One of Netflix’s top hit series is “Squid Game” where the characters play children’s games and wager their life to win the grand prize at the end. Inspired by the” Squid Game”, the cryptocurrency token Squid Game (SQUID) plummeted to zero, leaving many investors with nothing. According to CoinMarketCap.com, the meme coins launched on October 26th increased by more than 17,000% in one day. The peak was around $ 2,862 but fell to a fraction of a cent within minutes. This is known as a “rug pull” in the crypto circle.
Table of Contents
1. What is a Rug Pull
2. Rug Pull example: Big Daddy Ape Club
3. Rug Pull example: Balloonsville
4. Ways to avoid Rug Pull
5. Concluding Thoughts
Part 1. What is Rug Pull?
The term “rug pull” is seen in the NFT circle more and more often. So why the heck is it called Rug Pull and what does it represent? The name comes from the phrase to pull the rug out from under (someone), meaning to withdraw support unexpectedly.
Rug pull is the action that occurs when the creator of the token abandons the project and liquidates their cryptocurrency into real-world cash. They quickly drain liquidity from the product, effectively driving the coin’s value to zero and leaving other investors holding the bag in an apparent scam.
Rug pulls are mostly associated with Decentralized Finance (Defi) projects which provide liquidity to Decentralized Exchanges (DEXs). But as NFT is becoming more popular, Rug Pull is seen in the NFT space as well.
Part 2. Big Daddy Ape Club
One of the biggest rugs on the Solana blockchain history is the “Big Daddy Ape Club” NFT collection, liquidating with 9,136 SOL which is around 1.3 million USD at that time. The project initially issued 2,222 NFTs on the Solana blockchain. These were later to be listed on NFT’s buying and selling platform, Solanart. However, the project never issued the NFTs in question, despite massive investment from the community.
On January 11th, when it was minting time, the creator just disappeared. No tokens were created, meaning no NFT was given out. According to Decrypt, like any other rug pull, Twitter accounts, Discord servers, and the official website of the series have all been closed.
What made this rug even more notable is that the creators of “Big Daddy Ape Club” vetted themselves with Civic (a San Francisco-based decentralized identity verification company) meaning this project was doxed by officials. The next day, Civic announced that they are “in direct contact with US authorities” to track down the people behind the scam.
In the end, after various investigations, people have managed to track down the funds from the Solana wallet of the creators of Big Daddy Ape Club. The funds were transferred to Binance, a trading platform. BINANCE platform announced that it had blocked the funds and was working with law enforcement to track down the scammers.
Part 3. Balloonsville
The Balloonsville NFT series, a 5000-item NFT collection, was a successful launch and allegedly, the project made more than 17890 SOL which is around 2 million USD before the rug pull. The Balloonville NFTs were minted via Magic Eden, a marketplace for NFTs on the Solana blockchain.
Trading platform Magic Eden announced it would compensate some of the victims of the Balloonville rug pull. The platform intends to use 5,000 SOLs to compensate first-time buyers (people who minted during mint ) of the NFT if they have sold their assets for less than the price floor.
The scammers announced their rug pull on Twitter. The messages of the scammers can be read on screenshots taken by several users before the account was deleted. In it, they accuse the Magic Eden platform and called them “cash grabbers”. The creators announced that Magic Eden would have intentionally overlooked three “red flags” instead of stopping the project. The Red Flags were that Magic Eden did not carry out an identity check on them. The platform was not made skeptical by its American accent. The initiators refused to explain the feasibility of their concept. Magic Eden overlooked all of these despite being the number one marketplace for Solana NFTs.
Part 4. Ways to avoid Rug Pull
There is no exact way to prevent people from being rugged, but there are several ways to take precautions to reduce your chances which are shown as the following:
Research the Teams behind the projects
Not all NFT collections have a doxed team, but many of the popular collections do. Many large NFT collections are created by the crypto community or trusted people in their respective communities. For example, pop artists who have jumped into the world of NFTs, or artists who have previously worked on other NFTs.
Research on the Community
Are there any well-known people, or a community of crypto enthusiasts? These people are usually more experienced and know what to look out for, so they may have a better idea of what is going on. Don’t fall for big numbers (like 100k Twitter followers), make sure the engagement is from real people who know their stuff.
Only click and mint on Official sites
Be sure to double-check on what you click. Connecting your wallet to a random website is very dangerous! Only click on official links provided by the team and always check the legitimacy of the source.
Check out the Roadmap
Make sure the roadmap is realistic. Many rug pull schemes include an exciting roadmap to get the community fired up, but aside from the fact that they won’t happen, they are often too difficult to execute.
Look out for red flags
- Inconsistencies in details, e.g. The amount available to mint does not line up with the previous advertised total mint number, constant price, release date change, etc.
- Non-expert / unresponsive team
- Confused or nonsense answers to community questions
Asking for your personal information
Do not give them any personal information that could lead to your account being hacked. Like banks and other trusted institutions, legitimate NFT projects do not require personal information such as mnemonic phrases.
Part 5. Concluding Thoughts
As the NFTs market continues to boom, scams are also on the rise. Last year, the estimated value of rug pull scams totaled $2.8 billion, according to Chainalysis.
It’s easy to get caught up in a rug pull due to the high rate of fraudulent activities nowadays. Therefore, investors should thoroughly understand the volatile and sensitive market before investing in NFT. DYOR (do your own research)is KEY! You can achieve this by reading document releases, checking technical information, tokenomics, and reviewing white papers.
Sources:
https://markets.businessinsider.com/news/currencies/nft-frosties-rug-pull-crypto-discord-opensea-non-fungible-tokens-2022-1
https://www.fool.com/the-ascent/cryptocurrency/articles/squid-game-crypto-creators-steal-millions-in-rug-pull-heres-how-to-avoid-scams/https://decrypt.co/90833/solana-nft-project-rug-pull-big-daddy-ape-civic
https://nftevening.com/balloonsville-admit-to-being-a-rugpull-then-blame-magic-eden/
