that point, but this community decided not to take it lying down. And although their initial ETH investments were gone they found a way to revamp the project using a new contract and the art from the original artist. 

The project was then renamed "The Fight Back Apes" and the project lore now included fighting back against their chief enemy "Evil Ape" the very dev who had rugged them all. 

It’s a bit of a heart-warming story but you wish this community didn’t have to go through the pain of getting rugged and a scam artist still remains at large in the NFT community ready to rug again at any time.

Curious to where the Fight Back Apes go in the future and if this project will go anywhere significant to create a new chapter for themselves beyond their shaky origin story. 

You can read more about the Evolved Apes Incident Here

Frosties NFT - The Government Fights Back

Communities fighting back against scammers is great to see. It shows that many more of us are just caring individuals who want to create good things from the NFT space and our activities here, but they can’t really prevent rugs or provide consequences for those who pull them. 

But the US DOJ can!

And that’s actually what happened in March to the founders of FrostiesNFT - the first rug pull case where charges were filed by the DOJ. Now, the government and crypto barely get along so I am not writing this saying that government involvement is good or bad, simply reviewing what can happen when Rug Pullers "f around and find out".

Read the DOJ's Press Release on the case here

So two founders launched Frosties and sold out a 1.3M collection of 8,888 NFTs. Their character was based on an ice cream cone and the traits were different outfits. They made many of the usual claims of future utility in a P2E game and future drops but in January this year they began engaging in shady activities. 

They tried to obscure where they had moved the project funds, who purchased their NFTs and they took the project website offline. 

I am not sure why the DOJ investigated this particular rug over others, but maybe it was because the founders in this case were doxxed. And if that is the main reason why, then wow, these guys are pretty dumb crooks. 

When they were arrested they were actually in the process of initiating a second rug pull project - this one was named Embers.

Both men have been charged with one count of wire fraud and money laundering, both of which are punishable with a maximum sentence of 20 years in prison. 

Damn! 

This case is notable because it shows some real (and very serious) consequences for perpetuating a fraud in the NFT space, especially if your identity is doxxed. I am curious to how this case precedes and how the government will treat these fraudsters when it goes before a judge.

You can read more about the Frosties Incident Here 

The Board Bad Bunnies…. Will Mayweather Fight Back?

Last, we have Bored Bad Bunnies, one of the most recent “slow” rugs in the NFT space. This rug is unique in the fact that they actually pulled off 3 launches in a short time period before the rug was really uncovered, AND they managed to rope in serious influencers like Jake Paul, Floyd Mayweather, French Montana, DJ Khaled and Chantel Jefferies to shill their project for them.

They were incredibly successful using these celebs to shill their 3D bayc-esque bunny NFT avatars. They had raised over 6000 ETH on their launch, equating to 21 Million dollars.

A twitter thread from blockchain detective @zachxbt exposed the entire scam back on March 31st. He had been watching the project since the first launch under suspicion that it would become an overt rug. 

zachxbt's twitter thread on board bad bunnies

zachxbt's Twitter thread on Board Bad Bunnies

One red flag that should have tipped off savvy investors from the project's roadmap was an outright promise to 2x, 5x, or even 10x their initial investment within days of the launch. 

That’s the kind of too-good-to-be-true promise that should have you running from a mint site.

ZachXbt received a tip regarding insider trader among the developer wallet accounts and it was revealed they had purchased the celebrities NFTs for them, meaning that these influencers didn’t have any real skin in the project and were just getting paid to promote it. 

This is an incredibly unscrupulous practice, and for celebrities it largely goes unpunished.

Through on-chain analysis it was also uncovered that the project funds had been transferred to an account at Binance and that it was no longer in the project wallet.

The team had also disappeared for an entire month only to resurface and claim they had been busy going through "multiple emails". A ridiculous cover story that makes no sense. 

The founders "Jake" and "Greg" then attempt to pass ownership of the contract to a community manager but this wouldn’t have meant a transfer of funds of course.

You can read more about the Board Bad Bunnies Incident Here

Final Thoughts

Web3 has been growing with leaps and bounds and presents one of the greatest opportunities for artists, creators, and brand builders as well as for those who want to invest in them but it’s not without significant risks. 

Unfortunately the crazy valuations of some projects and the speed at which they take off has led to a lot of bad actors entering the scene in hopes to make a quick buck off the community. 

Rug Pulls probably won’t go away anytime soon as long as there are new entrants to the space who don’t do their homework before investing. As long as NFTs have crazy hype associated with them there will be people promising the moon with their projects that fall flat on their face weeks or months later. 

Regulations may change the space in ways we can’t imagine right now, and that will also bring both good and bad, but the landscape remains murky. 

The best we can hope for in the immediate future is to continue to educate our newbie friends as they come into the space and support the legitimate builders and communities we like.

Take your journey in NFTs seriously and continue to learn about the space daily and you’ll become adept at avoiding obvious rugs and scam projects.

Mike Grossman

About the Author
Mike Grossman is a writer and creative strategist based in Brooklyn NY. He ape’d into NFTs in early 2021 and has been following the industry ever since.

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