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Buying NFTs: Watch out for these risks

BVS has taken a closer look at trading in NFTs. The Association of German Experts points out a number of significant risks. How much is there to the warnings? We explain the dangers of fake NFTs and fraud.

The “Bundesverband öffentlich bestellter und vereidigter sowie qualifizierter Sachverständiger” (BVS for short) has published its assessment of “Non-fungible Tokens” (NFTs). In doing so, it warns above all of the risks of trading with NFTs. While the association is not entirely opposed to NFTs, it points to three grievances:

  • Authenticity of the artworks,
  • wash trading and
  • Quantum Resistance.

Two of these issues are related to the decentralized nature of trading, and quantum resistance is related to future technologies. It is worth looking at the individual positions of the Federal Association.

1. Lack of authentication of artists

In an NFT marketplace, basically anyone can offer their own non-fungible tokens for sale. Anyone can be an artist or imitate others. To trade NFTs, all you need is a wallet and the NFT you want to offer for sale. This can be digital artwork, pictures, 3D art, music pieces, videos and much more. The artist himself is initially just a number in the blockchain, an address, connected to the NFT. Risks arise when you want to purchase the artwork of a particular artist. This is because it is not always certain whether the real artist is behind it.

Concrete risk of NFTs

“One concrete risk, for example, is that the issuer of an NFT on a blockchain initially only has a technical identifier. Whether this identifier actually hides the real artist must be checked outside the blockchain or confirmed by the artist him/herself, or verified by the trading platform,” BVS writes.

On decentralized exchanges like OpenSea, it is the users who hold the digital assets. Not the platform itself. Smart contracts regulate the purchases and sales, not an employee or trader. So how can you protect yourself against the risk of buying from a fake?

Tips to protect against fakes on NFTs

  • Blue Checkmark: platforms like OpenSea, similar to Twitter, have introduced a checkmark. This confirms that it is the verified artist. Generally, the markings only apply to profiles with many followers on social media. Other NFT markets such as Simple Market also have such checkmarks.
  • Verify accounts: To protect yourself against threats, it is always a good idea to check the accounts of sellers and artists (which are not always the same). However, not all of them disclose additional information. You might find a link to a website or profile on social media.
  • Checkingwith the artist: Check out the artist’s websites or social media profiles first. They may link directly to marketplaces and NFTs. Then you can be sure it’s the right work.

So check carefully before making a purchase. However, it is difficult to completely avoid the risk. If there is no indication that the Non-fungible Token is a work of art by the desired artist, then it is better to leave it alone. On the other hand, if you want to be active as an artist yourself, it’s best to follow our NFT instructions. The NFT experience report is also worth reading.

2. Wash Trading on the NFT Markets

Another risk is “wash trading.” This is a technique for manipulating markets. In wash trading, the trader buys and sells the value within a very short time to simulate increased demand. This artificially increases the price. The trader can end up selling much more expensive than the NFT is actually worth.

It can result in a total loss

“This can mean a total loss for an investor if he acquires an NFT that has been doctored in this way and later finds that he cannot find a new buyer for it and that it therefore has no value,” says Dr. Oliver Stiemerling, IT expert at BVS.

The decentralized nature of the NFT marketplaces makes it possible. Non-authentic artists can simply create multiple accounts and trade the digital artwork with themselves multiple times. Market manipulations of this kind are prohibited, however, such violations are hard to punish in the decentralized world of cryptocurrencies. Wash trading is a well-known problem on the Exchanges. Even CoinMarketCap, the largest crypto trading data website, has no answers for this that help the ordinary trader. The decentralized approach of the Exchanges is both a curse and a blessing.

As a trader, check the history

However, when it comes to NFTs, traders at least have the ability to track the trade history of the artwork. Each Non-fungible Token is unique, with its own distinctive identification number. Many NFT markets make the trading history of the token identifiable, including selling prices and traders. From this, it is possible to assess whether it is just a pushed token. Nevertheless, caution is advised. you cannot protect yourself 100% against a price drop. It remains a speculation even after a thorough examination.

NFT token in the hand of a woman
Check the risks oft art tokens or other before investing in NFTs

3. Danger from quantum computers

Quantum computers are the next evolutionary step in computing, the next big technological step. While normal PCs can only think in 0s and 1s, the capabilities of quantum computers are much broader. The name comes from the special processors that are subject to the laws of quantum mechanics. The fear: These computers have astronomical computing power and can thus crack otherwise secure blockchains.

Security of NFT transactions at risk

“If there is a working quantum computer before blockchains are retrofitted, it could throw the security of NFT transactions into turmoil. This is because a quantum computer could ‘crack’ the known digital identifiers, so that third parties could also execute transactions in someone else’s name or even duplicate their NFTs,” says Dr. Oliver Stiemerling.

So a threat to the blockchain and NFT owners? If so, then only in the future. A lot of time will have to pass before quantum computing takes hold. Further, it is not assured that quantum computers are actually that much better than regular PCs in all respects. Meanwhile, encryption technology is also evolving. It just needs an update to protect blockchains like Bitcoin’s and Ethereum’s against quantum computers.

NFT risks from new technologies?

Bitcoin, for example, uses the SHA-256 algorithm, which may already be resistant to quantum computing. So whether there is a risk to NFTs in new technologies remains to be seen. It should be mentioned that quantum-resistant blockchains already exist, for example, with IOTA.

What exactly are quantum computers?

While regular computers use "bits," quantum computers use "qubits" (quantum bits). A bit only knows the state 1 or 0. A qubit, however, can be both 1 and 0 at the same time. This is also called "superposition". This is supposed to result in the high speed of quantum computers. In the NFT market, people fear risks from quantum computers.

FAQ – Frequently asked questions

How secure are my NFTs?

Ultimately, you are responsible for the security of your Non-fungible Tokens (NFTs). You need a trusted wallet and must keep the private key protected. MetaMask is supported by many Ethereum applications, but it is not suitable for permanent storage. A trust wallet, for example, has a higher level of security.

Can I trust the decentralized NFT marketplaces?

It is always appropriate to exercise caution. Certainly, the crypto space has become very professionalized in recent years. Exchanges and NFT marketplaces want to provide safe and good platforms for their users. However, they cannot completely prevent fraud.

Why does BVS evaluate NFTs?

“BVS” is the abbreviation for the “Bundesverband öffentlich bestellter und vereidigter sowie qualifizierter Sachverständiger e.V.” The association consists of around 3,000 members, all of them publicly or state-employed experts in various fields. Specialists have also examined the risks of NFTs in their role. They prepare expert opinions for the judiciary, public authorities, business, industry and trade.

Thomas Grether

Journalist | Editor | Entrepreneur & Environmental Scientist.
Main focus: Tokenization | Digital Transformation Processes in Companies | Internet and Web Publishing | Environment

Thomas Grether

Journalist | Redakteur | Unternehmer & Umweltwissenschaftler
Schwerpunkte: Tokenisierung | Digitale Transformationsprozesse in Firmen | Internet und Webpublishing | Umwelt