NFT fraud and how to avoid it
There have already been several notable NFT scams over the past year. For example, one criminal under the nickname “Evil Ape” created a series of NFT Evolved Apes only to expose zealous investors and escape with 798 ETH tokens.
Other scammers founded the company Solana Towers to sell virtual apartments in the metaverse. Unfortunately for those who bought into this idea, the ”developers” of virtual real estate robbed them of 1,881 SOL tokens, after which they disappeared. Unfortunately, there are other types of fraud.
Fraud in the field of NFT has various forms, from “pulling mats” to overly contrived sales offers. We’ve all faced overblown sales offers, from multi-level marketing promoters to used car salesmen. But for those who are not familiar with this term, let’s first consider “Rug Pull”.
Pulling out the mat is the same as it sounds. It describes an event when project creators quit it and leave with a profit. But don’t confuse a failed project with a Rug Pull. If the project failed, it does not mean that it was a deliberate “pulling of the rug” or another scam with NFT. The NFT market is volatile, and things can quickly go awry, even for teams with good intentions. That’s why project research is needed.
- Research in Discord
Before investing in NFT, check out their community channel via Discord. Discord is one of the most important steps on your way to understanding NFT enterprises before investing. You can get an idea of the community by following the topics of conversations and interacting with other participants.
The first thing to check is the number of participants. If an enterprise recruits a large number of participants in a short period, this can be a potential alarm signal. This is due to the fact that it takes time to create a grassroots community. Stable growth in the number of members is a more likely and better scenario. Or you may see an enterprise that will take years to gain thousands of followers, and then suddenly dramatically increase its growth rate after reaching critical mass.
However, if you see that a channel with 150,000 participants appears out of nowhere in Discord, this should make you wary. You should proceed with caution because the channel may be full of fake accounts and bots.
- Communication with the creators and participants of the project
If you have any questions about launching NFT, contact the creators. They should at least be present in Discord. When answering your questions, pay attention to how they answer. Are they explicit? Or are they evading the answer and simply shifting the conversation in a different direction without answering your question?
Also pay attention to the tone in the responses to fair criticism. If the questions are reasonable, don’t expect a hostile reaction. Founders who work for the future will be more interested in creating a long-term community and will answer questions naturally, to the best of their abilities.
On the other hand, scammers will be more interested in having their members focused on the hype about getting rich quick, rather than on the technical aspects of the project. If your questions can lead to exposure, and alert other members to what’s going on, it might scare them. In this case, unethical leaders will try to ban you.
If a team expels people from their Discord channel for asking reasonable questions, this should already cause you concern. You should only participate in enterprises with open and straightforward leaders, not secretive ones.
- Fake members and spam
When studying Discord, you should see meaningful conversations, not overblown discussions with fake participants and spam. Be careful with “corrupt” language, such as “here comes the next CryptoPunks!”. An abundance of corrupt rhetoric, as a rule, accompanies weak projects.
Suppose you feel that the project leaders are too carried away by the hype, and the participants absorb it. This does not necessarily mean that all participants are fake. The community can buy into this, as it feeds their own fantasies of quick profits. If your questions reveal some obvious issues that will ruin their fantasies, community members may also accuse you of spreading FUD. Therefore, use your judgment to determine whether the community is too emotionally interested in this project?
- Twitter Followers Research
You can use the same rules when researching Twitter. However, in this case, you should first check the number of followers. The founders can brag about the number of subscribers, but you have to make sure that a significant portion of them are not fake.
Besides, beware of Twitter messages that come unexpectedly. If a random NFT project notifies you of an impending crash via the DM, check to see if any of your subscribers are following it. If not, and you notice that the NFT Twitter account has gained an unusually large following for such a new venture, consider it a wake-up call.
Legal projects will not ask you through DMs or recruit fictitious subscribers to increase their number. They will develop at the expense of organic interest.
