The NFT market went through the roof in 2021, when it grew to around $22 billion and attracted around 280,000 buyers and sellers, along with around 185,000 unique wallets. But as the market has grown, so has the scope of cybercrime, with eye-catching reports of NFT fraud, NFT art scams, and NFT gaming scams. Read on to learn more about NFTs and how to avoid NFT scams.
What is an NFT?
NFT is an acronym for “non-fungible token”. In essence, fungible means exchangeable, for example, bitcoins are fungible, since you can exchange one bitcoin for another and, after the operation, you still have something with the same value. An NFT is non-fungible because it is unique and cannot be directly replaced by another NFT. NFTs can be any digital item: photos, videos, audio files, and more. They have generated a lot of excitement because of their potential to use technology in the sale and collection of digital art.
At its core, NFTs are a type of digital asset, and this is where the “token” part comes into play. When you purchase an NFT attached to a digital asset, you do not acquire ownership of the asset itself. You may not reproduce or use it commercially. Instead, you take ownership of a purchase record on the blockchain, which you can keep or sell back to someone else.
How do NFTs work?
NFTs are layered on top of a blockchain (a record of transactions stored on multiple computer systems) and point to a web link, like an image file. In general, NFTs use the Ethereum blockchain, although other blockchains support them as well.
NFTs are created from digital objects that represent both tangible and intangible items. Here are some of them:
- Gifs y memes
- virtual avatars
This is not a complete list. NFTs can be just about anything: In one notorious transaction, Jack Dorsey, the founder of Twitter, sold his first tweet as an NFT for more than $2,900,000 .
NFTs are the digital equivalent of collectibles. Instead of getting a piece of art to display, the buyer receives a digital file. This gives them exclusive property rights, because NFTs can only have one owner at a time. Unique data associated with each NFT enables verification of ownership. It is also possible that the owners or creators store specific information within them, for example, articles may include their signature within the NFT metadata.
To collect NFTs, you need a virtual wallet that can store both cryptocurrencies and NFTs. You also need cryptocurrency to make your NFT purchases. There are NFT marketplaces where you can search for NFTs for sale: some of the best known are OpenSea, Rarible, and Foundation. Many people claim that NFTs are a way to support digital artists, while others argue that there is a resource cost involved in any transaction on a blockchain. If you are interested in NFTs it is essential to be aware of the risks involved, including NFT scams and fraud.
Types of NFT scams
Both cryptocurrencies and NFTs are relatively unregulated spaces. This means that there is a possibility for criminals to exploit loopholes and carry out scams. This is why we have seen extensive media coverage of NFT pyramid schemes, OpenSea scams, NFT art finance scams, and others. The following are some of the more well-known NFT scams:
Third-party marketplaces like OpenSea exist to facilitate NFT transactions and provide security behind every sale. But criminals can set up imitation marketplaces with similar URLs to trick users. The visible component is a virtual component, which can be easily copied, along with information in a text file, which means that these websites can be very similar to legitimate markets.
A rug pull is a scam in which organizers deliberately promote an asset through social media to drive up the price. Once they have investors’ money, they stop backing it, resulting in loss of asset value and investor funds. A variation of this scheme is when NFT developers remove the ability to sell the token by adding code that prevents this, leaving buyers with an asset that cannot be sold.
Inflate and sell strategies
Pump and dump schemes occur when a group deliberately buys an NFT to artificially increase demand. Believing that the NFT has value, unsuspecting buyers join the auction and bid. Once supply increases, fraudsters make a profit by selling the NFTs, while buyers are left with worthless assets.
Before buying an NFT, you need to register to a virtual wallet. NFT phishing scams often use fake advertisements to trick victims (for example, on Discord, Telegram, and other public forums) into asking them to share their private wallet key, along with the security phrase of 12 words. Or, scammers can impersonate MetaMask and send fake alert emails, saying their wallet has been suspended due to security issues, asking victims to click a link in the email to verify your account. NFT phishing scams are designed to obtain your personal information and empty your digital wallet.
Customer support scams
Similar to phishing scams , hackers pose as blockchain marketplace customer support staff and contact victims via Telegram or Discord. Under the pretense of trying to solve a problem, scammers send links to fake but official-looking websites in an attempt to gain personal information and access to cryptocurrency wallets. They may also ask you to share your screen to solve the problem, when, in fact, they want to see and take a screenshot of your cryptocurrency wallet credentials.
Bid scams occur when investors seek to resell the NFTs they purchased on a secondary market. Bidders can exchange your preferred currency for lower value cryptocurrencies without notice to you, once the sale of your NFT has concluded. This can result in potential losses for the seller if they don’t recheck the coin before agreeing to a sale.
