What’s wrong with NFTs? - A Deep-Dive into NFTs, Rug Pulls, and the Industry
Crypto has the potential to revolutionize the way we buy, sell, and trade goods with one another. Yet while cryptocurrencies like Bitcoin and Ethereum have become household names, many would-be investors are still struggling to “get” NFTs.
NFTs (or non-fungible tokens) are crypto assets that can represent both online-only and physical assets, and a lot of reputable markets have made it simpler than ever to buy and sell NFTs to investors. But as the NFT market rapidly rises to attract new investors, it’s also opened the door to a range of scammers looking to steal money and assets from others.
This guide explains what NFTs are, how NFT scams work, what’s wrong with current NFT projects, and how you can avoid NFT scams.
What is NFT as a technology?
Before we speed right into why some people don’t trust NFTs, let’s pump the brakes for a minute and talk about what NFTs actually are.
Simply put, a non-fungible token (NFT) is a cryptographic asset. Just like a cryptocurrency, a blockchain supports most NFTs, and they have unique identification codes and metadata to distinguish themselves from other NFTs and crypto assets.
NFTs are most commonly supported using the Ethereum blockchain. That being said, it’s worth noting that there are other blockchains that support NFTs, too.
Unlike fungible tokens (like cryptocurrencies and fiat currencies), NFTs can’t be exchanged or traded at equivalency. That means you can’t use an NFT to buy goods or services as part of a commercial transaction.
Fungible tokens are identical to each other, which is why you can use large increments of the same token type to make a purchase. So if you can’t pay for goods using an NFT, why would you want one?
An NFT is a digital representation of an asset. It can represent any type of asset. That includes digital assets like online artwork or real-life assets like real estate properties. One of the most common types of NFTs you’re going to come across are in-game items in video games like digital collectibles and avatars — but you’re also going to see things like event tickets and domain names.
From a creator’s perspective, NFTs give artists a unique and lucrative way to monetize their works of art. Thanks to NFTs, artists no longer have to rely on big art galleries and auction houses to sell their artwork. Instead, they can turn their art into NFTs, sell on an NFT marketplace, and earn a sizable profit instantly.
Artists can also program royalties into an NFT so that they’re able to receive a percentage of every sale when their artwork is sold to another owner. This is particularly useful for artists who don’t normally get a profit from future proceeds after an initial sale.
From a buyer’s point of view, NFTs are a quick and easy way to purchase an asset that could be worth a lot in the future (although there are no guarantees). (If you’re wondering how this process works, check out our post on how NFTs gain value.)
In 2021, the NFT marketplace grew to almost $41 billion in sales — and there have been some high-profile transactions, too. For example, Twitter founder Jack Dorsey sold an NFT of his first-ever tweet last year for a whopping $2.9 million.
But it’s important to note that thanks to some flaws and scams, faith in the NFT system has shaken lately, too. That’s why that same NFT Dorsey sold for millions in 2021 could only muster a bid of $14,000 after its new owner tried to resell the NFT in 2022.
What are NFT scams?
Just like any other asset market, quite a few scammers have started to exploit this budding market for non-fungible tokens recently.
NFT scams come in a few different forms, but they all have one goal: to con people out of their money. This can be done directly or indirectly by getting a person’s login credentials to access somebody else’s digital wallet or crypto wallet.
Unfortunately, it’s pretty hard to recover stolen digital wallet credentials or stolen money after a scam. To help you get an idea of what types of scams are out there, let’s take a quick look at different NFT scams.
One of the biggest NFT scam types is called a “rug pull.”
A rug pull is when a scammer attracts buyers by pushing fake NFT projects or NFT collections. In rug pulls, the creator promises buyers they’re going to make loads of money, and the scams are usually promoted heavily on social media.
But after the buyer has been reeled in and invested in the scheme, those promotions and the scammer’s online presence disappear overnight.
The scammer will turn into a ghost and vanish — along with the ability to sell the NFT in the future.
Phishing is nothing new in terms of scams. It works the same way with NFTs as it does with other online methods.
You’re probably familiar with phishing emails or pop-ups trying to get you to click on links and go to phony websites. You click the link, and the fake website asks you for your payment details and then uses those details to steal your cash right out from under you.
In the context of NFTs, phishing is all about tricking you into giving away your private wallet keys or crypto wallet credentials so that the scammers can steal your NFT collections.
In an airdrop, scammers use social media accounts to advertise NFT giveaways.
Those promotions will often claim to be giving away free NFT assets if you agree to spread the word or sign up for the giveaway on their websites. But when it comes time for you to claim your free NFT prize, the scammer will ask for info about your digital wallet so that they can send you your free NFT.
Instead of sending you a free NFT, the scammer will then use those credentials to sneak into your account and clean it out of any existing NFTs or cryptocurrencies.
Another way scammers are damaging faith in NFT markets is by creating and selling counterfeit NFTs.
With counterfeit scams, somebody will make a copy of somebody else’s artwork and then sell that counterfeit content on a legitimate NFT site.
