NFT Scams / Rug Pulls - 6 Red Flags to Avoid - Guide for 2022

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March 15, 2023

TOP 6 Major Red Flags in NFT Projects

When you enter the NFT market as a newcomer, you will most likely encounter many NFT projects that sound almost too good to be true. It does not matter whether you have close to zero or years of experience, people still tend to ignore these easy to remember red flags to separate promising NFT projects from the shady ones. To ensure that you don’t make these massive mistakes by getting into a suspicious NFT project, we gathered TOP 6 red flags to not ignore by any means.

1. Undoxxed team

If you look at the project’s website and it does not have links to real Instagram, Twitter, or LinkedIn accounts, do not buy the NFT to prevent the possibility of getting scammed.

A doxed team, regardless of skillset or background, adds a layer of trust that there are real people building real projects.

Recommendation: Question their discord as to why there is no personal information included. If they cannot provide an answer as to why that satisfies your standards, stay away.

2. Fake Twitter or Discord followers/accounts

There are plenty of sources that will chat on behalf of the team on their Discord server. For example, Fiverr provides a message every min per hour just for $20. Different websites such as GetViral sell Twitter followers for almost no money that will create an illusion of a reliable following.

Recommendation: Do a quick audit, for instance use TwitterAudit. Look through engagement on posts to see if there are any real people or just bots. If the account has 120k followers and only 50 likes, it is a red flag. Also check if any notable people follow the account.

3. Artificial hype

Most shady NFT projects often purchase celebrity endorsements to generate unrealistic publicity around the project. Big names in the field of entertainment such as Thiago Silva can be hired for a silly amount of money to gain people’s attention in the sketchy project.

Recommendation: It is highly recommended to do some research. Dig into whether the partnerships are officially approved or just paid “partnerships”.

4. Unrealistic mint price

Hype-based pricing is certainly a real problem in the NFT space. The golden rule to identify a suspicious NFT project is to analyse the mint price. Behind a high mint price there is almost always the combination of hype and FOMO which drives the price unrealistically high. Many projects have nothing of substance to back their price and rely solely on “influencers” to boost the price. This results in investing money into those projects because of FOMO and losing everything when the hype dies.

Real community builders start the mint price at a reasonable level and do not extract all the liquidity out of the market. Just because the NFT project can demand a high price does not mean they should.

Recommendation: A project that allows the original minters to participate in an affordable way is what builds loyal supporters of the project to stick through the storm and lulls. As an opposite, projects that mint at ridiculously high prices often have difficulty finding support during tough times. Therefore, it is important to invest in projects you truly believe in.

5. Predatory tactics

Floor sweeps: Sweeping the floor in the NFT world means when a specific project buys all its minted NFTS at the floor price. The floor price is the minimum “ask” or the lowest price an NFT can be sold on the secondary market. It is the most popular metric for tracking a project’s performance over time and its relative success compared to others. As an emerging project, floor sweeping can be a method to attract newcomers by guaranteeing low entry points.

Banning members: Another predatory tactic to look out for is banning members for listing below prices. This means a member of the project is being kicked out of the community for selling their NFT at a much lower price than the fishy owners of the projects approve.

Echo chamber: A big red flag is the existence of an echo chamber. It is an environment where a person only encounters information or opinions that reflect and reinforce their own. This may limit the information the users consume and promote ideas relevant to the NFT project.

Recommendation: Step out of the chamber (Discord, forums etc) for a few days. This often allows for the head to clear so better judgement can be made.

Other popular red flags to watch out for are harassments of any kind, threats and piggybacking of popular projects.

6. Meta cliché

If the project fails to bring more than little innovation by introducing repetitive meta or roadmaps, be cautious. This can be an alarming indicator that the project is most likely going to take advantage of your money to cover its own interests. In addition, if the project fails to address legality concerns over securities and insurance of tokens, consider exiting the project.

Meta is easy to copy, and tokens can be launched only in a matter or hours. On the contrary, real economies take months or years to create.

The lack of ability to create proper Tokenomics or P2E for sustainability and longevity is also a worrying measure. For instance, the owners of the Bored Ape Yacht Club can participate in exclusive clubs and areas of the BAYC. This is a good way of thinking in the future and gaining people’s trust.

Tokenomics: The goal of a Tokenomic analysis is to understand the potential value of the project by considering all aspects of a token’s creation and management, including its supply, allocation, and distribution. The reason why Tokenomics is so important is that it helps to ascertain the future worth of an asset by giving an insight into the profitability of one asset over the other in the future.

P2E (Play to Earn): indicates a type of gaming that hinges on NFT technologies. For example, gamers can play video games and virtual worlds for rewards by making an initial investment in the NFT.

Identifying these red flags may be a long arduous journey of separating the real NFT projects from the quick cash-grabs, but once you understand the importance of it, success is guaranteed. Unfortunately, there are no blueprints to follow in this new industry, which means there are no right or wrong ways to approach a project.

Start by looking for niches and teams with the ability to execute. Find out who is the founding team, and how they work, what their values and grand vision are. If they show lack in respect, transparency, or communication, consider moving on.

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