Letter #69: NFTs - Beauty In The Eye Of The Behodler

Read now to learn how NFTs are anything but immune to some of the most blatant scams in crypto.

  
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Dear Readers,

The arrival of Bitcoin and Blockchain have been revolutionary for society at large. On the whole, we’re moving to a place in which we can successfully take back the power and control that oppressive governments and businesses have held over us for centuries. It’s no exaggeration to say that the world will be completely different in fifty years as a direct result.

That said, not all developments within the space have been positive. Exchanges have been hacked, scamcoins have launched, and rugs have been pulled. As has happened time and time again throughout history, revolutionary technology that gives freedom to its users has been appropriated by those who would use it to profit at the expense of everyone else. For that reason above all others, it’s essential that new participants and veterans alike in the crypto space do their own research and protect themselves.

The newest scam in the space has come on the heels of what is heralded as one of the most revolutionary blockchain technologies of all: non-fungible tokens (NFTs). As we know from prior discussions, NFTs are cryptographically unique representations of physical (like real estate) and digital (like jpegs) assets on a blockchain. The popularity of NFTs, especially of the digital variety, has exploded during 2021, with popular NFT collections like Cryptopunks and the Bored Ape Yacht Club accumulating tens of millions of dollars’ worth of value in the minds of hodlers, traders, and speculators alike. But their growing popularity has a darker side as well.

NFTs: Beauty is in the Eye of the Behodler

It will probably come as no surprise to most readers that the majority of NFT trading volume occurs on top of exchanges tailor-made to service buyers and sellers of digital art. While bread and butter cryptocurrency exchanges like Coinbase are trying to break into the space with NFT exchanges of their own, NFT exchanges like Opensea and Rarible dominate trading volume within the space.

These exchanges have made the process of exchanging NFTs relatively simple. In fact, they’ve made the process so simple that some particularly clever scammers have started selling their own NFTs to themselves at exorbitant prices in the hopes of manipulating demand for their NFT in two ways:

Raising an NFT Collection’s Average Price

In markets for fungible goods, or goods that are indistinguishable from one another, average price doesn’t really matter because the price is usually the same from unit to unit anyway. However, the opposite is true for rare, non-fungible goods like NFTs and art. For example, if the price of Van Gogh’s “Starry Night” doubles, it’s a safe bet that buyers will start to pay a premium on other Van Gogh pieces too.

That same buyer mentality can also apply to buyers of popular NFT collections. As a result, the ease of exchanging NFTs coupled with the anonymity of blockchain has given scammers the ability to gradually raise the average price of the collection their NFT belongs to by selling it to themselves over and over at higher prices until an unsuspecting buyer comes along and pays the inflated price for the scammer’s piece of the collection.

Selling an NFT at a “Loss”

I’d argue that this type of manipulation is the more harmful of the two and it works like this:

The impact of raising the average price of an NFT collection is diluted over all pieces of the collection. Meanwhile, creating fake price history for one’s own NFT is a very direct way to scam unsuspecting buyers out of their hard-earned assets when the “discount” they believe they’re receiving is the exact opposite.

The most extreme example of this behavior came courtesy of NFT Cryptopunk #9998, which sold for over $530 million back in October. A staggering sum to be sure since the average price for Cryptopunks at the time was a few hundred thousand dollars. In fact, it was the priciest art sale in history, surpassing the $450 million sale of Salvator Mundi by Leonardo Da Vinci in 2017. The public nature of blockchain worked against this scammer however, as sleuths in the space were quickly able to identify that a single entity appeared to own each of the wallets involved in the “purchase”.

How Do We Stop This Type Of Scammer?

The decentralization and pseudonymity afforded by blockchain are a godsend…for all users, good and bad. In my opinion, there are two answers to the question at this point, and neither of them is palatable:

The first answer is that we can’t. Public blockchains are open to everyone and there’s no limit to the number of wallets that a single person can control. On top of that, a true decentralized blockchain doesn’t care about the reasons behind a transaction. As long as transactions are valid and transaction fees are paid, scammers can perpetrate fake NFT sales as often as they’d like.

The second answer is that NFT sales can take place over highly centralized exchanges with robust KYC procedures and enforcement. Such a course of action would put the exchange operator in the position of limiting self-dealing transactions between the same user’s wallets. Of course, one of the main points of blockchain is to eliminate the need to rely on centralized organizations. So, in the long run, this option is far from desirable.

Perhaps the best thing we can do is to stay educated on the NFT space in general and the historical value of the NFT or collection in which we’re interested. And hope that scammers are dumb enough to leave traces of their scams easily visible on the blockchain of course.


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