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Welcome to the The Dark Side of NFTs

Mar 15, 2022 Megan DeMatteo

Scams, Plagiarism, Data Nightmares and Growing Pains: Welcome to The Dark Side of NFTs

NFTs could foster the best of human potential—or the worst. And the acronym ‘DYOR’—’do your own research’—may provide a weak defense.

You don’t have to look far for evidence that non-fungible tokens (NFTs) are either the greatest thing since sliced bread or a terrible, identity-theft-ridden scam.

And honestly both extremes, plus everything in the middle, are true. Depending on who you ask within the crypto community, you may find arguments embracing the chaos of NFTs or loud cries for stricter oversight when it comes to digital art assets. A growing number of founders, developers, creators, artists, and collectors are starting to move with cautious optimism and a well-paced commitment to ushering in the nuance of this new technology — before it’s too late.

NFTs have exploded into a massive sector of the crypto industry in the last 12 months, opening up previously unimaginable possibilities for artists who want better autonomy over their work and the ability to maintain close contact with their community of collectors. NFT creation, while something of a $25 billion gold rush, is an improvement compared to the archaic — even exclusive — methods of art curation which have always put most control in the hands of museums, digital platforms, and other third parties poised to profit from a creator’s body of work.

Just take a look at the earning potential: Beeple’s famed digital piece EVERYDAYS: THE FIRST 5000 DAYS sold for $69.3 million, dozens of now-scarce CryptoPunks are valued between at least $7 and $24 million, and countless of collections now generate trading volumes in the millions after a six-month rollout on Twitter. Moreover, artists use their NFT communities to raise money for important causes, such as the sold-out Women Rise project which donates 2.5% of profits to the Malala Fund and has created a road map to raise support for girls’ education worldwide.

Is the gold rush effect creating a frenzy? 

Some seem to think so, with more journalists and commentators turning their backs on what, just nine months ago, seemed to be an egalitarian godsend. Outlets such as VICE, Bezinga, and Hyperallergic recently published articles criticizing the NFT community, and the first and arguably most popular NFT marketplace, OpenSea is well into handling its first big year of PR nightmares, including insider trading allegations, targeted hacks, and high-profile employees calling it quits.  

On one hand, it’s natural for any type of tech innovation to experience learning curves and growing pains. And the utility promised by NFTs makes them far from a lost cause, argue bullish crypto investors who see a future in which NFT technology improves nearly all of our digital transactions, from supply chain tracking to voting. 

But on the other hand, a quick look under the hood reveals a greasy dark side to the fad that’s taken celebrity influencers and Twitter by storm. Let’s have a look at why NFTs — while innovative — deserve to be enjoyed with a healthy grain of salt.

Why are NFT scams so common? Scams abound

It’s no secret NFTs are rife with scams. Just to begin your NFT journey, you’ll need to sign up for a digital wallet that can be linked to your NFT marketplace of choice. MetaMask is one of the most popular Ethereum wallets for NFT collectors, but you can go through a centralized exchange like Coinbase, too.

Linking a wallet, however, opens NFT buyers up to phishing scams and targeted hacks like the one that recently drained top collector’s items from users’ collections.  There are also fake malicious pop-ups and DMS that you might receive in Telegram, Discord, or Twitter (and maybe even other public forums). The general advice is don’t click any links you didn’t explicitly ask for. Always try to request information publicly (via Twitter threads or community Discord pages), and don’t share links in DMs. Of course, old habits die hard, so you wouldn’t be alone if you clicked on a dangerous link. The amount of sophisticated hackers flocking to the NFT space currently means users should always be extra vigilant.

In addition, all the virtual community building makes it easy for people to assume fake identities and essentially catfish their new friends, claiming to be someone they are not.

