A handful of months back, a certain aspirational blue chip NFT PFP project (which I happen to generally like) was in particularly hot water for certain allegations that one of the anon-founders had, in a past life (past anon identity), rug-pulled (“rugged”) the funds from another NFT project he had built previously.
Despite this project being on a complete roll at that time - successfully shipping a new side collection, regular community updates, IRL events, and having otherwise a pretty solid execution track record for the short life of the project - the allegation of past indiscretion had the Crypto-Twitterati at full shitstorm, and this totally tanked the price of the project.
I really don’t mean to pick on this project specifically either (again, I am fond of the project and a holder), they are just a recent example in a pretty spotted track record of the NFT space. Indeed, projects get accused of this all the time for things less egregious than outright theft of funds.
The fear of both “rugging” (direct theft of funds) and even “soft-rugging” (misuse, mismanagement, mishandling, or otherwise even just failing to execute successfully with the funds) are so pervasive that they hang as daggers above the heads of collectors and creators alike in the NFT market.
As I reflected on the phenomenon, it became clear that the space really wasn’t asking the right questions here.
We shouldn’t have to ask:
Am I going to get rugged?
We should instead create a culture of building and collecting under the premise of:
How do we make this NFT project un-ruggable?
It’s obviously impossible to make things infinitely incorruptible - the intersectional force of human avarice and ingenuity theoretically knows no bounds - but… are there tools we could be using and cultural precedents we could be setting to significantly mitigate the obvious rug-vectors?
Methinks yes, definitely.
The space is sufficiently young that it’s not sooo surprising that not much is being done yet, but there’s a ton of easy and obvious stuff we should adopt and demand of the NFT projects we collect from.
The NFT projects of the future, even small “indie” projects, will have much more explicit terms of engagement with their community, clear sustainable treasury policies, and a much better use of the various DeFi tools at their disposal.
Is it even possible to rug an NFT project?
Before we dive into some of the more tangible solutions here, there’s a bit of a cultural discourse needed as an aside first.
The idea that it was even possible to rug-pull an NFT project is actually a relatively new phenomenon. Certainly it’s a concept much younger than the span of the NFT space.
Early NFTs, at least the ones we see in something like a Profile Pic (PFP) project, were largely thought of as Art Projects. Collectors purchased these things for nebulous reasons like status signaling and culture (or, the ability to otherwise sell them in the future to someone who valued the NFTs on this basis). Indeed, this is how most of us early collectors got our start.
NFTs back then existed for the sake of existing, the purchase of the JPEG was the delivery of the value.
We literally bought that shit because we thought it was cool.
That was it.
dickbutts are what they are. We don’t need roadmaps or founders and can’t be rugged. Their existence is all they need for success.
- tenjed, NFT OG + CryptoDickbutt collectoooor, via DM
“Roadmaps,” the idea that the creators of the project remain on the hook to deliver future value to the project in some way, are not originally native to the NFT space.
Roadmaps are a transplant from the liquid token world (and indeed, from several generations of traditional software development before that).
In these prior roadmaps, developers needed upfront funding in order to develop, deliver, and iterate various software products, find product-market fit, and adapt to unforeseeable market conditions. Devs needed some way to show executives, investors, and other stakeholders their progress relative to a funding plan.
Except in some very rare cases of software products bootstrapped by gigachad “10x Developers” there really aren’t many precedents for software products going directly to market with fully formed products.
Software doesn’t come fully-formed like art historically has had to.
By contrast, in traditional art and collectible markets, both of which I believe to have meaningful parentage over the current NFT collecting meta, the idea that the artist or designer has to keep you happy after the purchase would be pretty fucking weird.
Prior to NFTs, it was rare that most artists would get meaningfully paid for any reason at all (at least for the art they did on their own time) - so when they actually did, the spoils were completely theirs to keep.
Roadmaps are important in the context of rug-pulls because it’s implied that the funding otherwise being taken by the creator would have actually been used to work on, hire for, and bring-to-market said roadmap plans.
The funding is the starting point for a dev and the completion point for the artist.
Sooo… which is it? Can NFT projects actually get rugged then?
Well, uhh, the answer is… yes and no and either and both and neither.
“NFT Project” or even “PFP Project” is already too big of a category, but we don’t yet have the vocabulary as an ecosystem to distinguish between the different types of these projects and drops.
Some NFT projects are pure art projects. Some are products being taken to market. Some are businesses with plans for further IP development. Some are just memes that people want to participate in collectively.
Worse yet… most are actually some combination of all of the above. NFTs are new things altogether, it’s not so easy to box them into a single model of what has existed before. We get the opportunity to mix them into new contexts.
This divergence in intention is made harder by the fact that we have had many different waves of PFP projects already, each made in different time periods of this mercurial ecosystem, with very different terms of engagement per unit time.
Many of the top projects today started as cool art/collectibles, but only tacked on the desire to make - plots of land and future games and arbitrary tokens and shitty voxel versions - after the fact (or perhaps, after Yuga Labs had success doing it, thereby forcing a lot of hands).
The terms of engagement for many of the early projects were not nearly as pronounced as they are today (and today it’s still not great yet). There were not clear guidelines on what would be done with funds, future development, community building, etc.
While we don’t want to grant a pass altogether to these projects, the concept of a rug-pull inevitably does require a lot of this context before witch-hunting these creators.
It’s very unfair to hold an artist or meme wizard creating something cultural to the same standards and intentions of a Silicon Valley founder or growth marketer creating something commercial - even if the two items conceptually are both “PFPs” that sit in the same wallets and compete for the same ETH spend.
We must be a little more deliberate and, dare I say, even merciful about how we sift through these things. I don’t know that I want to live in a world where pure artists are altogether forced to become commercial animals.
