Lions, tigers and NFTS, oh my! There is no shortage of news articles and blogs that categorize NFTs as useless scams but the real question is: Are NFTs a scam, or are the creators behind some of these NFT projects to blame?
There are two major scam categories currently happening in the NFT space: rug pulls and hackers. A rug pull is a Web3 term that refers to an NFT project promoting promises of high utility to the community but after said project is launched, they don’t keep those promises and essentially ghost the NFT holders. Another definition of a rug pull refers to the infamous “pump and dump” — creators pump the project using fake bots in Discord so it seems like more people are interested than actually are, or they pay celebrities to promote it, then dump or leave the NFT holders with nothing.
There is a recent story of two 20-year-olds who scammed $1.5 million from their NFT holders through a rug pull NFT project. The “Frosties” project creators abandoned it, shut down their website and essentially ran off on the plug — I mean, their investors. The two creators were charged with wire fraud and conspiracy to commit money laundering for selling a bogus NFT project. They have since been arrested, and they are facing up to 20 years in prison if convicted. The sad part about this story is that they were planning on executing another rug pull just a few days later.
Despite legal consequences, there are creators who continue to put out rug pull NFT projects — but are they the only ones to blame? At times, they hire celebrities or influencers to promote their projects to their millions of followers without providing fans with a proper education regarding the risks of NFTs. Now, these celebrities may have no idea that the project is a scam or even know what an NFT is, but it is their job to do their due diligence on things that they are promoting, right? The only way to acquire influence is to have a community of people who are swayed a certain way by what you say/post through a trusted relationship. If there is no trust, then the influence goes out the window, and if that’s the case then why are they willing to risk that? MONEY.
Knowing that your favorite influencer could be steering you down the wrong path when it comes to NFT projects, how do you protect yourself from rug pulls? Here are a few red flags you should look out for and questions you should ask yourself before investing.
- Who is the creator? A lot of people in the Web3 community use NFTs for their profile photos, so it may be hard to figure out who someone is, but if the creator of the project seems to be so anonymous that they do not have any affiliation with anyone in the current Web3 space, that may be a sign that they are plotting a scam. On the flip side, if the creator of a project is clearly stated, and they have been a part of previous rug pulls, or they are associate with someone who is a known scammer, it’s probably best to not invest in their project.
- What is the purpose of the project? Having a clear understanding of the purpose of an NFT project is key because it allows the community to hold the creator accountable. For instance, if someone puts out an NFT project to empower women — although it’s good sentiment, the scope is really broad. They haven’t defined how they will empower women or how they will allocate the funds from the project to invest in resources for women.
- Scam influencer marketing: If an NFT project is being promoted by a celebrity or influencer who has no stake in the Web3 space, that is a red flag and a sign that the NFT project creators paid them JUST to lure their fan base and convince them to invest in a project they have little to no knowledge about.
- What type of utility are they promising? Depending on the type of NFT, project holders are expecting some kind of utility other than the NFT itself after purchase. Take a look at what the roadmap entails (if they have one) and the perks they are promising. Do the promises seem reasonable? Do the creators have the proper team to deliver said incentives? Are the promises so general that you won’t be able to hold them accountable? These are the questions you should be asking yourself.
Now when it comes to hackers in the Web3 space, they have three main areas they try to hit: Discord, social media and NFT marketplaces. Discord is a chat app that is used by NFT project creators to keep in touch with their community, provide updates and network. But, it is also the playground for hackers to steal cryptocurrency and NFTs from people in Web3. A recent Discord hack happened with Ozzy Osbourne’s NFT project, and his holders lost out on thousands of dollars. Osbourne provided a new Discord link to his community but left the old one up in a tweet on his account. Hackers went into his old Discord and posed as the community manager, then posted a scam link that sent users to a phishing site to connect their crypto wallets. This resulted in folks losing out on a lot of money. Now, I am sure Ozzy Osbourne had no intention of this happening and didn’t think leaving one tweet up would result in his fans being scammed, but does he have any liability in this situation? Acting on good faith, you would think he would AirDrop money to those holders to rectify the situation, but legally he is not obligated to do anything. If he had a trusted team who is well-versed in the Web3 space and knows not to leave old Discord links up due to the risk of being hacked, could this have been avoided? Maybe, but this is why education about the Web3 space is important not only for consumers but also for creators. To stop yourself from getting hacked on Discord, be sure to follow verified social channels of NFT project creators to make sure you are clicking the right link. Don’t click any link in the Discord channel that is not posted by the official community manager, and don’t click random links that are DM’ed to you.
We are all very familiar with social media accounts getting hacked. It seems as though every day one of our friends send us a weird message about flipping money — and then comes the post saying they got hacked, warning you not to click any random links sent to you. But how does this affect NFT projects? Recently, scammers hacked into Bored Ape Yacht Club’s Instagram and stole $1 million worth of NFTs from their followers. The hacker posted a scam link to mirror the website, and it prompted users to sign in to a transfer form at which point their wallet assets were transferred to the scammer’s wallet. The hacker stole approximately 133 NFTs from supporters. That said, Bored Ape Yacht Club creators did send free tokens to those who were affected. Was the liability of that scam higher or different than Ozzy Osbourne’s situation? Probably not, but because the creators tried to rectify it by sending free tokens, the trust factor between them and their community was not diminished. Protecting yourself from social media hacks can be tricky because they are verified accounts but before you click a random link posted, I would double check with the other social media pages and even Discord to see if the link is a scam. Most projects post the same info across different social media platforms so if you only see it on one, then that is a red flag.
NFT marketplaces are digital store fronts where you can buy and sell NFTs, but they are also another hotspot for scams. Opensea is the most popular NFT marketplace, and they had a recent hack that saw $1.7 million worth of NFTs stolen. Users were able to hack the site by completing a partial smart contract that pushed funds into their own wallets. The attack took place while Opensea was updating their smart contract system. This type of hack is something that is hard for people to protect themselves against because you have no idea when it could happen. Thankfully, Opensea has been trying to rectify the situation with those who were affected.
So, what is the reason for high scam rates? LACK OF EDUCATION thanks to social media NFTs spreading like wildfire and people getting FOMO from seeing teenagers become millionaires by selling an ape photo. Naturally, everyone wants to hop on the bandwagon and get a piece of the pie, but the problem is that they are doing so without having any knowledge about the Web3 space. This is why I often preach to those wanting to get into Web3 that the first step is education — so you know what you are doing and so you can protect yourself from potential scams. As a thought leader in the space, it is your responsibility to educate people not just about your NFT project but the foundational aspects of the Web3 space. Now, everyone doesn’t share my same sentiments on this topic. Many NFT project creators only want to market to current investors in the Web3 space. They don’t want to take the time to educate potential investors who are interested but don’t have the proper knowledge to take the jump. This is a disservice not only to the ROI of the project but also to the ultimate goal of mass adoption of Web3.
But, at what point do we hold ourselves accountable for being scammed? The internet has been around for a while, and we all know by now not to click random links on sites. We also know that we should research a business before paying for its service … so why shouldn’t the same standards apply in Web3?