Cryptogram_26Aug2022

How to spot NFT scams

August 26, 2022

26 August 2022

In this issue

Hello, Lots of crazy things happen in crypto land, but crazy-of-the-week is what’s happening in the NFT market and BendDAO.NFTs are not as easy to trade and thus pretty illiquid compared to cryptocurrencies. As an NFT-holder who doesn’t want to sell an NFT but needs currency, you would very much like to leverage the NFT rather than sell it. That’s where lending protocols like BendDAO come in, they lend ETH by keeping your NFT as a collateral. BendDAO gets that ETH from other small depositors, like you, who want to make interest off it.Now the markets have crashed and a lot of the depositors want their ETH back. BendDAO doesn’t have enough of it, so they turned to their borrowers. Borrowers don’t have it either, or they don’t want to give it back, so they just handed over their collateralized NFTs to BendDAO. Here’s the fun part: those NFTs are worth far less now. NFT floor prices (the lowest price an NFT is selling for in a particular collection), have crashed by about 60% in the past few days. So, borrowers don’t want their Apes back, depositors want their ETH back and BendDAO doesn’t want to liquidate these NFTs at these prices.Sheesh. There are a lot of problems we can talk about here, like why BendDAO even exists or that their marketing poster should look like…

But the biggest problem is how overhyped, overpriced NFTs were, and all the scams the hype hid. In this issue, we tell you WHY we think that happened, WHAT some of the scams were, and HOW you can protect yourself from these situations. 

The newsletter is put together by Giottus Crypto Platform and The News Minute’s Brand Studio. You can read all the previous issues of Cryptogram here.

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THE BIG STORY

The big story  How to spot an NFT scam

Something funny has been happening to the NFT market. Since the most valuable NFTs such as artwork of Bored Apes and punky-looking characters are sold in ETH, the prices of NFTs and ETH typically tend to move in lockstep.That has not been the case in the past couple of months. Prices of ETH and NFTs that run on the Ethereum network have diverged sharply. ETH’s price, in anticipation of the Merge, has soared 54% between June 13 and August 15 this year. NFTs, on average, have declined almost 19% over the same period, according to researcher NonFungible. Interest in NFTs has continued to wane and trading volumes have dropped precipitously in recent months, according to tracker DappRadar. The world’s biggest NFT marketplace, OpenSea, is seeing its lowest monthly sales in a year, according to Dune Analytics.Across all decentralised finance categories, NFTs have seen the biggest average weekly drop in transaction volumes in the two months since the cryptocurrency crash from May 2022 to July 2022, according to Chainalysis.

While freefalling cryptocurrency prices may account for some of the drop in NFT transaction volume, the decline is too steep to be explained by this alone, according to Chainalysis economist Ethan McMahon.What else could be the reason? An inflated market.

Scams galore High-profile scams in 2022, such as the $600-million hack of NFT gaming company Axie Infinity in March and the $2.8-million worth of NFTs stolen from the Bored Ape Yacht Club’s Instagram account in April, have induced uncertainty in the market, which could explain why the NFT market is sluggish. But in retrospect, the real question to ask is: was the initial hype real appreciation in the market or was it whipped to cover up a lot of shady stuff happening behind the scenes?Part of the reason why the NFT market is now being looked at with suspicion is the fact that unlike cryptocurrencies, KYCs are not mandated to trade NFTs. NFT trade happens between wallets and not identified individuals, which makes NFT money laundering a very real possibility.Crypto investor and uber-bearish crypto commentator Mr. Whale has drawn attention to this darker side of the burgeoning NFT space. He argues that because art is so subjective and in the eye of the beholder, NFTs often do not face scrutiny from lawmakers and regulators. This aspect of art is the primary reason why it has been used as a vehicle for illicit financial flows for centuries, he added. “If you have $1 million in illegal money, you would spend $1 million on your own NFT. You can do this yourself or use a trusted third-party account. Then you resell the trash for nothing and bank the profits.”Heh. So, think about it. Some of the Bored Ape hype could just be a bunch of shady crypto bros trading NFTs with themselves at insane prices so they can convert their “black” into “white.” 

