Non-fungible tokens (NFTs) are most likely the most significant technology trend since the beginning of 2021. Many industries are welcoming the concept in order to secure early-bird benefits before it becomes fully-fledged.
However, because this is a new industry, there isn't much information available about its safety, sustainability, and regulation. While the observers take notes, users must figure out the dos and don'ts on their own. Nonetheless, here are a few key takeaways to keep you safe in the world of digital assets:
It Is A Volatile And Decentralized Market
The lack of regulation and the digital nature of NFTs, like cryptocurrencies, make it impossible to implement a standard measure of quality. Furthermore, the technology is not backed by any form of insurance, which means that buyers assume all risks with no recourse.
Fraudsters can sell you NFT assets at exorbitant prices, only for you to discover their worthlessness when you have no bargaining power.
The Crime Rate Among NFTs Is Increasing
In the NFTs space, there has been an alarming increase in cases of fraud, theft, and wash trading. One of the most popular NFT markets, OpenSea, discovered that more than four-fifths of the assets traded on their platform were spam, fake collections, and copied works.
Because of the numerous platforms involved in the management and trade of NFTs, it is nearly impossible for regular buyers to identify scams.
Security Risks Exist In Both Decentralized And Centralized Exchanges
Centralized exchanges (CEX) are thought to be safer because all transactions are processed by a third party who establishes a minimum standard for implementation across their market. However, in the case of OpenSea, it is clear that even centralized exchanges are vulnerable.
Buyers and sellers deal directly on Decentralized Exchanges (DEX), eliminating the possibility of implementing a minimum standard measure. In this case, market participants are completely on their own and make excellent targets for scams. It is also more dangerous to forget your password in a DEX.
Cyberattacks Are Unavoidable
The NFT, like any other industry, is a hot target for cybercriminals seeking transactions worth hundreds of millions of dollars in a single transaction. Because not all humans are equally intelligent, social engineering attacks are limitless.
For example, hackers can forge emails purporting to be from an NFT company, requesting asset owners to verify their credentials due to suspicious activity. They may send attachments containing malicious code that will be installed in the user's account for future access or damage.
Smart Contracts Are Dangerous
Smart contracts can close NFT transfers when both parties meet the terms, without the need for a central party's approval. Their vulnerabilities, however, have spread to the NFT market, where they can be used to reverse funds post-transfer.
CryptoPunks believes that hackers may be able to recover funds from contracts after discovering a bug that was used to prevent funds from reaching an ETH seller. As a result, the company relaunched with a completely new smart contract system. In another case, $600 million was stolen from Poly Network due to flaws in their smart contracts.
It is debatable whether NFT owners truly own their assets. The bottom line is that asset owners only purchase identifiers that can be used to view NFTs on third-party platforms.
The InterPlanetary File Systems (IPFS) nodes are managed by NFT minting companies, which ties their existence directly to the identifiers held by NFT owners. If the companies fail, NFT owners will lose access to their assets or see their value depreciate.
The Last Word
Despite the fact that cryptocurrency technologies have limitless potential, we cannot ignore the uncertainty that comes with their relatively short lifespan. You can only risk what you can afford to lose until more effort is put into improving their safety and regulation.