Fraud and Theft
Note: Data in this section last updated May 28th, 2022
Crime is an ongoing problem in the cryptocurrency space. According to blockchain data firm Chainalysis, over $14B was stolen in 2021 across the broader ecosystem.
NFTs are not immune to these problems, and holders often report losses due to one of three reasons:
Purchasing from fake collections
Phising Scams
Platform Bugs
Fake collections
Although platforms such as OpenSea are getting better at removing fake collections, there was a time not too long ago where if you searched for a project like the Bored Ape Yacht Club, you would see dozens, if not hundreds, of collections – most of them fakes.
Even today, I recently searched for “Invisible Friends” and a handful of fakes came up (although, to OpenSea’s credit, they were quickly removed).
Fakes Collections on Open Sea
This is not a problem if you know what to look for, as real collections will have:
Verification via a blue checkmark (if the collection is large enough)
A realistic floor price (i.e. if you find a Bored Ape for 1 ETH, it’s probably a fake)
A high number of owners
A reasonable trading volume
Unfortunately, new users rarely know to look for these signs, and can easily purchase fake NFTs.
Phishing Scams
Most NFTs are held in wallets such as Metamask. While it is very difficult to hack a wallet, it’s surprisingly easy to gain access through social engineering.
Most notably, every wallet is protected by a “seed phrase” – a random collection of 12 to 24 words.
Social engineers will often pose as tech support, asking users to provide their seed phrase so they can fix problems with accounts. Once they get this phrase, they can access the wallet and transfer all of the assets to their own account.
If you don’t want to get scammed, remember this simple rule: never, ever, ever, ever give out your seed phrase. Ever.
“Bugs”
There was recently a “bug” in OpenSea that allowed “hackers” to purchase NFTs for well below market value. Although the total damage is unclear, many estimate that losses were in the millions (one Bored Ape Yacht Club owner’s asset sold for $26 when the market value was around $250,000).
I put the terms “bug” and “hackers” in quotes because it’s debatable who is ultimately at fault here.
Basically, when you list an item for sale on OpenSea, you are actually listing it on a blockchain – OpenSea is just an intermediary, and it doesn’t control the actual sale. Similarly, to cancel a listing, you have to do it through the blockchain, and this can cost hundreds of dollars in gas fees.
These additional fees annoyed many users, and some found what they thought was a loophole. If a user transferred their NFT to another wallet, it “cancelled” the sale on OpenSea. They could then transfer it back and continue business as usual. Unfortunately, this only “cancelled” the sale on OpenSea’s front-end display. The original contract was still live on the blockchain and could be accessed by tech-saavy users (who took advantage of this and bought $300K NFTs for <$10K).
While many blame OpenSea for not taking a larger role in protecting the community (in fact, the user mentioned above is suing the platform for over $1 million), there are just as many who take a “serves them right” approach. In their opinion, these buyers deserved to lose their NFTs because they didn’t understand how a blockchain works and tried to game the system.
Ultimately who is right or wrong here is irrelevant, as the presence of issues like these ultimately hurts the digital asset community as a whole.
Last updated
