With the non-fungible token market booms recently, the number of NFT scams soars simultaneously. While traditional scam methods like phishing scams and malicious pop-ups exist, this article is going to focus on how to spot phoney NFT projects or rug pulls. Here are some tips to avoid NFT scams.
1. Anonymous Team
The first red flag in investing in NFTs is an undisclosed team. An undisclosed development team is one of the crucial red flags, and it is relatively easy to spot it compared to other signs on the list. A doxed team provides confidence to the potential investors and a better understanding of the team’s background and capabilities to execute the NFT project. Investors could therefore check the credentials of the team members. Investors should be skeptical of any NFT project with an undoxxed team, and request an explanation from the team through social platforms, like Twitter and Discord.
2. Artificial Hype
When evaluating NFT projects, be aware of artificial hype and fake endorsement on their social media. There are ample sources that allow scammers to buy fake followers, discord level-ups or even celebrity endorsements. Investors could go through websites like TwitterAudit to see how many of the NFT project’s followers are real. Sadly, checking whether the discord interaction or celebrities’ endorsement is real is easier said than done. Nonetheless, investors should be cautious about hype in NFT projects, and put some effort into researching the genuineness of the endorsement and community interactions.
3. Counterfeit or Plagiarism
One of the concerns regarding NFTs is counterfeits and plagiarized artworks. Luckily, trading platforms like OpenSea and Rarible offer the verification label (blue ticks for OpenSea and yellow ticks for Rarible). Such a function allows investors to buy artworks that are truly created by the artist. Otherwise, the NFT could be worthless as soon as the crypto market realizes it is a counterfeit. If the trading platform does not provide anti-counterfeiting functions or labels, check the artists’ social media or even get in touch with the artist to ensure the NFT is a genuine art piece rather than plagiarism done by scammers.
4. Centralized Storage
Investors often forget buying an NFT does not necessarily mean you own the art piece. If the image is not stored in decentralized storage, say stored in a centralized server, the person owning the server could change the content within the server anytime. Websites like Check My NFT provides investors with a means to investigate the storage location of the desired NFT by inputting the ERC-721 contract address and token ID. Sometimes, such information could also be found on a marketplace like OpenSea.
5. Tokenomics Loophole
The tokenomics loophole is one of the most complicated red flags listed in the article. The reason behind this is loopholes are different from one project to another project, and they are not easy to spot unless you are experienced and well educated on the technical side of NFT. Mekaverse, an NFT project with more than 200 thousand followers on Twitter, is a good case in point. The project had no proven randomness (which allow the development team to designate a certain NFT to a certain wallet, and the rarity ranking is revealed in the case of Mekaverse, meaning people could “request” an NFT with high rarity), and the unminted tokens were transferred to development team’s wallet without notice, rather than being sent to active members, supporters and for future events, as promised in Mekaverse’s announcement. The example illustrates the difficulties in spotting all the loopholes in tokenomics as they could be extremely technical to most investors.
6. Wash Trading & Sleepminting Activity
Another red flag on the list is wash trading and sleep minting activity. Wash trading, where the trader is acting as both the buyer and seller in a transaction, could create hype in a certain NFT project and artificially bump up the asset price and trading volume as mentioned in the previous article. Sleepminting allows scammers to mint an NFT to a well-known artist’s wallet and transfer it back to their wallet, tricking other investors into believing that the NFT is a genuine art piece by the specified artist, consequently increasing the scam NFT’s price. While wash trading could be noticed through a substantial time of investigation on trading activities, sleepminting is even trickier to detect as trading platforms have also been deceived in the past. Forta Explorer is one of the tools for warning investors of such malicious activities. Although platforms do not guarantee success in detecting NFT scams, they do provide an extra layer of safety for investors.
7. Meta Cliché
We put meta cliché at the bottom of the list as it is not as indicative as the other six red flags mentioned. While scammers will most likely try to copy others’ meta or tokenomics, being repetitive in an NFT project’s documentation or roadmap does not necessarily mean it is a scam. Nevertheless, an investor who has done due diligence would not want to invest in such a project because, no matter whether it is truly a scam or not, a cliché NFT project is probably not an ideal investment opportunity.
While the mentioned tips seem to be a good blueprint to survive in the NFT space, there are no everlasting rules of thumb in such a situation, particularly with scammers being more and more creative day by day. Sometimes, even experienced NFT collectors are scammed. To navigate in the NFT market, investors are recommended to perform thorough due diligence and avoid making investment decisions in an echo chamber.
By Arthur Kwan and Ezreal Kung at Art of Trades
Join our professional community: https://discord.gg/vQ86KykhM2
Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. The content created by Art of Trades is for educational and informational purposes only and should not be construed as professional financial advice. Investing in cryptocurrencies is highly risky and speculative, and this article is not a recommendation by Art of Trades or the writer to invest in cryptocurrencies. Please do your own research and use your own judgment before investing. We shall not be liable for any losses that may arise from your use of the content created by Art of Trades.
Art of Trades is not a financial institution and does not provide any financial products or services. The publishers of Art of Trades are not brokers, dealers, or registered investment advisors and do not attempt or intend to influence the purchase or sale of any security. Art of Trades makes no representations or warranties as to the accuracy or timeliness of the information contained herein. Art of Trades and the author may or may not own cryptocurrency.