- Low quality code
If the project passes the review in Discord and Twitter, this is a good start. But if you are investing a large amount of cryptocurrency in a little-known project, perhaps you should take another step forward to avoid fraud with NFT.
Poor coding can lead to numerous problems, such as bugs and exploits for the mint. However, detecting code errors is not a skill that beginners possess. Therefore, the best solution is to follow the experts in social networks who understand such things. If they tweet about problems with the NFT code, you should listen.
If you are more technical and can study the code, then, of course, do it. The smart contract address is where to start.
- Security audits
If you participate in NFT, choose projects with proven smart contracts. Smart contracts that have not passed a security audit are more risky. In the end, even proven projects are hacked. But they have at least taken some basic security measures. However, do not think that every project that has not been audited behaves recklessly.
Currently, all security audit firms are overwhelmed with excessive demand. Many teams want to launch a project, but they don’t want to wait forever for a security audit before entering the market. Thus, many DeFi projects, including NFT, take significant risks in order to enter the market faster.
- Inflated roadmaps and promises
It will be better if you are also on Coinmarketrate.com, pay attention to overblown roadmaps that make vague promises. Such promises may include statements that the characters of the NFT project will soon appear in a video game or will be integrated with a part of the digital earth in the metaverse. Remember that the design of high-quality video game can take a few years so beware of short-term promises about inclusion in the game.
Also, promises to buy land in the metaverse can be very vague. Such statements can be compared with the promise of a developer to purchase land somewhere on the South American continent. If such vague promises cause alarm, you can ask a question in Discord.
If you’ve discovered that a video game is definitely in development, here are a few more points to check out:
If the plot of the game does not make any sense to you, consider it a risky investment.
Check the biography of the game developers to make sure they are legal. Find out if they have developed other NFTs before. The lack of a track record increases the likelihood that the project will fail.
To summarize, below is a short list of what you should pay attention to before diving into NFT.
- Anonymous commands
Beware of anonymous commands. If the team plans to “pull out the mat”, of course, they will want to remain anonymous so that no one can track them. However, this factor is not necessarily a harbinger of trouble. Some developers may prefer privacy. So if the codebase is reliable, the anonymous team may turn out to be nice guys.
- Social channels
Make sure that the team not only has a website and social channels, but also conducted several interviews. Have you ever wondered what are the best cryptocurrency YouTube channels?
- Road map
A team with a roadmap is a good sign. Fraudsters intending to commit theft can also come up with a fictitious roadmap. But when there is no roadmap at all, it’s even worse.
- Tokenomics and Partnership
Make sure that tokenomics makes sense in the long run. You don’t want to participate in the “pump and dump” scenario. Therefore, make sure that the developers, founders, partners and venture investors of the team will not be able to dump their tokens at once and bring down their price. Otherwise, they can deceive you right after you invested the money.
- Exorbitantly high prices for tokens
When determining reasonable coin prices, there is no single correct answer. However, if the NFT release price goes beyond the norm for comparable projects, pay attention and ask why.
- Low quality art
If you find an NFT project with art that looks like some paid “artist” thoughtlessly painted it for the sake of quick earnings, it will not retain its value. Yes, art is subjective, and garbage for one person is a treasure for another. But if the art looks ordinary, then the project is likely to be ordinary.
- Purchase maximums
The number of NFTs that one user can purchase must have limits. The lower the limit, the better, and five is an adequate ceiling. Otherwise, if one buyer can snatch a large amount of NFT in one transaction, it can suppress community participation and possibly destroy the project. Large limits or their absence only contribute to the dominance of whales, when a small group of investors can distort market prices.
In general, many of the above steps may seem too tedious. After all, who wants to waste time analyzing NFT when it’s much more interesting to “get in” before the crowd swoops in and raises the price.
Investing in NFT can be extremely profitable, but before succumbing to FOMO and entering the game, it’s worth thinking about the risks. Most importantly, if you have time to reduce some of the risks, why not do it? Some of the problems you have identified will automatically destroy the deal, while others will not. However, all of the above issues are worth considering.