Top 5 Biggest NFT Fails And Lesson Learned
Crypto and NFTs have had a difficult ride in 2022 because of a few major NFT fails. The Web3 low points of the previous year achieved new lows as a result of a more generalized market decline outside of the cryptocurrency sector and a growing winter freeze within it. The ecosystem lost billions of dollars due to rug pulls, token collapses, crypto exchange failures, and hedge fund failures, prompting a flurry of regulatory and criminal probes.
The lessons learned from this year’s low moments, of which there were many, may ultimately improve Web3. However, failure is far more exciting because our unpleasant experience this year helped us learn something important. Additionally, despite Web3’s more than ten years of existence, it is important to keep in mind that the ecosystem is still in its infancy. Errors of both the honest and evil kinds are unavoidably involved in the process of constructing its destiny. In order to learn from the year’s most memorable mistakes, we’ve collected some of them.
DOJ takes notice of Frosties
Some of the largest rug pull in the history of the NFT space occurred in 2022. Rug pulls are scams that take place when developers of cryptocurrency or NFT projects entice community members (and their money) before abruptly abandoning the project, disappearing completely, and leaving a community with little to no legal recourse.
With 8,888 NFTs themed around ice cream and touted as “cool, tasty, and unusual,” the NFT project Frosties garnered 335 ETH (more than one million dollars at the time) from its community in just a few hours after minting out. In order to ensure the project’s continuation, founders Ethan Nguyen (also known as “Frostie”) and Andre Llacuna (also known as “heyandre”) established a respectable community in their Discord and made promises to collectors about merch, raffles, and a treasury. The project website and Discord were deleted after the mint, and the sale proceeds were transferred to different wallets.
Frosties NFT rug pull – the technical details of the investigation
Let’s see how Tornado cash works, how the creators were caught, and look into the Frosties smart contract pic.twitter.com/BakrNA1YJ3
— Nazar Ilamanov (@nazar_ilamanov) March 26, 2022
The Southern District of New York’s prosecutors arrested and accused Nguyen and Llacuna of conspiracy to commit fraud and conspiracy to commit money laundering in March, despite the fact that the community was never able to recover the stolen funds. Despite the fact that the case is still pending, it is largely recognized as the department’s first rug pull bust, marking a critical turning point in NFT history.
Lessons discovered with this NFT fail
Folks, crime doesn’t pay. The consequences of Frosties’ rug pull were as follows: It served as a clear signal to would-be scammers that such activities were not beyond the reach of regulatory and enforcement organizations, and it served as a reminder to NFT fans exactly how careful they need to be when studying and investing in NFT communities. When nft now spoke to IRS Criminal Investigation New York earlier this year about such incidents, its agents made it apparent that they were significantly enhancing their cyber-investigative capabilities to handle blockchain-based cases of precisely this sort.
Rug pull for the redemption of Pixelmon
The history of the Pixelmon NFT project is crazy. It doesn’t exactly match the definition of a rug pull, but it occupies a space close to one, and it offers a useful lesson about hype and credibility in the NFT community. On February 7, 2022, the project consisted of 10,055 pieces of pixelated character NFTs—began to take shape after a mountain of anticipation had been raised around its collecting and aspirations.
A AAA open-world adventure game with a setting reminiscent of the Pokemon universe was what Pixelmon promised its fanbase. The project’s crew was advertised by its founder, Martin van Blerk, as having previously worked for Activision and Disney, which generated expectations that the NFT art, once it was released after launch, would be special. When the Pixelmon team revealed that the mint would be modelled after a Dutch auction with a steep beginning price of 3 ETH, these sentiments were only strengthened.
Within an hour of the project’s introduction, all 8,079 NFTs in the primary sale were gone, with the majority of buyers paying the full 3 ETH price. The Pixelmon team ended up earning 23,055 ETH, or more than $70 million, in total. However, as soon as information regarding the team’s identities and the metaverse game they were developing remained suspiciously scarce, community suspicions started to emerge. This was made worse by the fact that the NFT artwork was still a secret. After only a few hours of the debut, secondary sales had reached about 1 ETH.
Collectors were devastated when the art was ultimately made public on February 16. The pixel art appeared sloppy, even glitchy and absurd. The community felt they had the rug pulled out from under them since the promise did not match the delivery. This worry was increased by claims that van Blerk had spent money from the project on a shopping spree for high-end NFTs, picking up Bored Apes, Azuki’s, CloneX, Invisible Friends, and other valuable NFTs. When the floor price collapsed, Pixelmon was doomed.
