The NFT Standard That Could Stop Rug Pulls
The unscrupulous, the unforgiving and the unwise are running roughshod over the Web3 industry – and the most vulnerable are paying the price. Could this new NFT standard hold the key to a safer future?
The Mint One podcast has been home to many discussions of both accountability and ethics in blockchain gaming and NFTs.
A “rug pull” – where a project is created with the intention of taking the proceeds and running – has moved from a vague and rare term to something rather familiar, thanks to some high-profile incidents in crypto.
This isn’t to say crypto is rife with criminal activity – it isn’t – but it is easier for a rug pull to succeed at the moment.
Then there is the term I’ve coined and jammed into every discussion since: “rug slip”.
This is where the creators of a project make mistakes that cause the project to crash and burn, but without the malicious intent of a rug pull. Although the victims don’t suffer the indignation of having been scammed, all other effects are the same.
What exacerbates this issue further is the amount of money flying around in crypto, with new blockchain games and NFT projects often attracting millions upon millions in investment from everyday folk.
This is a potentially explosive blend and has led to John and I regularly picking apart how we can improve the situation.
One direction would be to increase accountability.
Though not failsafe, the idea is that if people’s real identities were tied to the project they created, any rug pull or dubious behaviour would be immediately linked to their real-world person.
That might act as a deterrent, it might not – whatever the case, it brings about a problem singular to crypto: should blockchain users be forced to forgo their anonymity? It doesn’t seem very crypto-like, does it?
What we really need is a solution within the tech itself, as opposed to leaning on Web2 solutions for Web3 problems.
One path for this is to use a platform such as Nuggets, which offers a decentralised, reusable and interoperable identity verification.
This would allow users to verify who they are, without making it public knowledge. It’s seen as an important solution to many problems encountered by exchanges and marketplaces, for example.
But, what if we came at the problem of accountability and trust from an even more tech-based perspective?
ERC721R: The First Step to Safeguarding Everyday Investors
There’s a great many solutions to a wide array of problems hidden within Web3 that we’re currently working to discover.
The value of blockchain technology may be high – extremely high, even – but we’re only just scratching the surface of what we can do with it.
There are many benefits being tested as we speak, such as logistics, but then there are plenty of hypothetical uses yet to come to fruition, such as my suggestion for whistleblowing. However, even in our fairly simplistic uses of the tech, we’re stuck with the issue of trust.
Blockchain is said to be trustless, and in many ways it is, but that doesn’t mean the people and projects using it are.
There are myriad examples of projects – particularly blockchain games – where, through no fault of the investors, it goes belly up. This has had so many high-profile occurrences that often people are reticent to invest in or support brand-new projects.
This is where the ERC721R standard enters the fray.
ERC721R’s tagline is “Bringing Greater Accountability to NFT Creators” which it does through code in the smart contract. It’s main selling point is that it allows for trustless, full refunds by purchasers and minters within a set refund period, no questions asked.
ERC721R lists their 4 key benefits as follows:
- Preventing Rug Pulls: By adding an X number of days refund period, a project cannot perform a quick rug pull or not deliver on what they’ve promised.
- Greater Accountability: If the creators do not deliver, they’re held accountable by code, rendering their disappearance valueless.
- Protected Floor Prices: Prices cannot be tanked below the mint price as they could simply be refunded.
- Lower Risk: The buyer doesn’t have to have a reason to return the NFT for a refund; if they don’t like the direction the project is going or they have doubts, they can refund and walk away.
The essence of this standard is that it removes a lot of the trust involved in investing into a project early. When creators use ERC721R, they’re committing to delivering the results or facing full refunds.
One difficulty that’s often raised in this area is what a creator would do if they needed some of the money they raise to develop the project. Well, it’s customizable insofar as the creator could offer, for example, 75% refunds.
This is far from the perfect solution, but it’s a great step that offers a lot of value to the community. Furthermore, it raises another method to safeguard everyday investors, collectors and gamers from being victims to the unscrupulous and the naïve.
For NFTs and blockchain gaming to prosper, there needs to be some overlap with how things work in the world outside of crypto’s walls; some protection, and some alleviation of risk. The current level of risk in investing in new projects is untenable.
There will often be a familiar reply at this point, along the lines of “you should do your own research.”
This is true, but this fails to observe two things: firstly, DYOR is not infallible, no matter how well versed you are in crypto. There’s too many unknown variables and it’s too easy to escape without consequence.
Secondly, as a society, we must protect the most vulnerable. Those who are perhaps unable to perform the level of research necessary to effectively evaluate a project (as much as anyone can), for whatever reason that might be, are currently without any form of safety net.
Protecting those capable of undertaking thorough research before investing is important, but protecting the most vulnerable is essential if we want the space to continue to grow and succeed.
This is why we need to turn to the source of the industry in the first place: tech. ERC721R is the first standard (at least that I’ve seen) that goes a substantial way to protecting today’s NFT buyers in a truly trustless and secure way.