NFT stands for Non-Fungible Token and is a unique digital asset, generally tied to art, music, gaming, or videos that can be sold and traded on the blockchain. In previous articles, Overwatch discussed cryptocurrency and the metaverse; the blockchain is a digital ledger that records financial transactions and tracks digital assets.
NFTs are best known to the public as collectible digital art. An NFT could be something as basic as a drawing done on Microsoft Paint and then integrated on the blockchain. However, NFTs with use cases are becoming much more popular, providing the NFT holder with benefits like the ability to play and earn cryptocurrency from blockchain-based video games, access to social media influencers and celebrities, sports memorabilia, and more. While NFTs are digital assets, they also access goods and services in the real world.
One of the most popular NFTs — Bored Ape Yacht Club — provides an owner with access to a chatroom with celebrities on Discord, a text, video, and chat app used by over 300 million people. The average price for a Bored Ape Yacht Club NFT is 95 Ethereum, known as ETH (the world’s second most popular cryptocurrency), equivalent to $232,560.00.
In 2021, trading in NFTs reached about 22 billion dollars. In addition, last year, venture capital firms invested over 4 billion USD into NFT projects, which is according to Venture Capital Journal, “eleven times more than the previous seven years combined.” Open-source research suggests the NFT market will grow by 147.24 billion dollars in the next four years.
While NFTs are present on Twitter, Meta (Which owns Instagram) recently announced its plans to incorporate NFTs into its platform.
Thousands of NFT sales occur every hour, and new NFTs are released daily on NFT exchanges like OpenSea. However, according to OpenSea, the largest NFT marketplace, nearly 80% of NFT projects on its platform are either “spam, plagiarized, or fake collections.” Further, cybercriminals frequently target NFT holders, NFT projects, creators, and NFT exchanges.
With NFTs projected to have a significant financial impact on the digital world, analysts researched the digital assets further and determined how NFTs could gain more mainstream adoption in the future. Additionally, we investigated how scammers use NFTs to commit fraud on the blockchain and will provide some suggestions for mitigating risk regarding NFTs in this brief.
Brief Background on NFTs
The first NFT, the Colored Coin, was created in 2012. The Colored Coin, which was on the Bitcoin blockchain, had multiple use cases. Per Exhibit.Tech, its use cases were for “coupons, real estate, [the] possibility of creating your cryptocurrency, distribution of a company’s shares, and purchasing subscriptions.” However, research indicates that the use cases proposed for Colored Coins did not receive implementation on the blockchain.
In 2017, CryptoPunks were released on the Ethereum blockchain. Initially, CryptoPunks were free to anyone with an Ethereum wallet. CryptoPunks had no use case but gained popularity as the first widely recognized digital art pieces. The current lowest price available for a CryptoPunk is 56.54 ETH, which equates to approximately $138,000.00.
NFTs began to receive more mainstream adoption in 2021, with the highly publicized launch of the Bored Ape Yacht Club and other projects.
NFTs with Use Cases
NFTs are quickly becoming a popular asset within the gaming world, an approximately 155-billion-dollar industry. Some of the largest gaming companies globally have expressed interest in bringing NFTs into gaming. Those companies include Nintendo, Square Enix, EA, and Ubisoft.
Our research suggests that many people purchase NFTs because their primary use case is tied to a video game, where they can play and earn rewards like cryptocurrency. With over 2 million users, Axie Infinity is the most popular play-to-earn game on the blockchain. Those who own NFTs with play-to-earn utility take the rewards from their game and exchange them for USDC, a stable coin cryptocurrency backed by the U.S. dollar.
While gaming may be one of the most popular use cases for an NFT, NFTs use cases are also associated with sports, travel, philanthropy, the metaverse, virtual land, digital identity, and exclusivity. Celebrities like NFL quarterback Tom Brady, business magnate Mark Cuban, and Hollywood actress Reese Witherspoon have invested in NFTs.
Exclusivity is a significant driver of NFT ownership. For example, analysts’ research identified an NFT called Space+, which aims to provide NFT owners with real-life space experiences.
Photo Credit: Space+NFT
Scammers and NFTs
The most common form of an NFT scam is called a rug pull. With a rug pull, NFT creators develop a significant level of support for their project on social media and considerable funding from either investors or consumers interested in the project before it goes live. However, the NFT does not meet the standards it promised consumers on its launch day. As a result, the value of the NFT plummets, and its creators shut down the project.
In March 2022, the Department of Justice charged Ethan Nguyen and Andre Llacuna, who launched the NFT, Frosties, with one count of wire fraud and committing money laundering for their rug pull with Frosties.
The DOJ press release for Nguyen and Llacuna’s arrest reads, in part, “HSI Acting Special Agent-in-Charge Ricky J. Patel said, “‘The trending market and demand for NFT investments has not only drawn the attention of real artists but scam artists as well. The arrested thieves allegedly hid behind online identities where they promised investors rewards, giveaways, and exclusive opportunities before implementing their ‘’ scheme – leaving investors with empty pockets and no legitimate investment.’”
4 Things You Can Do to Avoid an NFT Scam
- Perform multiple Google searches about the NFT and the team members who are part of the project. Many NFTs have team members with aliases or who are anonymous. We suggest avoiding these NFT projects, as they could be future rug pulls.
- NFTs are receiving billions in investment from venture capital firms. If the NFT website does not have a professional look, or there are misspellings and poor grammar, it could be a future rug pull.
- If the NFT website asks you to provide your private key for your cryptocurrency wallet, it is most likely involved in illicit activity.
- Perform a reverse image search of the NFT art. You can do this by going to Google, clicking images, and uploading. The art may be stolen if the results are returned with the image on many different websites or platforms.
In 2022, we assess that NFTs will likely receive more funding and mainstream support than reported in 2021. NFTs with use cases that provide exclusive benefits to digital asset holders will probably be the primary driver of the NFT market in 2022. In addition, as NFTs generate more considerable revenue, scams and fraudulent activity will increase, creating more risk in the blockchain environment. NFT holders who do not perform due diligence will likely fall victim to NFT scams.
With the further adoption of NFTs on social media, general consumer awareness about NFTs will also grow in 2022. Instagram, which has over 1 billion users, will begin testing NFTs this week. Other social media platforms are likely to follow similar trends with NFTs.
With NFTs projected to become a 100-billion-dollar industry, investors, collectors, and creators of digital assets will remain at risk. However, without significant educational awareness regarding rampant scams in the NFT marketplace, NFT exchanges will continue to be plagued with illicit activity.