What is NFT?
NFTs (Non fungible Tokens) are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions. If you want to know more about blockchain, you should read our blockchain fraud article...
Fraud in NFT
The popularity of NFTs (Non fungible Tokens) has skyrocketed over the past few years, with NFT art pieces now going for millions. But when an industry gets this large, it's only natural for scammers to try to take advantage of unknowing buyers.
No one wants to find out that they have just been scammed. But unfortunately, the number of cryptos and NFT fraud is increasing in direct proportion to the market growth. So, with every invention; scammers are getting more sophisticated in their attempts to find new ways to cheat the system through hacking, phishing, or identity theft.
So, what are the most common NFT fraud, and how can you steer clear of them? Let us find out.
Fraud Types in NFT
- Fake NFT Stores
First of the NFT Fraud is Fake NFT Stores. Often, scammers very closely replicate popular NFT marketplaces, like OpenSea, to create fake NFT stores. These sites can look almost identical to the originals and can trick even an experienced NFT buyer into spending enormous amounts of money on fake artwork. However it is worth nothing. For example, the NFT known as ApeGang #4510 is currently priced at 10 ETH, or approximately $39,428.10, on OpenSea's official website. However, on a scam website, you might see it listed for a fraction of 1 ETH.
- Social Media and Artist Impersonation
Some official Twitter accounts genuinely sell NFT artworks. Scammers often copy these kinds of accounts, creating fake pages that closely resemble the originals. But, on these fake accounts, scammers can convince users of their legitimacy, and therefore sell them fake NFT artworks. It is another way they can pass off fake artworks for profit. These fake social media accounts can also host fake giveaways, which can pose a huge risk to unknowing users.
Another major problem plaguing the NFT world is artist impersonation. One such case was that of the anonymous NFT collector called Pranksy who spent US$3 million (in Ethereum) on an NFT which they believed was the original artwork by Banksy. Lucky for Pranksy, the original seller refunded the Ethereum they had paid for the purchase after the scam garnered media attention.
Artist impersonation scams might be one of the most important NFT fraud and They expected to see an increase. You need to be careful about what you buy. Make sure to always check that the seller you are buying from and the NFT itself is verified to ensure the safety of your purchase.
- Customer Support Impersonation
NFT fraud can manifest itself in many ways. Scammers can often fake legitimate NFT customer service pages to divulge sensitive information from unknowing NFT owners. This is pretty common on Discord. If you happen to connect to one of these fake customer service servers instead of the official one. Scammers can ask you for sensitive information to 'fix' whatever problem you may be having.
If you are worried about this; first consider how you are accessing these Discord servers. Instead of just googling a particular server, or looking for it on Discord, try accessing it via the NFT creator's official website or social media first. You should also check how many followers the server as if you cannot access it this way, as it's unlikely a fake server will have thousands of followers.
- Fake Bidding
Another common NFT fraud that has emerged recently is fake bidding on the OpenSea marketplace. Scammer's approach NFT sellers on the marketplace and place bids on the NFTs with USDC (USD stable coin). Yet, they trick sellers into believing that they are bidding in WETH (wrapped Ethereum) by using the logo as their profile photos. .
The concern here is that WETH has a much higher value (about US$3,785 as of writing this article) than USDC (US$1). If a seller rushes to make a sale, they can end up falling for the WETH logo scam and end up losing a lot of money. . The best way to avoid this scam is to take your time when going through bids and report such bidders if you come across them.
- Insider Trading
Insider trading is also a major NFT Fraud problem that concerns NFT traders and collectors. In the context of NFTs, insider trading refers to the purchase of the NFTs before they are put on sale to the general public. In September this year, the NFT marketplace OpenSea admitted that their Head of Product Nate Chastain was involved in an insider trading fraud.
While other scams on this list can be avoided to a certain extent with caution, the same is not true for insider trading. There are no legal precedents that would make such activity illegal. NFT marketplaces need to have stricter rules in place to curb insider trading. After admitting to the scam, OpenSea has banned employees from buying and selling NFTs that are being promoted by the company.
How to Avoid NFT Fraud
First, you need to know that the scams in this space are annoyingly crazy and elaborate. Scammers spend hours and hours thinking about new ways to trick people because there is a crazy amount of money in this space, and they can make millions of dollars if they do it cunningly.
- The biggest thing that scammers and hackers will try to do is steal the secret recovery phrase or private key to your crypto wallet. If they get a hold of this, they can log into your wallet from their device and transfer all your funds and NFTs to their wallet. What happens if they get your seed phrase or private key? They can log in to your wallet and send all the money to their address and all the money you have in the wallet will be gone in a second. Once the transaction is made, there is absolutely no way to get it back. So, it is absolutely important to keep your secret recovery phrase safe and not share it with anyone, or on any site.
- Fraudsters love to take advantage of basic human nature. As humans, we sometimes misspell things leading us to the wrong site. In the NFT world, these scam sites can be extremely dangerous. Fraudsters have been known to create sites that are a replica of an authentic site, leaving unsuspecting victims susceptible to a cyber-attack. Always double-check the URL to ensure the address you are visiting is correct. Never enter your secret phrase, especially at the request of a site, and avoid doing anything you do not feel comfortable doing.
- Doing your own research on any digital asset you are considering investing in is critical to ensure all your assets remain safe, including your currency. One common scam found in the NFT space is known as a Rug Pull. A rug pull is an exit scam where developers build a bunch of hype around a product/brand—and then once liquidity flows into the project, they pull out the liquidity, leaving consumers empty-handed. One key sign to look for when investigating a potential investment is to look and verify that the creators of the project are completely open and honest about who they are as humans. If you find little or no information regarding the actual human being behind a project, someone who is willing to put their reputation on the line, this should be a huge red flag.
- Make sure you only transact with people you know and trust on a personal basis. Transacting with an untrustworthy person can end very badly. Say you send someone your digital asset with the promise of payment upon delivery of the said asset, but instead the person does not pay you and keeps your non-fungible token. It’s like taking candy from a baby, it is literally that easy if you are unaware of this type of scam. If you are looking to buy or sell one of your NFTs it is best to use a secondary marketplace such as OpenSea.io. When you sell an NFT on an official platform, you can keep the sale private and specify one address that is allowed to purchase it.
It is a little frightening to consider how many various frauds you may fall for these days. Every other week, cybercriminals become more inventive, inventing new techniques to deceive people. However, if you remain cautious and informed of what scams exist and how to identify them, you will undoubtedly keep yourself safe when venturing into the amazing world of NFTs. As the popularity of NFTs grows, it is critical that we, as buyers and sellers, continue to conduct our research and keep a watch out for frauds. It's crucial to remember that if something appears to be too good to be true, it typically is.