However, this is where things become interesting: Martin van Blerk didn’t steal money from the community. In the following months, he maintained a low profile while looking for investors who would be prepared to help with the project’s reconstruction. Giulio Xiloyannis, Co-Founder of Web3 VC studio LiquidX, eventually discovered one. Since taking over in the late spring, Xiloyannis has worked diligently to restore faith in the undertaking, and despite everything that happened before, the Pixelmon community has reacted largely positively. The current floor for Pixelmon is 0.368 ETH, which is a modest recovery given the circumstances but a far cry from the project’s peak.
Pixelmon still needs to do a lot to earn the respect of the community it once terribly harmed, but it’s making headway. Speaking to nft now in early October, Xiloyannis emphasized a few points regarding the project’s background, most notably that he felt van Blerk had done less maliciously and more foolishly. The NFT community as a whole was justified in criticizing the project for its flaws, but Pixelmon has so far demonstrated that recovery from a setback is, at the very least, a possibility. No, despite the project’s past, the excitement and commitment that its new CEO has demonstrated over the past six months are not something to laugh at. The story of Pixelmon demonstrates how important it is to uphold noble principles in a society when people have been so hardened by the harm done by con artists and dishonest people.
$615 million Axie Infinity hack
The popular play-to-earn game Axie Infinity is supported by the Ronin Network, which was successfully targeted on March 23 by hackers from the Lazarus Group and APT38 (groups with ties to the North Korean government). The gangs were able to conduct fraudulent withdrawals from the network totalling more than $615 million, surpassing the $611 million Poly Network attack from August 2021, by withdrawing $25 million in USDC stablecoin and 173,600 ETH.
By taking advantage of the validator nodes on the Ronin chain, the hackers were able to carry out the attack and take over four of the nine validators, as well as a separate validator run by Axie DAO. They succeeded in tricking the system into believing that its withdrawals were valid. After realizing what had transpired, the Ronin team suspended the network, stopping transactions for several months before beginning them again in late June.
In the three months following the incident, Axie participants were able to retrieve any lost cash they had kept on the Ronin Network through a bridge made available by Binance, with Sky Mavis paying all players’ losses. However, 56,000 ETH that was taken from the Axie DAO’s bank account is still missing. The Ronin team noted in a blog post that if this money is not recovered after two years, the DAO would be asked to vote on the treasury’s next course of action.
Lessons discovered with this NFT fail
The breach served as a general reminder to the community that Web3 systems need to be vigilant about security and discover solutions to guarantee the advantages of decentralization without compromising security. Following the attack, Sky Mavis engaged in a number of examinations of its Ronin Network with unbiased auditors Certik and Verichains. Since then, the network has been rebuilt with a few significant changes, such as a multi-tiered “circuit breaker” mechanism that restricts network withdrawal quantities and upgraded Bridge Smart Contract software to limit daily withdrawals and enable greater administrative monitoring.
Three Arrows Capital’s demise
The Singapore-based cryptocurrency hedge fund Three Arrows Capital (3AC), which was founded in 2012 by Su Zhu and Kyle Davies, had a precipitous decline in reputation beginning in June of this year. Zhu and Davies, who were well-known in the Web3 community for their notable optimism towards Bitcoin, used some remarkably aggressive borrowing to fund 3AC’s various investments in Web3. In the short term, this enabled 3AC to broaden its influence across the ecosystem, but the success of this strategy depended on each of its assets increasing in value.
One of those investments was the algorithmic stablecoin TerraUSD, which fell in May along with Luna, its sister coin worth almost $200 million. And although the business had lately managed billions of dollars worth of assets, by the start of the summer, Zhu and Davies had run out of options for repaying the huge amount of debt they had taken on.
When word spread that the business had fallen behind on a loan from digital asset brokerage Voyager Digital valued at over $670 million in cryptocurrency, this became immediately clear. A British Virgin Islands court subsequently mandated the fund’s and its assets’ immediate liquidation. A few days later, 3AC submitted a Chapter 15 bankruptcy petition.
The bankrupt crypto hedge fund put its assets at $1 billion as of July, but that figure was significantly surpassed by its liabilities, which total more than $3 billion, according to records obtained by The Block. According to a tweet quoting a now-gone Dune article, these assets included $7.5 million in NFTs. Despite being small compared to the billions of dollars of cryptocurrency the fund manages, a sizable portion of that NFT collection was made up of blue-chip NFTs. These included a collection of CryptoPunks items valued at over $3 million and a group of Art Blocks Curated NFTs with a combined value of about $2.5 million.
In order to launch Starry Night Capital, an NFT fund with the goal of injecting $100 million into the NFT community through a series of high-value transactions, the hedge fund’s founders also worked with NFT collector Vincent VanDough. This included the $1,800 ETH acquisition of Ringers #879 in August 2021, which was worth $5.9 million at the time. The fact that Starry Night Capital combined a sizable portion of their multi-million dollar NFT collection into a single wallet in mid-June, ostensibly in anticipation of liquidation, was one of the first signs that all was not well at 3AC.
The collapse of the hedge fund had an impact on the entire sector. Blockchain.com, a cryptocurrency exchange, suffered a $270 million loss on loans it made to 3AC. Voyager Digital filed for Chapter 11 bankruptcy due to 3AC’s failure to repay its debt to that company, and the crypto financial service providers BlockFi and Genesis also suffered sizable losses.
A liquidity issue at 3AC eventually surfaced as a result of a summer decline in cryptocurrency values and a dangerous and highly leveraged trading technique employed by the company, wiping out its assets and rendering it unable to pay creditors. Davies and Zhu’s irresponsible bullishness and confidence in the “number go up fast” mindset that afflicts so much of the crypto sector proved to be their downfall, not too dissimilar from the irresponsibility that led to FTX’s demise. Even more depressing are allegations that Davies and Zhu are now allegedly more interested in protecting their reputations than helping liquidators collect assets. In terms of financial plays, cryptocurrency has a reputation for being rather Wild West-like, and 3AC’s collapse hasn’t done anything to disprove that notion. Its demise serves as a stark warning to the industry that, even though Web3 has created new economic opportunities, unbridled greed still has the power to bring about its demise.
The turbulent 2022 for OpenSea
The biggest NFT platform has experienced some turbulence this year. The Web3 juggernaut had several notable high points and did some admirable things throughout the year, but OpenSea also experienced its fair share of scandal and controversy in 2022.
Users of OpenSea started to notice some odd behaviour on the platform on February 19. They saw a hacker interacting with OpenSea’s brand-new exchange contract using a smart contract to steal a sizable amount of NFTs from its customers. The hacker used a helper contract that had been deployed 30 days earlier in the latent phishing attack, which allowed him to steal $1.7 million and some of the most prestigious and valuable NFTs in the world in under three hours.
The corporation got into trouble in March after it started widespread bans and takedowns of accounts connected to Iran in an effort to abide by U.S. sanctions law. Similar pressure was placed on MetaMask to adhere to Iranian transaction and sanctions laws. Users who were impacted by the change were not promptly and clearly informed by the corporation, and many expressed their dissatisfaction on Twitter as a result. The prohibition also unintentionally excluded Iranian-born individuals who possessed citizenship in other nations but were no longer residents of Iran.
The FBI accused a former OpenSea employee of insider trading in June. Former OpenSea product manager Nathaniel Chastain, who worked for the company, was accused of using privileged information from his position to conduct wire fraud and was charged with one count of money laundering. The arrest was one of the first times traditional laws were used to penalize bad actors in the NFT field since insider trading had a long and illustrious history before the Web3 space.
The largest OpenSea story that made headlines this year, aside from a significant data breach on the platform in late June, was when it proposed abolishing royalties on current collections on its platform in November. The information was released concurrently with a statement from OpenSea announcing the launch of a tool to enforce creator fees for new collections on the platform. The neighbourhood rejoiced over this but expressed concern that the platform might not provide current collections, which helped shape what OpenSea is today, with the same level of protection. The industry’s top names came together to keep royalties for such collections, and OpenSea changed its mind.
Without OpenSea, Web3 wouldn’t be where it is today. OpenSea is generally a good contributor to the NFT space. However, due to its problems in 2022, several crucial issues have been brought to light, including those about the value of decentralization and how well it is implemented in the industry, artist rights and empowerment, innovation, Web3 security, and other topics. It’s simple to criticize OpenSea, but the platform is learning from its mistakes as it develops and improves how it engages with its artists and users. The platform’s ability to spark a type of unionization drive among artists in Web3 this year may be its most beneficial side effect, revitalizing the notion of artist empowerment that the community has long hailed as its guiding ideal.