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In Oklahoma, Melissa Kotter, a Frosties “mod” or moderator, was also puzzled when the Discord server went missing. “Everyone was freaking out,” the 26-year-old artist told Protocol.

A few hours later, in Singapore, a sales manager who asked to be identified only as Kerry and who, together with a friend, bought about 160 Frosties worth about 12 ETH, or more than 45 $000 at the time, woke up with “many messages telling me a rug was pulled.

At that time, thousands of Frosties realized they had been scammed, confirmed by a tweet on the Frosties Twitter account before it subsequently disappeared. “I’m sorry,” he said.

Frosties, which had become the latest star of the NFT world at the start of 2022, has just as quickly become the most notable scam of the year. It was a coin toss, a trick where the creators of a cryptocurrency or an NFT artwork or game abruptly shut down the project, got rid of the project funds, and disappeared. With the money, trust and goodwill essential to get a project that merges new forms of art and funding off the ground.

Sweepstakes have become a major form of crypto fraud, accounting for almost 40% of crypto scams and costing users an estimated $2.8 billion last year, up from just 1% the year before, according to Chainalysis.

The Frosties scam led to the theft of at least $1.2 million, moved in a series of rapid transfers of funds from the Frosties OpenSea Wallet to other accounts, leaving a community, which numbered around 40,000 people at its peak, stunned.

“My initial thought was like, ‘F—, this is awful,” Christian said. “I honestly couldn’t believe it at first,” Kotter said. “It was a lot of anxiety – and I can’t say I slept well.”

Frosties NFT on OpenSeaScreenshot: Open Sea

Kotter’s Frosties journey started on an optimistic note. She started getting into NFTs last year and was drawn to the Frosties project which she said looked “very professional”. There were things she found curious about the community, such as the fact that, unlike other NFT projects, Frosties officials did not reveal their identities to reassure potential buyers. But, Kotter said, she “went anyway.”

So did Christian, who spent around $1,000 on three Frosties that cost around $112 each in ether, including gas costs. “I really like the art style. They looked really cute on the site. Frosties had a feeling people would buy that, you know. In the world of NFTs, that means the collection could be worth a lot of money.

Take the Bored Ape Yacht Club, which has attracted celebrity buyers including Justin Bieber, who reportedly bought one for $1.3 million. Companies are also getting in on the action. Visa bought a CryptoPunk for $150,000, a bargain considering an NFT from the same collection sold for almost $12 million.

NFTs are not just a work of art for the buyer and others to admire. Christian said he bought Frosties for its staking feature, in which he could earn fees by staking his NFTs on the Ethereum blockchain, which in turn would help process transactions. Buyers were also promised other ways to make money from the investment, such as “breeding” – essentially creating new Frosties from two existing ones.

Kotter, who was elected as a mod, came on the whitelist, giving her early access to the first Frosties to be minted, an incentive that helped spark interest in the project.

Many members were upset by the high gas costs at the start of the strike. In a surprising move, the anonymous developer of Frosties has refunded the costs. This should have been an alarm, but unsuspecting buyers took it as a positive sign.

Reimbursement of fees “screams at me like a Ponzi scheme-type strategy,” said Michael Fasanello, an anti-money laundering specialist who has analyzed other scams. Returning early customers their money for gas costs led to people publicly praising the project, helping to recruit more users.

Melissa Kotter and Cruise Ingles

Melissa Kotter and Cruise InglesPhotos: Melissa Kotter, Cruise Ingles

The Frosties rug pull had the “characteristics of financial cybercrime when you use the mixers, address jumps, peel strings and all that,” said Fasanello, director of training and regulatory affairs at Blockchain Intelligence. Group. His firm is investigating Frosties pro bono.

Fasanello used blockchain analysis to track the movements of the Frosties page on OpenSea. Funds were first moved in “peeling chains,” a series of small transfers ranging from $3,500 to $25,000, mostly to non-hosted or stealth wallets. A transfer went to a Coinbase account, although it was quickly moved to another wallet.

Then much larger transfers followed, including three worth around $300,000 each. This time, the scammer used Tornado Cash, an Ethereum-based tool that hides the source of funds using stealth addresses.

Tracking funds is difficult, but not impossible, Fasanello said: “At least some of this money, theoretically, could be obtained and returned to customers, if all the coins were lined up correctly. Coinbase declined to comment. OpenSea could not immediately be reached for comment.

Some of the victims take what happened with impatience.

Kerry, the Singapore-based sales manager, said he and his friend “had a good laugh” at what happened, although they now look for “red flags” when considering new crypto projects. .

Christian said it was “really annoying” to learn he was involved in a rug draw. He was perplexed as to why the developer opted for the quick profit of a scam versus the money he could have earned by running the project legitimately.

It does not drop NFTs. “I’m 20 and I want to do everything I can young, so I can live my 30s and everything stress-free,” he said. The total NFT market is now worth around $16 billion, just 1% of the $2 trillion crypto market. But NFTs, predicted Christian, “will explode in the coming years.”

Some of Frosties’ victims attempt to rebuild the community through a technical maneuver called wrapping – taking the tokens issued in the scam, which still exist on the blockchain, and placing them under a brand new smart contract outside of the developer’s control. of origin. Christian said he paid $140 to bring his three Frosties into the new contract.

The “Wrapped Frosties”, as the group is called, have created a new page on OpenSea. The page recently listed a “floor,” or lowest price for the collection, at 0.005 ETH, or roughly $13.11. Cruise Ingles, a rug-pulling victim who also decided to join the rebuilding effort, said he would like to see the collection return to its original floor price of 0.04 ETH, or $116, “to guarantee decent royalties” to members of the community.

Ingles said the group plans to launch a new collection called Cutie Pies to raise funds which they hope to use to support and grow the Frosties collection. He said the new Frosties Discord community has around 1,600 members, with 150 active participants.

But rebuilding an NFT community “that has lost all its money” is a challenge, Ingles acknowledged. A thriving NFT community emerges largely through FOMO, he said. “The fact that a project has ‘already failed’ makes other buyers want to avoid it, no matter what happens next,” he said.

Christian Joshua

Christian JoshuaPhoto: Joshua Christian

Christian also complained of “a lot of conflict” between the members, saying, “The very idea of ​​everyone working together has kind of drifted away.”

Ingles said his experience with Frosties, which was his first experience with a rug pull, reinforced one of his beliefs: it’s usually not a good idea to embark on a brand new NFT project, even with tens of thousands of enthusiastic members.

“The hype is where it gets a lot of people,” he said. “I’ve seen probably 10 different projects in the last week get tougher because of the hype. There’s a big community coming together around one thing and they’re super excited. And so they all buy at the same time. And this allows the investor to withdraw everything at once.

Kotter, who is also part of the rebuilding effort, remains optimistic, calling what happened “revealing and, oddly, inspiring”.

“I wanted to do something to help,” she said. “There are a lot of scams in the crypto space, and that’s something we’d like to change. It won’t be overnight, but there are great things to come that were born out of the chaos of the Frosties carpet pull.

Still, she wondered if the original Frosties developer was “able to sleep at night with all that guilt.”

There was a hint of guilt in the latest posts from the scammer, who sought to clear the names of two other mods, a couple named Andre and Katelyn. “You’re probably going to get a lot of heat,” the developer wrote, adding that he was sending them ether “for your troubles.” Andre and Katelyn have kept a low profile and have not been active in the rebuilding effort, according to Kotter.

A legacy of Frosties may be a cultural shift around anonymity in crypto. “Doxxing” was once a dirty word in Internet culture, meaning the unwitting unmasking of an anonymous user’s personal information. Reddit explicitly prohibits doxxing, and a recent article in BuzzFeed News caused an uproar when it revealed the names of two Bored Ape Yacht Club creators who had previously gone by pseudonyms, even as the corporate value behind this, Yuga Labs, soared. Billions.

But doxxing is beginning to take on a new meaning: the voluntary self-identification of a project developer to build trust. The Frosties developer hasn’t been doxxed, but so-called doxxed projects are on the rise. CryptoDads, for example, advertise themselves as “fully doxxed”, and others refer to a “doxxed team”. Magic Eden, an NFT marketplace on the Solana blockchain, relaunched its service this month after some high-profile rug draws with new identification requirements.

If the industry does not embrace open identities, regulators can force them. NFTs involve financial transactions, sometimes on a large scale. Increasingly, crypto firms are taking seriously adhering to know-your-customer rules that are common in traditional finance. This may mean losing some of the charm of the largely anonymous crypto scene that attracted early NFT buyers. But if that means stopping rug draws that put off traditional customers, that may be a good trade.