If you’re involved in tech in any way, somebody’s probably asked you about NFTs in the last six months. The hot new digital collectibles are seeing million-dollar sale prices and tons of news coverage and social media chatter. Proponents claim that they will redefine the way we purchase art, fashion, music, and more.
But with all commerce comes scams, and these blockchain-dependent items are no different. It seems like every day, a prospective NFT magnate is moaning that they got hoodwinked out of their digital assets. If you want to get into this wild world and get out with your shirt intact, here’s a guide to avoiding NFT scams and schemes.
What Is an NFT?
Let’s start out with the basics. NFT stands for Non-Fungible Token. If you’re not using the word “fungible” in your daily vocabulary, it basically means “interchangeable.” A dollar, for example, is fungible—you can trade it for another dollar without a loss in value. The whole gimmick of an NFT is that each one is a completely unique digital commodity. The “token” part is a digital asset that is layered on top of a blockchain—a ledger of transactions that is stored over multiple computer systems simultaneously—and points to a Web link, typically an image file.
When you purchase an NFT that is attached to an image, you’re not actually taking ownership of the image itself—you can’t replicate it or exploit it commercially. Instead, you’re taking ownership of a record of purchase in the blockchain. You can then sell that record of purchase associated with that image to somebody else.
The value proposition here is a little tough to understand. Some argue that NFTs are a way to support digital artists by creating scarcity and allowing buyers to “own” a unique digital file. But there are still a lot of kinks that need to be worked out in the system, from the resource cost of blockchain transactions to the plethora of scams and hustles that are already endemic.
How Do People Get Scammed?
The nature of the blockchain—a distributed, decentralized record that’s impossible to tamper with—makes many NFT purchasers confident that their tokens are inviolate. But some classic old-school hacker methods have proven extremely effective in scamming.
Impersonation has resulted in the loss of both NFTs and crypto on both sides of a transaction. Although these assets exist on the blockchain, third-party marketplaces like OpenSea exist to facilitate transactions. They provide the institutional security to back up each sale. But it’s trivial for hoaxers to set up imitation marketplaces with similar URLs—and because the visible component of an NFT is just an image that can be easily copied and some plaintext information, these websites can look virtually identical to legitimate sites.
Social media is also a popular place for scammers to operate. Imitation accounts for NFT creators and investors are everywhere, and will often hit up DMs of people looking to buy or sell to give them fraudulent promises of giveaways. In return, they gain access to your crypto wallet and pilfer your funds and assets.
The scary thing about investing in crypto and NFTs is that the space is still relatively unregulated, which offers a lot of potential for bad actors to exploit loopholes.
Scams From the Start
Other scams come from the creators of the NFTs themselves. “Rug pulls” have become endemic in the cryptocurrency space. The technique, which was first seen in the stock market, is when a new product is introduced, publicized by trustworthy figures, sold at a high price, and then abandoned by its creator, who makes off with the quick payday and leaves buyers holding worthless investments.
One of the most notorious NFT rug pulls came in October of 2021, when a collection of 10,000 “Evolved Apes” went on the market. The project was pretty typical for the space—buyers got a unique ape made of component elements that could be battled against other apes in a vaporware fighting game, with winners getting cryptocurrency rewards. The initial NFT offering was intended to raise funding to develop the game.
Unfortunately for purchasers, after the pseudonymous developer going by “Evil Ape” had raked in 798 Ether (around $2.7 million at the time), he ghosted on the entire community. There will be no Evolved Apes game, and the holders of those NFTs now have nothing but a JPG to show for their investment.
There’s classic advice that applies to NFTs just as well as it did to more traditional purchases: If it seems too good to be true, it probably is. Sure, there are bargains to be had in the space, but there’s little to no accountability for the big promises being made by NFT creators. And, as gaming NFT platform Fractal had to admit after having their Discord hacked, “there’s no undo button in crypto.”
Essential Security for NFT Transactions
If, after reading all of this, you’re still interested in purchasing or selling NFTs, here are some key tips to reduce the possibility of getting ripped off.
- Do your homework. Check into every aspect of a transaction before agreeing to it. Is it being conducted on a reputable marketplace? Does the other party, seller or buyer, have a transaction history that you can view?
- Don’t open any files from senders you don’t know very well. Hackers have already started creating viruses that explicitly target cryptocurrency wallets. Avoid clicking any links on unsolicited emails, as they can also lead to fraudulent exchange sites.
- Watch out for giveaways. Although the NFT space is rife with them, these free “drops” can often carry with them unwanted security exploits. Because each NFT is tied to a “contract” that determines what can be done with it, unscrupulous hackers can load them with authorizations to access your wallet, sell your holdings, and more. Never accept an NFT from someone you don’t know and trust 100%.
- Most importantly, never give your seed phrase or private key to your crypto wallet to anyone. New participants in the space might not be up to speed on the requirements of conducting transactions, but with these, anybody can enter your wallet and untraceably remove any NFTs or cryptocurrency.
Even if you follow this advice, there’s still no guarantee that the NFT bubble won’t pop and make your digital goods worthless anyway. But if you’re comfortable assuming that risk, you should be able to trade confidently and safely moving forward.
