With digital art NFTs attracting large sums for their value, cybercriminals and hackers are also attracted to defrauding their owners. How do NFT owners know if a Bored Ape NFT or digital Banksy is real?
The non-fungible token (NFT) market was worth $87 billion in February 2022. Much of the growth is fueled by mainstream apps and celebrities like Discord, Mastercard, Coinbase, Twitter, Nike, Adidas, Paris Hilton and Eminem entering the space, offering creators, artists and collectors more possibilities to showcase and trade digital art.
But as the NFT space grows, security issues become increasingly problematic with NFT fraud.
An NFT will include information on where the holder can find the artwork they represent on-chain like Bored Apes is. Usually, all fraud is just people being reckless and acting too fast or not doing their research.
Typically, frauds occur when someone ‘steals’ the real NFT from buyers, and there is little they can do about it since they confirmed the deal either by:
- Connecting their wallet to a fishy website that asks for the right to move specific NFTs out from the wallet in a way that goes unnoticed by the wallet holder.
- Leaving their wallet connected to a proper website that was hacked and whose contract is changed so that the hackers can move out NFTs.
- "Accidentally" shows private keys to a "moderator" or some other fraudster who then does the transfer themselves.
- OR just get phished or hacked.
If NFT fraud is occurring, why buy NFTs in the first place?
Why are people buying digital art NFTs?
With NFTs, assets can be 'tokenised' to create a digital certificate of ownership, which can then be bought and sold. The practice is proving popular in computer gaming to digital art fields.
In general, very little data is stored within an NFT, however. The NFT mostly contains only the information on where the holder can find a description of the artist's name and the work's title. NFT info is then recorded on the blockchain itself.
The more unique the digital art NFTs are, the higher value they attract, as they are rare. NFT scarcity means they are treasured, thus command large sums when sold.
NFTs that attract large sums stir the interest of investors.
- In sport, NFTs for licensed NBA basketball game clips have amassed more than €220,000 to date.
- When Twitter founder Jack Dorsey auctioned the NFT for his first-ever tweet – "just setting up my twttr" – a Malaysia-based businessman paid €2.5 million for it.
- Digital artist Pak (sold 266,445 shares of an NFT art Mass Banner for $91.8 million.
Therefore, it will be no surprise when criminals attempt to defraud the industry to make money; buyers have fallen victim to fraud.
Recent NFT frauds
Prominent NFT frauds that have occurred include the recent Banksy scam, in which fake Banksy NFTs were listed on OpenSea and sold for US$350,000. Then there was the 'Evolved Apes' NFT scam, also on OpenSea, that led to US$2.7 million being stolen by the anonymous 'Evil Ape' developer behind the hack.
Whilst more significant hacks garner the most media coverage, there is also no shortage of smaller scams that are largely unreported. Malicious actors have found the NFT space lucrative. They have been exploiting technological gaps in the system whilst showing no signs of slowing down.
Not all frauds are this sophisticated.
Most basic NFT frauds occur because of the 'rug pull,' whereby innovative crypto developers announce the release of an incredible new digital asset that will do amazing things in the future, thus increasing its value.
The community responds with enthusiasm and invests the owners with funds. Still, the project is then pumped and dumped as the issuers vanish, delete their website, Telegram and Discord chats and phoney LinkedIn profiles along the way.
Whilst not all projects that fail early are ‘rug pulls’ - some are merely early-stage projects where the founders didn't know how to run a business, thus overspending and running out of funds before delivering the project. It is similar to startups that don't find the appropriate business model before shutting down.
What do these NFT scams mean for the blockchain ecosystem? First, they give NFTs a lousy reputation and are unfairly labelled ‘fraud.’
Web 3.0 technology already provides a secure environment for their NFT creators to list and store their digital assets if the industry becomes mainstream.
Instead, the question is on the buyers' side - how to not fall for fraud, which usually comes from buyers not doing their research and jumping on new projects too fast.
This is where web 3.0 companies can help in stopping NFT fraud.
How web 3.0 companies combatting NFT fraud
The current issues with hacks and NFT scams in the space mean that individuals could lose or have their NFT stolen, much the same if they lost their identity.
Web 3.0 solutions reduce the likelihood of NFT fraud as everything is recorded on the blockchain. NFTs include information on where the holder can find the artwork they represent. However, the actual digital artwork is still a click to a URL away.
As mentioned already, all fraud is usually people being reckless and acting too fast or not doing their research. Thus, the adoption of NFTs will suffer as they are incorrectly labelled as a scam or bubble.
However, suppose you're talking about authenticity. In that case, the problem does not affect any NFT collections per see, but rather the art uploaded without the Intellectual Property (IP). Or, they are fraudulent collections and web pages that attempt to impersonate the original creators' collections that NFT novices then buy (known as ‘mint’).
- Authenticating the ownership pre-NFT creation is complicated and not controllable via NFT creation since NFT is just a technology where you store the file. Thus when buying expensive 1/1 art, the only way to authenticate whether it's real or not is doable either by:
- Establishing that the creator of the wallet is the accurate person or organisation who controls the rights - either by checking their "verified" status, their documents or jumping on a call with them (when spending over 100k, getting on a call for a second should not be too much to ask!)
- Trusting the herd, if there have been multiple previous sales by the same account that have not had any problems, ideally some time ago and even better - to people you know.
- Checking whether it's fraudulent collection or webpage is simpler since you can always check the contract code, check whether it's the same contract like the one on the website/collection/Discord and check if other parameters are correct + ideally wait until others have tested it by themselves—no need to be the first one to take the risk.
Educating buyers about NFT fraud
Because NFTs will revolutionise how we live and interact within and outside the crypto environment. Their limitless uses outside the digital art and collectables world will be invaluable to modern businesses, from gaming to the supply chain.
Letting buyers know what types of fraud to look out for on these platforms can help reduce NFT scams, especially if these users can use platform technologies to flag opportunities for fraud.
Different platforms also have varying verification systems, so offering resources to help users navigate these choices and select the safest option may be another step in the right direction.
Whilst scams and hacks are vital issues to discuss and resolve; the NFT space has ultimately flourished.
It has become a space where NFT creators have more control over their digital assets and make serious money.
NFTs are here to stay and will have significant implications on how we interact online, enjoy our hobbies, and even provide businesses with more transparent data records.
These future use cases will not be possible without increased security and verification measures and educating mainstream audiences of the viability of web 3.0 technology.