It’s time to face the facts. The NFT space isn’t what it used to be. The small community centered on trading art and inventing slang has transformed. Now, it feels a bit more like an investment group. The result? A massive rise in NFT scams and NFT fraud.
As user numbers continue to skyrocket, new projects are cropping up and gaining massive followings. Money is flying everywhere, and it’s challenging to know what projects, brands, and influencers to trust. Why? Because even some of the most well-known individuals and organizations have been caught promoting NFT scams or behaving unethically.
For example, take @NFT. It was the joint venture of Jason Falovitch and Mark Cuban. They were suspended from nearly every social media platform for failing to properly label sponsored posts and — this is even worse — promoting (and allegedly profiting from) numerous projects that turned out to be scams. Need another example? Read this article on what Larva Labs did.
There’s a severe lack of accountability. So it’s more important than ever for consumers to know how to spot NFT red flags and keep themselves safe. This guide covers nearly everything you need to know to protect yourself.
The main point? Research.
The best way to prevent yourself from NFT fraud and NFT scams is to research. Notably, this doesn’t mean just reading what others have to say. It means fact-checking and investigating yourself. It means doing your own homework. Remember: No matter what anyone else says, if you buy into an NFT project and the developers pull the rug from under you, the responsibility ultimately lies with you.
For those who have been in the NFT space for some time, researching projects has become almost second nature. That doesn’t mean that NFT veterans don’t get burned sometimes, but most know how to avoid common newbie mistakes.
To get some expertise regarding how to properly research, we spoke with Steve Mitobe, CEO of Hexbite Labs and Westcoast NFT. To date, Mitobe has played an integral part in launching some of the world’s most respected NFT projects, like Doodles, mfers, “I’m Spottie” and more.
As a collector himself, Mitobe knows the pitfalls of jumping into a project and getting burned all too well. Because of these experiences, Mitobe says his team spends a lot of time vetting artists and developers before deciding who to work with. What do they research to vet projects? According to Mitobe, everything. “You have to vet every project from a macro perspective,” Mitobe said in an interview with nft now, “It comes down to vetting everything.”
But before we break down exactly how you can research everything, it’s essential to understand how scams are perpetrated in NFTs. And that brings us to rug pulls.
What’s a rug pull in crypto and NFTs?
A rug pull is a scam in which a team promotes their project and then disappears with all the funds. By absconding with all of the money, the team leaves collectors with a valueless asset. They don’t fulfill any of their obligations, like donating money to charity or using the funds to create live events or new artwork. Instead, they fill their pockets and leave.
For example, a week after the launch of the Evolved Apes NFTs, the anonymous creator of the project known as Evil Ape vanished and drained the project of 798 ether ($2.7 million). The NFT fighting game that was promised never materialized and prices plummetted.
Notably, most rug pulls aren’t illegal. Are they unethical? Sure. But if a project promises to donate funds and then chooses to keep the money, there isn’t really anything anyone can do.
How to tell if a project is an NFT scam
Scammers in the NFT space are usually pretty clever. Stealing crypto takes an advanced understanding of blockchain technologies and smart contracts. It also takes some pretty decent marketing skills. Scammers can trip up and accidentally reveal themselves. However, you can’t rely on that happening. Instead, you must research many things to determine if a project is more likely to be sound or unsavory.
Here are the things that are red flags and what you need to research to detect NFT fraud.
1. The Project Team
Who’s behind the project? Is it someone well-known in the NFT space? How long have they been active in the community? How long ago were the founders’ accounts created? These things can tell you a lot about a project. In fact, Mitobe says that this is the most crucial part of researching any project.
“With NFT projects, it comes down to the artists and developers,” Mitobe said. “Do they have a community? Do they engage with their community? …How long have they been creating? You can really tell, from these simple questions, what their motivations are behind what they want to do,” he continued.
And if information about the team isn’t verifiable in any way, that’s your first red flag. Yes, the NFT space promotes anonymity, but even the most anonymous of NFT developers and influencers have a community paper trail, for lack of a better phrase. A project with anonymous developers isn’t necessarily a scam, but you should be able to find at least a little bit of information about the project leads.
An excellent place to start your research is Twitter. The team, hopefully, has an account that is more than just a few months old. Ideally, the founders follow and have followers in the NFT space, tweet regularly, engage with others in conversations about NFTs, and so on. What’s more, they should have been doing this for a long time.
When an established artist announces a new project, it’s usually pretty easy to confirm whether or not it’s legitimate. But if a PFP project starts gaining a following, and you can’t even tell if the “Lead Artist” or “Marketing Director” is a real human being, there’s a red flag.