And finally, no NFT scam discussion would be complete without mentioning pump-and-dump schemes and rug pulls. These are when a group of people buys up a bunch of NFTs in order to artificially drive demand way up, then cash out when prices are high — leaving those who weren’t in on the plan behind with worthless assets. Of course, assets always have the potential to tank in such a volatile environment, And unfortunately, with the amount of pie-in-the-sky promises getting tossed about on NFT Twitter, investors must do thorough due diligence before buying into an NFT project, in order to determine whether it is a true scam or simply a disappointing project that failed to live up to its potential.

How to spot an NFT scam

Unfortunately, there’s no such thing as an easy way to spot an NFT scam. It comes down to trusting your spidey sense (aka a feeling that something is, just, off) and noticing red flags early. 

Plainly put, NFT scams “suck,” said one Twitter user who responded to our request for NFT scam stories. “[I] feel so stupid. And I know better,” said the user, who uses the Twitter handle @femalegazin and wants to remain anonymous. 

This particular user, fortunately, didn’t lose a Bored Ape or another popular NFT worth in some cases up to five-figure sums or even millions. However, the sense of trust and excitement for the potential NFTs offer gets easily deflated after someone experiences that icky feeling of having been scammed.

For @femalegazin, they checked their account on TxHash, a service that lets you aggregate your wallet codes and track your payments and smart contract transactions. This user watched as their NFTs were taken directly from their wallets, which they guess was possible thanks to a sophisticated code of some kind that makes it possible to infiltrate a digital wallet after gaining access through a fake trade.

“I stupidly transacted with a fake Ape coin claim. The transaction didn’t seem to go through so I pressed it three times total. Each signed transaction gave them access to my wallet.”

@femalegazin, Twitter user

The best advice is therefore to avoid clicking links you didn’t ask for or providing any wallet details to users without verifying their credibility first.

According to @femalegazin, the scammers swiped the wallet’s highest tiered tokens: a Cryptoadz, a Boss Beauty, and Wizard with floor prices at 3 ETH, 1.8 ETH, and 2 to 3 ETH, respectively. 

“It’s not a WoW or Ape [which have floor prices of 12 ETH and 103 ETH, respectively] but still,” said the anonymous victim. “I was hoping to hold those tokens for a while. I’ve written lore for my Wizard, I’m an active community member for Toadz. It’s silly to get so attached, but you do.

Luckily I bought these tokens at just post-mint but they all have long term potential for growth.”

One positive upside of NFTs is that you are able to track where the tokens go on blockchain. Therefore, @femalegazin was able to locate the new owners of the tokens (the people who presumably bought them from the scammers), meaning the victim still has a chance to get their NFTs back.

“I’ve asked if I can buy them back at cost once I get enough ETH again by selling things,” said @femalegazin. “Don’t know if they’ll respond.”

Plagiarism of NFTs

OpenSea, the world’s largest decentralized marketplace, announced in January that more than 80% of the NFTs minted using the platform’s shared storefront feature were plagiarized, fake or spam. The feature was meant to eliminate gas fees for creators and let artists host their content on NFTs platform until a buyer purchases, or mints, it. But people misused the feature, according to OpenSea, uploading works of art using content they did not own the intellectual property (IP) rights to, and even trying to pass some of it off as original. 

“They have quintillions — billions of billions of billions — of NFTs in those contracts,” says Carlos Mercado, a data scientist and founder of the crypto collective CharlieDAO. “That makes it impossible for data analysts to actually do anything … to actually filter the collections. It’s a nightmare.”

One might argue that the solution is to run every uploaded image through a database that could scan it and cross-reference it to trademarked works of art. However, doing so in a way that honors crypto’s community-driven, decentralized ethos is going to take time.

NFTs and Data nightmares 

Now let’s pivot away from NFT art marketplaces like OpenSea and talk about how NFTs can be used like QR code tickets or virtual wristbands unlocking membership to clubs, events, and communities.

This versatility is part of the value NFTs offer companies, but they also create liability, according to David Litwak, who is currently in the process of launching Maxwell Social, an NFT-based gathering spot in New York City’s Tribeca neighborhood. Members who purchase NFT memberships are trusting businesses with immutable data, so companies must ask what they want to live permanently on a public ledger, argues David.