All that said, these standards should be clarified ahead of time and there are some easy/obvious things that they could be doing to get ahead of these issues.
Apes love using tools
So, we’ve established that:
Not all NFT projects are the same category or have the same intended purpose, sometimes they have no purpose at all, and that collectors need to be able to better tell the difference before coming in with different sets of expectations.
Pure artists and other creators shouldn’t have to suddenly become business people, but they should learn some basic principles/skills/tools to manage things responsibly (without totally losing their artistic souls).
The ecosystem in general needs a more granular vocabulary for the different types of NFT projects and just better cultural alignment between collectors and creators in general.
So anyway, returning to the original question:
How do we make this NFT project un-ruggable?
One thing I am often struck by in the NFT space is how seemingly separate it is from the DeFi world, even within the same Layer-1 ecosystem.
They sort of exist as neighborhoods right next to each other, but a lot less people than you would think travel between them despite figuratively “being in the same city.”
This is to say that there seems to be shockingly little use of the DeFi tools for things like NFT project treasury management, so as we look to areas of improvement for a lot of these more indie projects, there’s A TON of low hanging fruit to pick here.
What are the principles I personally would look to for NFT project treasury management?
To the extent possible, DO NOT spend the actual principal funds from the sale, instead create a DeFi treasury policy that uses the funds as collateral
In NFT land, ETH is money to be made and spent, but in DeFi land, ETH is a high quality collateral asset that can be used for many different productive purposes, like generating yield and borrowing against
If I personally were in the position to manage an NFT project treasury, I would send all principal funds into a protocol like Alchemix and then perpetually borrow against the yield on the base collateral to fund ongoing operations (using “self-repaying loans”)
Unless you are building a business with a specific path towards growth (which many projects are not), the goal should be to ultimately NEVER touch the principal
If the principal remains attached to the project, even if locked in a vault, it can literally never be a rug pull, the original customer funds will always remain attached to the project that way
Founders/Creators should get an explicit bonus payout for initial delivery of the project
I personally would not want to be involved in a project where the creators have to pretend that they are infinitely-altruistic saints with no personal financial motive, that sort of thing creates very adverse incentives and totally opaque alignment
Within reason, you do want founders to be rewarded for hitting various milestones, project delivery itself being a super critical one
If there’s not some basic payout or IP value being built, you create a system where the incentive to steal funds becomes an issue simply out of economic disparity
For the initial bonus itself, there are ways to make this payment without violating the first rule about not touching principal funds
I personally would pay the founders a bonus by taking out a self-repaying Alchemix loan (mentioned above), thereby getting access to a bonus up to 50% of the original total sale value while not having the project outflow the actual sale proceeds
Obviously founders/creators would probably prefer to have a bonus closer to 100% of proceeds, but many will see the smaller bonus as a way to maintain credibility, build a financial war chest, and ultimately make the size of the pie (value of the total project) much larger - especially since they are often also the owners of the project IP/equity
One last thing to explore here, in order to keep incentives aligned and have the founders/creators remain engaged in the project longer-term, some sort of vesting or milestone schedule on the various bonuses could be a good measure here
To the extent possible, try to fund ongoing operating expenses (salaries, marketing, other contributor payments, etc.) entirely via secondary royalties, yield, and other loans against collateral
Steps 1 + 2 guard user funds and knock out the major upfront reward payments to the founders, after this is where the project starts operating within very basic profit and loss business parameters
Without any additional sources of capital, the project should have at least 2 major sources of additional further cash
1 - Income from secondary sale royalties: high end projects have meaningful monthly cash flow on secondary royalties alone, this comes directly into the wallet as spendable ETH (essentially cash)
2 - Yield from and loans against the principal collateral balance: with a high ETH principal balance, this could result in meaningful capital access if secondary sales start slowing down
If the project is well run and has a supportive community, the funds from royalties and yield can be meaningful enough to operate the project at a monthly profit while still paying a team and funding ongoing community events, marketing, and other growth initiatives
If you do bring things to a profit, you can start funding additional cash into the treasury to build up the principal balance that yield/loans come from - this is how value can really start to compound
If you manage the treasury well, you can actually get to the point where your project has a proper “balance sheet” to leverage for strategic purposes
As loan balances re-charge and collateral balances grow, additional spending from treasury can act as a sort of central bank, creating some very interesting community financial programs:
Sweeping floors from treasury when the project feels undervalued, then flipping the assets at a would-be higher floor price - a great way to have the balance sheet support the floor of the project
Creating a grants program to fund new community projects, collections, lore, fan art, etc.
Investing in partner projects or even making angel investments for things that promote your project’s community
Have a dedicated member of the team that is responsible for treasury initiatives
One way to prevent artists from “becoming business people” is simply having a part-time business-focused team member who can help weigh in on treasury moves
This person should be trustworthy, generally known to the community, and should share treasury policies and plans with the community ahead of time
This list is a super lean version of how to start thinking about a project treasury, but I think this alone would take a lot of indie projects to the forefront in terms of treasury sophistication (which speaks to how little is done presently).
Collectors should learn to demand more
So, how should we up-level from here?
Collectors and creators should have more explicit terms of engagement prior to the launch of these collections
Collectors should expect higher standards of treasury management from the collections they collect from
Teams should have a stated policy about where the money goes and easily auditable addresses
Ideally, community treasury managers can become a go-to skill the way that various marketing, forum management, etc. has become a community skill as the ecosystem has matured
The lack of existing solutions and discourse on this topic really speaks to how early this entire NFT project experience is.
This is an obvious area for improvement which is not being adequately discussed.
Solving this will lead to less heartache for collectors, bigger wins for creators, and better credibility for the entire ecosystem.
Let’s kill rug-pulls once and for all.
-Colin Goltra, September 2022