With the rise of the non-fungible tokens (NFT) market, more and more new projects are coming out. With this, it also tends to be difficult to identify if fraud is hidden among so many initiatives, although there are some techniques to discover it.
There are a series of elements to take into account to avoid the traps laid by those who they swindle the unwary. That is precisely what the safe practices guide for the NFT market, recently published by the team of the specialized site NonFungible, wants to prevent.
So, in order to encourage good practices, The guide guides users about the steps to follow to distinguish promising projects from those that are not .
In that sense , specialists recommend abiding by an eight-point checklist that should be considered before making any purchase, regardless of the type of NFT that the project contemplates.
1. Check each NFT and its smart contracts
When someone creates or mints a NFT, executes a code that is stored in smart contracts. This information is added to the blockchain where the non-fungible token is managed.
Thanks to the transparency of public blockchains, this data can be verified. It means that any interested party can see precisely what is the underlying logic of a smart contract linked to a digital asset.
To identify if the NFT project is a fraud, NonFungible specialists recommend check the data published in the markets such as Opensea to determine its legitimacy, as well as its history.
2. Check which team is behind the project
The safe practices guide recommends that before buying NFT users check who is behind of the initiative . “Take time to explore the section of the project where the developers introduce themselves, and from there do your research on the founders. Sometimes this helps to avoid terrible scams », they point out.
3. Why is the NFT you are interested in valuable?
Although the Question may sound trivial and the answer depends on each use case, specialists recommend answering honestly: why do you consider the NFT you are interested in valuable? This will lead you to rethink the reasons why you think you should have it and pay a certain portion of money for it.
Also, the researchers invite to check if the digital asset is useful for something , since, among other use cases, it is also used to sell crafts and physical sculptures in digital galleries.
Another element to consider is to make a projection to determine if the price of the NFT is likely to increase or decrease over time. This in order to calculate if the asset will revalue over time or if on the contrary it will devalue .
4. Is it a decentralized project?
«It is important to understand when your assets really belong to you, ”the NonFungible team notes in the guide. With this, they remember the phrase that exists in the ecosystem, which reads: “if they are not your keys, they are not your bitcoins.”
In this way they alert users so that they do not forget that must keep their crypto assets for themselves . “If, on the other hand, someone else guards them, then they are not yours,” they warn.
In the guide they also recommend considering whether the developers of a project have the ability to suspend the account of the users or access the funds stored in their wallets.
They also believe that before buying NFT, the following questions should be answered: will the image, video or any other content really belong to you? linked to the NFT? Is the blockchain that coined it decentralized?
5. How does the project ensure that the NFT it issues is a scarce asset?
To check if an NFT project is a fraud, the guide advises users to check if there is any kind of risk that developers will release hundreds of other similar assets at any time. If possible, the asset loses value as a unique product, the main characteristic of collectible non-fungible tokens.
To give a concrete example, we can refer to one of the first NFT projects, the CryptoPunks, which are 10,000 images of 24 by 24 pixels of various punk characters. When they debuted in 2017, it was possible to get one just by paying the commission of an Ethereum transaction.
However, once 10,000 CryptoPunks had been claimed, no more of these digital characters could be created. Therefore, the offer was limited from the beginning by the smart contract . Once placed on the Ethereum blockchain, the contract was a binding agreement that established how many punks there can be.
This scarcity and limited supply, subject to greater demand, drives up the price , as with bitcoin.
Market manipulation exists in the world of NFTs
NonFungible analysts warn of another enemy hiding in the world of the NFTs, such as the Wash Trading . It is a form of market manipulation in which a trader simultaneously sells and buys the same financial instruments to create a false impression that there is high demand.
Has been identified Wash Trading in the NFT markets since the year 2018. It happened at a time when more than half of the trading volume was generated by a handful of Ethereum wallets trading the same assets over and over again. “It was obvious for this type of reason that it was not a human activity,” the analysts point out in the guide.
However, this deceptive practice has evolved over time, although there are methods to detect it if certain patterns are identified. Among them, the most basic is called Wash Trading 101, which is one of the easiest to identify.
6. Wash Trading 101
Wash Trading 101 happens when a buyer and a seller exchange the same asset with each other insistently. It is characterized by presenting very high NFT prices and precise intervals between each sale, such as every 2 hours, for example. Also, the price of the asset can stay the same over the course of different transactions, or it can go down slightly, so that gas costs are taken into account in the equation.
The safe practices guide for the NFT market shows the characteristics of Wash Trading 101, in which the user identified in the image as 0xA sells an asset at 0xB. The same asset is then resold shortly at 0xA.
This operation can be performed multiple times using the same addresses . In some cases, the asset is traded tens or hundreds of times between the same two portfolios.
Analysts show a movement that allowed them to detect the Wash Trading 101 modality. It happened in July 2019 when two users traded the same asset at least 10 times. During this process the price of NFT gradually decreased over time, from 2.14 to 1.9 ethers (ETH).
Although Wash Trading 101 describes a procedure to manipulate the market between two players, it can also include other participants , who buy and sell the same asset with each other.
7. Top Selling Creator Pattern
Some Content Creators on NFT use a manipulative practice to give the false impression that they are in high demand . This occurs when an actor identified as 0xA, sells an asset at 0xB, but immediately afterwards the buyer returns it to 0xA for free so that it resells it to a third participant, in this case 0xC.
This pattern is unique because it artificially inflates the sales volume of a creator, as can be seen, because it sells each asset twice.
8. The tornado technique
The tornado technique is also used by creators from NFT who pretend to have a lot of sales. In this case user 0xA sells an asset at 0xB, but then the same asset is sold between different wallets. Finally, the NFT returns to 0xA once it is bought again.
“This pattern presents a very interesting opportunity to identify addresses that are involved in manipulating commercial activities,” NonFungible analysts point out.
Although there are other more complex patterns of market manipulation, all are characterized by trading the same NFT between a group of people. However, at this point it is necessary to point out the observation that the analysts make to take into account, since there is always the doubt that this type of operations happens between several actors by coincidence , without this in itself representing that there is market manipulation.
There are also other elements to consider, such as the fact that the participation of many purses does not always mean that behind them there are the same number of people involved.
Let us also remember that it is wallets and not necessarily human. In other words, behind an advanced pattern, which includes a dozen purses, it is very possible that in practice it is only one or the same person.
Guide of Safe Practices for the NonFungible NFT Market.
In any case, like this As the safe practices guide throws data in order for users to protect themselves while operating in the NFT market, CriptoNoticias has also reported on four types of scams that sneak into the boom of collectible tokens.
These variants include potential attacks by phishing , promises in exchange for something, disguised as an airdrop or distrib Free use of tokens and other scams launched on social media to catch dupes who have an interest in NFTs.