For example, Maxwell Social will have a mechanism called Golden Tickets, which will allow members to vouch for other members that they want to be able to get into the social club. “Should those Golden Tickets be immutable on the blockchain, or should that stay in our [private] database and we control that?” David asks.

Furthermore, what happens if a member gives someone a Golden Ticket but that person goes to jail or is involved in an activity that goes against a company’s ethics? “Let’s say now I have an immutable record on the blockchain that I vouched for a guy who’s now has been accused of sexual harassment and is in jail,” says David. “And I can’t honestly take that back. So there are certain things you might not want immutable.”

Just this past year at the superbowl, for instance, the NFL issued NFTs for attendees. For a simple record of attendance, blockchain’s indelible nature poses a smaller concern. But in cases where social currency is part of the equation and NFTs represent inclusion into some kind of club, companies should carefully consider who gets permanently branded as a friend.

NFT and decentralization growing pains

“I think the goal of decentralization is about credible neutrality,” says Carlos.

According to Carlos and like-minded members of the crypto world, no one should be able to stop someone from doing certain things with blockchain, yet everyone’s behavior exists within a self-created culture of permissionless, open-source transparency.

What does this create? An environment that may foster the best of human potential — or the worst. Users must therefore DYOR, or “do your own research,” and sharpen their inner compass before partaking in what could leave them drained of all their precious ETH. 

In other words, don’t buy into the utopian hype without healthy critical thought. Like any technology, it can be used however the communities operating it dictate.

“I’ve become less convinced that web3 is a democracy-supporting tool,” Carlos says. “I think it’s just credibly neutral. Anyone who pays the cost to launch a contract can launch a contract, but not everyone believes in majority rule. Not everyone believes in human rights. Not everyone believes in free access to information.”

We’re already seeing this tension play out across the world, with some governments and localities limiting or banning access to crypto, NFTs, and Web3 tools.

“NFTs are like the beautiful peer-to-peer creator economy that enables anyone with 1,000 true fans to make a sustainable living the way they want to live. They also make it super easy for crime and securities fraud to happen. So you’re going to always get both.”

Carlos Mercado

Yet, as NFTs grow in popularity, regulators, investors, and big brands are adopting the technology — raising the stakes and arguably requiring a more centralized approach. Yet because NFTs are so nascent, decisions often get made on the fly, leading decentralized darling platforms into traps in which their hurried decisions and, frankly, internal biases show with teeth.

A poignant example goes back to OpenSea’s shared storefront feature. As a U.S.-based company, OpenSea is subject to laws and regulation whether the decentralized crypto community likes it or not. This becomes touchy, or downright bigoted, during moments of high political tension where money laundering and sanctions become an urgent concern. 

In early March after Russia invaded Ukraine, OpenSea users with Iran-based internet protocol (IP) addresses complained their accounts were terminated. 

Carlos says, “OpenSea actually deleted the NFT collections of people who they tagged as Iranian and living in countries with sanctions. A lot of Farsi-speaking and Iranian people on Twitter woke up one day and all their NFTs were gone.”

The importance of real community in the NFT world 

In a sector that’s evolving so fast, you can’t “DYOR” with just Google searches and Twitter Spaces chats. These approaches make for excellent places to start — but people weren’t meant to NFT alone. 

All the major NFT collectors, investors, and creators say that making friends and building a network of crypto-literate peers is essential to understanding (and protecting yourself from) NFTs. 

Thankfully, new platforms exist specifically to invite new users into the Web 3 space so that they don’t have to go it alone. Newcomers can check out resources like Surge, which has a free Discord channel for NFT-curious women and non-binary people, or Curious Addys’ Trading Club.

If you still want to venture bravely into the world of NFTs, embolden yourself with information and friends who can help. It really is the type of environment in which many minds are more beneficial than your own.