Because that NFT was made using stolen or fake artwork, it has no value — but by the time the buyer of a counterfeit NFT has realized this, it’s too late. The seller has disappeared with the buyer’s crypto, and it can be incredibly difficult to trace the scam back to the counterfeiter.
What’s wrong with current NFT projects?
There are a lot of amazing NFT projects out there. But for every great project artists create, there are just as many scams or poorly constructed projects that don’t come with any utility at all.
With some of these failed projects, project owners have no real company, team, or even partners behind them. Sometimes they don't even have a web page — just a ridiculous idea of some sort of P2E game (or “play-to-earn game”) in the non-existing Metaverse. With these hastily crafted projects, NFT holders can earn Crypto when (and if) project organizers sell out all NFTs and build that promised game.
Unfortunately, it doesn’t take much searching to find some pretty high-profile rug pulls or failed NFT projects in recent years. Let’s explore a few.
The Frosties NFT project is a great example of what can go wrong in the NFT market. The Frosties NFT project promised investors a chance to earn a share of the huge revenues that'd be generated through a non-existent metaverse game.
Right after selling out all 8,888 pieces created, the investors discovered that the project’s developers deactivated all of their social media accounts and went totally dark.
In the end, the scammers escaped with $1.3 million worth of money from investors, and the culprits still haven’t been found. Right now, it’s looking like investors aren’t likely to ever get their money back.
Iconics was an NFT project supported by the Solana blockchain.
Iconics was supposed to distribute some 8,000 randomized pieces of 3D artwork to would-be investors — and in the Iconics pre-sale, a whopping 2,000 pieces of art were sold for 0.5 SOL each. At the time of sale, that meant each NFT was worth almost $140,000.
But instead of getting the artwork they were promised, Iconics investors just got a random collection of emojis in their wallets. The artist responsible (who investors think turned out to be a 17-year-old kid) then deleted the project’s Twitter account and switched off the chat in the Iconics Discord group.
Evolved Apes was another big NFT scam involving 10,000 pieces. Evolved Apes promised investors they’d get profits from a game that would let people battle it out and win rewards using different characters.
But just like a lot of other big rug pulls we’ve seen recently, an anonymous developer known as “Evil Ape” then turned around and made off with $2.7 million worth of funds that were supposed to be used for the development and marketing of the Evolved Apes project.
All of the project’s social media accounts were deleted, and it turned out later that none of the game’s competition winners had been given the NFT prizes they were promised.
It’s important to note that rug pulls aren’t the only thing wrong with the NFT market.
In other cases, there have been more traditional companies that may simply fail to wrap their heads around the NFT market and asset class before diving in head first.
For example, in June 2022, carmaker Chevrolet tried to break into the NFT market by turning a piece of art into an NFT and selling it alongside its brand-new 2023 Corvette Z06. In the end, the online auction failed to attract any bids.
These rug pulls highlight an issue with why most people buy NFTs in the first place.
How do NFT scams affect the NFT Space?
As a result of the prevalence of scams, many legit NFTs fail too. The entire space has become a bread and butter for scammers and hypercapitalists — hyped projects with zero utility. Today, in the media, we see more “rug pulls” than real projects, which has severely damaged the reputation of the entire NFT industry.
In June 2022, NFT sales totaled just over $1 billion in June. That represents the market’s worst performance since last year when sales were at $648 million. In January 2022, sales reached a peak of $12.6bn. The market is definitely hurting here.
Fortunately, there are many ways you can avoid NFT scams — and the more investors place faith in legitimate NFT projects, the more sustainable the market will become.
First off, you’ve got to use reputable NFT exchange markets. If it sounds too good to be true, it probably is. That means you should stick to reputable markets like Mintable, Rarible, OpenSea, and MakersPlace.
Next, make sure you never share your crypto wallet information with anybody else — and always inspect an NFT seller’s marketplace account before making a purchase. You should also be looking at their social media accounts to do a bit of due diligence through research.
It’s also worth cross-checking NFT prices and watching previous bids before you get involved in a project. Visit different trading platforms to check how similar NFTs are priced to make sure the potential purchase you’re looking at isn’t too good to be true.
If the NFT is a token tied to something of actual value, like access to software or an item in game, and it’s not overpriced, that’s also a sign of a low-risk and safe NFT.
Finally, don’t click on any attachments or links that look suspicious. This is an easy way to lose the NFTs or cryptocurrencies you’ve got — so don’t fall for basic phishing scams.
At the end of the day, NFTs shouldn’t simply be considered characters in P2E games in the non-existing metaverse or collections of strange-looking JPGs. NFTs are a credible technology for digital asset ownership — and NFTs have a lot of potential as digital assets.
While legitimate NFT projects offer some attractive benefits for potential investors, scams and half-baked schemes have hurt market confidence and made it trickier for people to know which NFTs are legit.
That’s why it’s important you understand how NFT scams work and how you can avoid them.
So, do you want to learn more about digital assets and how you can maximize your efficiency?
Check out the Stack blog. You’ll find loads of information on NFTs, digital technologies, product, design, business, philosophy, and everything in between.