As non-fungible tokens (NFTs) take off in popularity, so do the scams that are taking advantage of investors interested in them. In this episode of "The Crypto Show" on Motley Fool Live, recorded on Feb. 9, Fool.com contributors Travis Hoium and Jon Quast discuss how investors should be cautious as the new NFT space continues its rapid development.
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Travis Hoium: This gets to our Balloonsville NFT. Magic Eden is a secondary marketplace on the Solana ecosystem. They have launched their own, what they call Launchpad, which is where you can mint NFTs, and Balloonsville NFT was one of the projects that they did last week, and it was very clearly a rug pull, which is when basically they do the mint, the money goes to the developer's wallet, and then the developer takes everything down and just disappears. This is still unfortunately commonplace in the NFT space. It's just another reason that we say be very cautious. As much as there's really great and really disruptive things going on, there are also really bad things. This is the mid-'90s on the internet. That's where we are in the development of the space. Magic Eden did not do the due diligence that I think everybody had expected that they would, and the developers basically ran off. Same thing happened with Big Daddy Ape Club in January, I guess. There was another rug pull that happened on Solana. These are getting attention, and the secondary markets specifically are trying to figure out ways to combat this. But given the hype in the system right now, it's really tough to know what's real and what's not.
Jon Quast: At least with Balloonsville, my understanding is, the people who minted the project, so they bought that initial Balloonsville NFT, one of the 5,000 pieces, they at least got to keep their image that they bought. With Big Daddy Ape Club, they didn't even distribute the images to the people who were buying that. It just sent the money and the images never showed up in the account and that was that. They disappeared. Now, Magic Eden is trying to make this right. They're trying to do what's called a reverse rug pull. Basically, they resurrect this project. They take it out of the hands of the original creators, redo the thing. Everyone who bought the image from the start, it's like they give it new funding, give it new life, and try to fulfill the original intention of the people who are now gone.
Hoium: Yeah. They basically tried to give everybody their money back if they minted. You can do that after the fact, but we shouldn't be at the point where we're having this happen on a semi-regular basis at all. That's really one of the challenges in the space right now. There's no great solution for it. It happens on Ethereum, it happens on Solana. It happens everywhere in NFT space, and there's no great framework right now. But again, we saw this in the '90s. Think about the companies that IPOed [laughs] and they were just IPOing based on this "we have this number of eyeballs." There was no real business there. Now, we're just seeing it in NFT space. As this matures, I think this could become less of a problem, but definitely something to be very wary of right now.