What is NFT?
NFTs are crypto assets on the blockchain that use unique identification codes and metadata to distinguish NFTs from each other. Unlike cryptocurrencies, they cannot be exchanged or exchanged for equivalents. Those are quite different from crypto tokens such as cryptocurrencies. Cryptocurrencies are identical to each other and can be used as a medium for commerce. If you want to know more about blockchain, you should read our related blockchain 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. However, if an industry gets this big, fraudsters will inevitably notice. We all try our best to avoid falling for scams. Yet, unfortunately, the number of crypto and NFT fraud is increasing directly proportioned to the market growth. So, with every invention; scammers are getting more sophisticated in their attempts to find new ways to cheat the system.
So, what are the most common NFT fraud types, and how can you steer clear of them? Let's find out together!
Fraud Types in NFT
1. 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. You can think that these sites are original because of their similarities. They can even sell fake artworks by deceiving NFT buyers who have been in this business for a long time. However, it's worth nothing. For example, a commonly known NFT can sell for 10 ETH on OpenSea's official website. However, on a scam website, you might see it listed for 1 ETH.
2. Social Media and Artist Impersonation
Some official Twitter accounts genuinely sell NFT artworks. Scammers regularly copy these sorts of accounts to form fake pages that look a lot just like the authentic account. Be that as it may, with these fake accounts, scammers may persuade clients of their authenticity and offer fake NFT artwork. These accounts that exist for fraudulent purposes, also orchestrate fake giveaways that put the buyer in a dangerous position.
Another big concern haunting the NFT world is artist impersonation. One such case was that of the anonymous NFT collector called Pranksy who spent US$3 million on an NFT which they believed was the original artwork by Banksy. But the original seller repaid the price they had paid for the purchase after the media attention. Artist impersonation scams might be one of the most important NFT frauds and they’re likely to increase. You must double-check what you purchase. Make sure to always check the seller you are buying from and the NFT itself or a guarantee.
3. Customer Support Impersonation
NFT fraud can manifest itself in many ways. Scammers may also fake legitimate NFT customer service pages to divulge sensitive information from unknowing NFT owners. This is quite a common method on Discord. If you join one of these fake customer service servers instead of the authorised one, you might get in trouble. Scammers can ask you for sensitive information to 'fix' whatever problem you may be having.
If you're worried about this; first, evaluate how you get on these discord servers. Instead of searching for a specific server on Google or Discord, try accessing the server through an NFT Designer certified website or social media. It is unlikely for a fake server to have thousands of followers. Therefore, if you can’t access it the right way, you should also check the number of followers on the server.
4. Fake Bidding
Another common NFT fraud that has surfaced lately is fake bidding on the OpenSea marketplace. Fraudsters approach NFT sellers on the marketplace and place bids on the NFTs with USDC (USD stable coin). Yet, they defraud sellers into believing that they are bidding in WETH (wrapped Ethereum) by using the logo as their profile photos.
The main problem here is that WETH has a much higher value (about $3,785 as of writing this article) than USDC ($1). If the seller hurries to make a sale, they can end up falling for the WETH logo fraud and end up losing a huge amount of money. The most useful way to circumvent this scam is to take your time when going through bids and report such bidders if you come across them.
5. Insider Trading
Insider trading is one of the most important NFT fraud problems that concerns traders and collectors. In the context of NFTs, insider trading refers to the purchase of the NFTs before they’re put on sale to the public. In September 2021, the NFT marketplace OpenSea admitted that their Head of Product Nate Chastain was involved in an insider trading fraud.
Other scams on this list can be avoided with some caution, but insider trading can’t be avoided. No precedent makes such activities illegal. The NFT Marketplace needs to set stricter rules to curb insider trading. After admitting the fraud, OpenSea banned employees from buying and selling NFTs advertised by the company.
How to Avoid NFT Fraud
First, you need to know that the scams in this space are annoyingly elaborate. Scammers spend hours and hours thinking about new ways to trick people because there is a crazy amount of money in this place, and they can make huge profits if they do it shrewdly.
- Keep your private key safe!
The most significant thing that crooks and hackers will attempt to do is steal the secret recovery phrase or private key to your crypto wallet. If they had access to this, they could log into your wallet from their device and transfer all your funds and NFTs to their wallet. What happens if they get your private key? They can log into your wallet and send all the money to their address and all the money you have in the wallet will disappear in a second. Once you lose your money, there is no way to get it back. So, it is vital to keep your secret recovery phrase secure and not share it with anyone, or on any site.
- Always double-check the URLs!
Scammers prefer to take advantage of the misspelling that leads us to the wrong page. In the NFT world, these fraudulent sites are extremely dangerous. Fraudsters might create websites that mimic verified websites, leaving unsuspecting victims vulnerable to cyberattacks. Always double-check the URL to make sure the address you are accessing is correct. Do not enter secret phrases, especially when asked by the website. Also, avoid doing things you don't want to do.
- Beware of the rug-pulls!
The best way to avoid NFT fraud is by doing your research on any digital asset you are investing in. It’s critical to guarantee all your assets remain safe, including your currency. A common deception in NFT spaces is rug pulls. A rug pull is an exit scam where developers build a lot of hype around a product /brand. When liquidity is poured into a project, they withdraw liquidity and leave consumers empty-handed.
One key sign to look for before a potential investment is verification of the project creators’ identities and their cause. Verifying the creators of the project are fully open and honest about who they are is a crucial step. If you find 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.
- Verify your contacts!
Always ensure that you only transact with people you know and trust on a personal basis. Let's write a scenario. You send someone your digital asset with the promise of payment upon delivery of the said asset. Instead, the person does not pay you the price and keeps your non-fungible token. There is no way to get your NFT back. When you trade an NFT on an authorised platform, you can keep the sale private and specify one address that is allowed to purchase it. However, if you don’t trust your buyer, simply avoid a transaction.
To Sum Up
It is a little frightening to consider how many various frauds you may fall for these days. Every other week, cybercriminals become more cunning, 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 stay safe when venturing into the amazing world of NFTs.
As the demand for NFTs grows, it is critical that we, as traders, continue to conduct our research and keep a lookout for frauds. It's crucial to remember that if something looks too good to be true, it typically is. Lastly, for you crypto enthusiasts, we have one last offering. Go on and check out our "5 Cryptocurrency Frauds and How to Avoid Them" article.