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Rug Pulls in the NFT Space – How to Protect Yourself

A lot is happening in the NFT space with many players coming in. With all the good, there are also some bad. Of course, fraudulent activities are not exclusive to the NFT space. However, there is a growth in the number of NFT scams taking place in recent times.

NFT rug pull is one of the schemes that scammers use to defraud unsuspecting investors in the industry. So, what is rug pull and how can you protect yourself? 

Rug Pull: What is it?

Rug Pulls refer to a scenario where an NFT team abandons their project and disappears with investors’ money. It is a situation where a group of people behind an NFT project deceive investors into parting with their money and then disappearing without delivering on any of their promises.

The operation of these scammers involves releasing a limited collection of NFTs to whet the appetite of investors in anticipation of a bigger project. The team hypes these NFTs with promises of exclusive benefits, such as high rewards in blockchain games, exclusive access to project events, and merchandise.

They sometimes go as far as paying influencers to promote their NFT collections or host giveaways to generate a buzz and engagement for the project. After collecting sizeable investors’ money, they disappear.

Sometimes, rug pull happens very fast and in some cases, it happens slowly as the team stops talking about the project and leaves it to die a natural death. 

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Rug Pulls: How to Protect Yourself

No one is naturally immune to rug pulls because no one knows the mind of NFT project owners. Sometimes, they come out big with a lot of buzzes and you assume they are real but before you know it, they disappear.

So, is there any way you can guide against being caught in a web of a rug pull? Well, you can. Here are some tips to help you protect yourself from ever experiencing a rug pull.

  • Extensively Research the Project Team and Community

Doing your due diligence is very critical before you invest in any NFT project. It is even more important if you don’t want to fall victim to a rug pull. Thoroughly research an NFT project, including the team and its community, before you invest in it.

Take the time to check the social media channels of the project, including Twitter, Telegram, and Discord to see the level of activities. Projects with a sizable community and engaging platform are often reputable.

You should also not forget that many projects can use bots or create fake accounts to increase the number of their communities. If the engagement on the project’s post is lower than you would expect from the number of their following, then take that as a warning sign.

Also, take the time to understand their development and how they deliver on their roadmap. Do they have a professionally-looking website? You can check out some reputable sources that are affiliated with them. 

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Review their Roadmap

NFT projects provide their roadmaps to their communities. A roadmap entails the detailed goals and strategies of the project. Usually, it should detail project milestones, plans for growth and marketing, and short and long-term goals. If you suspect anything amiss on the roadmap, then don’t discard your intuition.

Most projects that use rug pull schemes usually have glowing and ambitious goals that are almost impossible to execute. You should stick with NFT projects with scalable strategies and realistic goals. While it may be a tad more expensive, investing in established NFT projects is a better deal.

Review the Project’s Liquidity

When an NFT project has low liquidity, it is difficult to trade your token into other assets or real cash. You should review the trading volume of the project to measure its performance in the marketplace.

Projects with high trading volumes usually have many users trading their collections. You should stir clear of projects with a small community, low liquidity, and low volume. They can easily carry out a rug pull on their community.

Final Thoughts

More new NFT projects are launching daily with exciting offers and promises. With this increase also comes an increase in rug pulls. To protect yourself, make sure to watch out for signs. Your ability to recognize red flags is the first step toward avoiding getting caught up in them.

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