Scammers can plagiarize an artist’s work and post the fake version on an NFT marketplace. Buyers who don’t know this can buy a counterfeit NFT that has no value.
NFT giveaway or NFT giveaway scams
Fraudsters may pose as genuine NFT trading platforms on social media to promote NFT giveaways. They usually offer a free NFT if you spread the message and register on the website. Once you sign up, you are prompted to associate your wallet credentials to receive the “prize”. When they have the credentials, they can access your account and steal from you.
Due to the anonymity associated with cryptocurrency trading, investor scams are common with NFTs. Scammers take advantage of anonymity by creating projects that appear to be viable investments, and then disappear with the funds they have collected from investors, leaving no trace.
Examples of NFT scams
2021: Evolved Apes
An example of a rug pull with NFT happened in October 2021. A collection of 10,000 “Evolved Apes” were released on the market. Buyers were supposed to receive a unique copy of each “Ape,” made up of items that could be pitted against each other in a vaporwave fighting game, with the prizes being cryptocurrency rewards. NFT’s initial offer was to raise funding for the game. However, once the developer, known as “Evil Ape,” raised 798 Ether (equivalent to around $2,700,000, at the time) he disappeared, leaving investors with nothing but a worthless .jpeg file.
Fractal is a marketplace for NFTs of gaming items. In 2021, a group of scammers created and spread a fraudulent NFT giveaway that resulted in users losing over $150,000 in cryptocurrency . Buyers expected to receive a limited edition NFT. Instead, they got an unpleasant surprise, discovering that the link sent through the project’s official Discord channel was a scam aimed at stealing cryptocurrency. Users who followed the link and associated their cryptocurrency wallets in the hope of receiving an NFT found that their funds had been transferred to the scammer’s account.
The Frosties NFT scam was an example of a rug pull scam, which led to the theft of at least $1,200,000. The creators of a collection of NFTs, under the name Frosties, absconded with investor funds. They disabled all communication channels with members, stunning a community that had grown to almost 40,000 members and was hoping to receive various prizes.
How to avoid NFT scams
Check the details of all transactions before accepting the conditions. Is the market that you are going to use reliable and recognized? Can you see the transaction history of the buyer or seller? Read reviews and look at the engagement level of creators to see if they’ve had transaction-related complaints in the past. If you invest in a project, check that the developers are genuine.
Don’t open files from vendors you don’t know well
Hackers have created viruses specifically targeting cryptocurrency wallets. Avoid clicking on links in unsolicited emails as they can also lead to fraudulent exchange sites. Never click on links or attachments from unknown sources.
Be careful with giveaways
Although common in the world of NFTs, sweepstakes or “giveaways” can carry security risks. Each NFT is tied to a contract that determines what can be done with it; This means hackers can attach authorizations to access your wallet, sell your holdings, and more. Never accept an NFT from someone you don’t know or trust.
Keep your private key and seed phrase safe. If someone has that data, they will be able to access your wallet and delete any NFT or cryptocurrency without leaving a trace. Use strong passwords for cryptocurrency wallet and other NFT accounts. Use two-factor authentication for all NFT accounts, whenever possible.
Check the creator of the project
Before transferring money, find and verify the contact information of the creator of the NFT you wish to purchase. Check that the creators of the project are honest and transparent about who they are. If you can’t find clear information about the entities behind a project, this is a red flag.
Only do operations with official sites
Always go directly to verified cryptocurrency trading websites and avoid using links or pop-ups to enter key information about your wallet. Resist the lure of so-called bargains, which could lead to questionable blockchain networks.
Avoid visiting untrustworthy sites
It’s easy to make spelling mistakes, but sometimes mistyping a URL can end up in the wrong place. In the world of NFTs, scam sites can be very dangerous. Always check the URL to make sure you’re on the right site, and avoid doing anything you’re not comfortable with. Remember that if it sounds too good to be true, it probably is.
Check the price of the NFT project
Before making any NFT purchases, check the price on an official trading platform, such as OpenSea or others. If the price is lower than on the legitimate trading site, beware, it could be a scam.
Use burner wallets (disposable wallets)
A burner wallet allows you to limit the number of funds you want to spend on a given purchase, including crypto for transaction fees. This reduces your exposure to risk in the event of a scam.
Check the check marks
Most legitimate NFT sellers have a blue tick next to their usernames on OpenSea or other NFT marketplaces, and collection properties are clearly listed. Check that the artist you are purchasing from has a verified account and is the legitimate artist. Look for the artist on social media channels or through their website. You may want to ask them directly if the art piece you want to buy is theirs, and if they have the correct user profile.