It’s not just laundering, a lot of NFT sellers are making a killing with wash trading.Wash trading, meaning executing a transaction in which the seller is on both sides of the trade to paint a misleading picture of an asset’s value and liquidity, is another area of concern for NFTs.In the case of NFT wash trading, the goal would be to make one’s NFT appear more valuable than it really is by “selling it” to a new wallet controlled by the same owner. In theory, this would be relatively easy with NFTs, as many NFT trading platforms allow users to trade by simply connecting their wallet to the platform, with no need to identify themselves.Analysis of NFT sales to self-financed addresses shows that some NFT sellers have conducted hundreds of wash trades. 

Source: THE 2022 CRYPTO CRIME REPORT (Chainalysis) 

Using blockchain analysis, they identified 262 users who have sold an NFT to a self-financed address more than 25 times. While they can’t be 100% sure that all instances of NFT sales to self-financed wallets are intended for wash trading, the 25-transaction threshold gives a higher degree of confidence that these users are habitual wash traders.Most NFT wash traders have been unprofitable. But the successful ones, a group of 262, have profited immensely overall. 

Source: THE 2022 CRYPTO CRIME REPORT (Chainalysis)

NFT wash trading exists in a murky legal area. While wash trading is prohibited in conventional securities and futures, wash trading involving NFTs is still not illegal under the law. However, that could change as regulators shift focus and apply existing anti-fraud laws to crypto markets. 

How to spot NFT malpractices

Now, let’s move past all this general knowledge and give you more specifics to work with. As an investor, how can you spot malpractice? Here are a few pointers. 

Price:

If the NFT you’re looking to buy is priced significantly higher than the collection’s floor price, then it is possible the NFT has been wash-traded, especially if that NFT has little to no rare attributes that might explain a higher price point.

Transaction history: 

Tools like Etherscan and BscScan can be used to check the transaction history of an NFT. Some marketplaces, like OpenSea, also display this information on their listing pages. A sudden jump in the price of an NFT without any prior activity could be a sign of wash trading.

Previous owners:

Look out for wallet addresses that show up multiple times in the transaction history. If the same wallet has purchased an NFT multiple times, then it could be a sign of wash trading. You can also look at individual wallet addresses to see if they’ve interacted with other wallet addresses listed in an NFTs transaction history – another potential sign that the wallets may be closely linked to one another.The saddest part about all the hype and scamming is that genuine use cases of NFTs are being overlooked and being ignored due to the hype. NFTs are not an easy way to make money.Beyond buying and selling art, NFTs can be used to prove authenticity of awards and rare goods, adding value to micro-transactions and register domain names or real estate in both the virtual and real worlds. Many innovative projects seek to emphasise the utility of NFTs.Whatever the future for the NFT market, many agree that it has reached an inflection point from which anything is possible. Like Irene Veng, founder and CEO of the Oxford-based Certi.NFT, said, perhaps the NFT market crash is a reminder that earning money is not the main purpose of NFTs.

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  THE TOP FIVE 

Stories from this week you cannot miss

  EXPLAIN, PLEASE 

Demystifying the world of cryptocurrency

This week, we explain STAKING POOLS Under the “proof-of-stake” consensus mechanism, transactions on the blockchain networks are validated by participants who ‘stake’ their tokens to let them be utilised for processing transactions in return for rewards. But to get a validator status, you need a minimum amount of computational strength. A participant with a lot of tokens has higher computational power and thus can get bigger rewards. A staking pool allows several crypto token holders to come together to pool in their tokens and combine their computational resources, which gives the pool a validator status and thus rewarding all stakeholders with tokens for their computational resources’ contribution. A pool basically allows them to unite their staking, so they have a higher probability of earning rewards.That’s it for this issue, see you next week. 

If you have any questions or feedback for us, write to us at [email protected]. You can check out the previous issues here.

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