2. The size of their social media following
Two words: fake followers. It’s easy to buy followers and engagement to bolster a social media account. This applies to Instagram, Discord, Twitter, and other social platforms. However, you’ll want to focus on just Twitter and Discord, as these are the two platforms that the NFT community uses the most.
If a project’s Twitter account was launched just over a month ago and they have a six-figure following, that’s a red flag. That said, some projects have exploded in popularity. As such, one invaluable tool is Twitter Audit, a trusted tool that can help determine how many followers are actually real.
Another thing to consider here is endorsements. A celebrity endorsement can be incredibly appealing and seem to validate the project. However, endorsements can be bought and sold. In fact, Jake Paul was recently found to be promoting NFT scams, and even Lil Uzi Vert was seemingly involved in a rug pull in 2021.
3. The NFT mint price
NFTs are generally priced in ETH. For some, a mint price of 0.1 ETH won’t seem like much. However, for newbies just getting into NFTs, $250 might be a bit too high. “As a fresh-faced rookie, that’s a lot of money to be spending on JPEGs,” Mitobe said. He continued by noting that you also need to ask questions like: is the project you’re considering buying into priced fairly, how much do the project developers stand to make, and where is that money going?
“Pick the projects that you think have long-term value. And be sure to determine what that value actually is,” Mitobe said.
When doing your due diligence on mint price, it’s important to consider prices established by prominent projects that were successful, like Doodles, Bored Ape Yacht Club (BAYC), Cool Cats, and World Of Women. Some PFP projects are charging anywhere between 0.25 – 1 ETH to mint a single token. However, BAYC originally all sold out at a flat rate of 0.08 ETH.
Additionally, projects that promote dutch auction sale mechanics (where a sale starts at a set amount and then drops over time to the final sale amount) should be considered with extra care. Projects that employ FOMO ramps (where the price increases, i.e., 1000 are sold at 0.08ETH/ea, 2000 are sold at 0.10ETH/ea, and so on) should be immediately be ruled out.
4. The project roadmap
When doing your due diligence on roadmaps, it’s important to remember that a project’s roadmap is not a promise and isn’t legally binding. Roadmaps, in many cases, are lists of things that the project developers hope to achieve once the primary sales have ended.
For an example of what these look like, here’s a look at what BAYC created for their roadmap 2.0.
If a project promises a lot in a roadmap — a collection-themed game, live events, free NFTs for subsequent projects, etc. — consider how feasible these deliverables are. Sure, roadmaps can be a great way to show collectors how a project hopes to grow, but they should be grounded in reality and not overpromise. Many scam projects made overly grandiose roadmaps in order to create hype. So you need to really consider what’s achievable.
On the other hand, no roadmap is just as concerning as an impossible roadmap. If a project has no future plans to speak of, that’s not necessarily a deal-breaker. For many artists, art is the utility. That is 100 percent fine. But if this is the case, the project founders should clearly spell this out, and it should be reflected in the quality of the art.
5. Community management
In 2022, most projects say they are community-focused. This likely goes back to one of the world’s most successful projects, BAYC. The founders of BAYC imagined their apes existing in an exclusive bar, accessible only to members of a club. In keeping with this idea, the founders put time and energy into fostering a real sense of community for their collectors. This tactic was remarkably successful and popularized the idea of community-based NFT projects.
Mitobe says that, for people new to NFTs, it’s important to investigate the ways in which the founders are trying to create a community, as it shows their dedication to the project. “For new people coming in, it comes down to the community aspect,” Mitobe tells nft now. “If you’re looking to throw money around, you need to understand what artists and developers are trying to create. Does it really makes sense?”
In other words, many projects say they are trying to build a community, but they don’t outline how they plan to do so. And none of their actions are actually focused on community building — they don’t do anything except talk about building a community.
Are the developers calling for floor sweeps? Are they banning members for listing below prices? Does the overall vibe of the community feel safe and welcoming? Without proper management, communities can quickly turn into an echo chamber that’s fraught with harassment. If a community has any of the aforementioned, it’s a huge red flag and may show the founders’ lack of dedication to the project. It’s a good sign that their only care is the money.
Final thoughts on NFT fraud
When it comes to researching a project for red flags and identifying NFT scams, overturning every rock can be a pain, but it’s invaluable in the end. Taking the time to investigate a project and the people behind it could end up saving you from a rug pull. This isn’t to say that wherever there is smoke, there is fire. But if something seems off or too good to be true, it probably is.
The truth is, digital goods are still widely unregulated. When things go south, it’s difficult (sometimes impossible) to get help. We can all stand to be just a bit more suspicious before jumping into a new project. It might end up saving you from a world of hurt down the line.