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‘Blockchain’ and ‘crypto’ are buzzwords that have quickly become part of the mainstream lexicon even though few actually understand the terms. In 2021, a new buzzword was added to the bucket - ‘NFTs’. Read on to know what NFTs are and how you can avoid getting scammed while trading them.
NFTs (or Non-Fungible Tokens) provide a way to establish ownership over digital assets such as visual art or music. Bits of data are stored on the Ethereum blockchain (web3) as tokens. This information helps establish ownership over digital assets like visual art or music. When a transaction or sale of an NFT is made, it is recorded on the digital ledger known as the blockchain. Even though NFT art is ridiculed as the digital asset - say, a JPG - can be downloaded by anyone, the proof of ownership exists on the blockchain ledger.
Many of the pitfalls that affect blockchain technology and cryptocurrencies are also present with NFTs. Decentralization and a lack of third-party monitoring are a double-edged sword as criminal or controversial activities carried out on the blockchain are harder to police.
An NFT can go missing after you have purchased it! That’s because the contract that lives on the blockchain (the NFT) is different from the actual artwork. While an NFT does indeed provide a means to signify ownership of a digital asset, many people don’t know that the NFT data stored on the blockchain is not the actual asset you bought.
Rather, it is likely to be just a link to the image. When you purchase an NFT, a smart contract is minted on the blockchain. The smart contract generally includes a link that points to an online drive where the asset is actually stored. Therefore, the drive could go down at any time and take all your NFTs with it.
Much like cryptocurrency trade, governments are still formulating regulations regarding the trade of NFTs. As such, the current scenario is a ‘Wild West’ where anyone can hire an artist to design a specific number of NFTs and then create enormous hype for the tokens by having influencers endorse them. The ease of creating NFTs and lack of consequences have given birth to thousands of NFT Pump & Dump schemes.
Pump & dump schemes are shockingly common in the crypto and NFT worlds. A ‘rug pull’ is an investment scam where a group of insiders buy up a bunch of assets - NFTs in this case - and artificially inflate demand. This drives up the prices of the NFTs which are then promoted heavily on social media and other channels. The general public buys into the scheme thinking that they have invested in an asset that is destined to gain value However, the fraudsters cash out quickly when prices are high and leave everyone else with worthless assets. The influencers who promoted the scam lose nothing as they are paid upfront for their endorsement.
It is critical to note that minting a piece of artwork as an NFT is not the same as having intellectual property (IP) ownership of it. Platforms such as OpenSea enable anyone to turn any photo or image into an NFT, whether or not they own the rights to that IP!
Scammers and bad actors steal an artist’s work and open fake accounts on platforms such as OpenSea where they list counterfeit artwork for auction. This would make an NFT practically worthless once the community finds out what that scammer is up to - and there’s no way to get your money back.
A platform selling music NFTs called HitPiece was called out as a scam by the RIAA for selling NFTs of musical works without permission from the artists and/or copyright holders.
There are several legitimate social media giveaways that are organized to hype up a new NFT collection. Scammers exploit this marketing tactic to trap NFT traders in scams instead. Watch out for fake NFT giveaways on Discord that direct you to scam websites. These sites will ask you to connect your wallet and verify your seed phrase. Anyone who has your seed phrase has access to your assets.
It is also known that hackers pretend to be representatives from NFT trading and storage platforms such as OpenSea and MetaMask. MetaMask users have previously been targeted in a phishing scam involving fake advertisements that asked for users’ private wallet keys or 12-word security seed phrases.
In an NFT giveaway, tokens are ‘airdropped’ to the winners, which refers to an NFT being sent to a web3 wallet address for free. Receiving an airdrop is like receiving an email in your inbox, in the sense that airdrops do not need to be approved or accepted.
Airdrops can be used for scams as they can contain malicious coding in them. Scammers will often randomly airdrop tokens into wallets. The name of the token is usually a website that the scammers want potential victims to visit.
If you go to the website and try to sell them, you are likely to find that they are unsellable. The intent of the airdrop is actually to force you into giving them access to your assets and then steal them.
Sometimes, airdropped tokens don’t actually do anything other than serving as a facade for a pump & dump scheme. If someone is creating a project with both a fake NFT collection and worthless tokens, they may airdrop the tokens into influencers’ wallets to create the false impression that the influencer holds their token.
Keep these simple pointers in mind to avoid NFT scams:
