Investing in NFTs safely can become complicated, as the booming market has led many cybercriminals to take advantage of the freedom provided by blockchain to scam, making it considerably more difficult to identify which initiatives are hiding a scam.
NFT scams can arise in many types of projects, some even use special techniques to hide the fact that it is a pyramid scheme. However, there are several methods by which we can identify NFT scams so that we can make money by playing and investing safely without taking any major risks.
Making money playing blockchain video games has become the main source of income and investment for millions of internet users over the last year, as many titles offer NFTs as digital assets that can be traded for a source of income. Likewise, some traditional platforms such as sports teams, restaurant chains or artists have launched their own crypto-collectables as a way to enter this growing market and make some profits. It is precisely this growing popularity that has attracted the attention of cybercriminals, who have found a new means to carry out their misdeeds.
Although the architects recreate all the stages of a project to simulate that it is a solid and reliable one, there are slight nuances that are impossible to disguise, being those the elements that we must evaluate to avoid being victims of NFT frauds.
In order to provide you with a better experience when investing in NFTs, we have put together a guide full of tips and advice to help you identify scams, so that you can invest safely and help other new investors. Let’s learn how to spot NFT scams!
NFT Scam: What are they?
Scams that use internet technology to commit fraud are known as scams. Like ordinary scams, they are caused by cybercriminals who seek to generate profit by deceiving different users. The most commonly used and effective methods are often hidden behind: phishing emails, malicious software, infected files or web spoofing.
However, NFT scams are those online frauds that are developed using non-fungible tokens as a means to take advantage of investors; these are a new form of pyramid scheme. They are usually designed in such a way that the cybercriminals use part of the investment made by new participants to pay a supposed profit to the first participants so that the first investor receives a small sum of money as an incentive to continue contributing. In addition, this scam model seeks to get participants to recommend the platform to third parties in order to attract more participants.
NFT scams: How to detect scams?
In general, NFT scams have a number of basic characteristics that make them stand out negatively from legitimate projects, because in most cases it is impossible to hide the elements that prove that a project is an imminent fraud. In this sense, the best alternative to invest safely is to analyse NFTs before making any purchase. Some of these features are simple to identify and others will require a little more research, but to spot a scam you will need to assess the following key points:
1. Promising profitability using a system centralised on themselves.
It is important to learn to differentiate when a project is generating profits through a viable method. Most legitimate NFT-based projects generate their profits using a standardised protocol, such as the POS (Proof of Stake) system, which has a structure that allows it to grow.
However, scams often base their profits on temporary contracts, which are based on a set of regulations that are not transparent and cannot guarantee a secure profit. Generally, NFT scams use masternodes or cloud mining systems.
2. Fixed and guaranteed profits
Due to the exchange-based nature of blockchain technology, it is virtually impossible to guarantee investors a secure profit, as the economic benefit can fluctuate according to the market. However, scams do not only promise a fixed profit, but also very accurate monthly averages, which is often synonymous with manipulation of figures and an imminent scam.
3. Referral system and recruitment of new investors
Referral marketing has aroused the suspicion of many internet users because it has become strongly associated with pyramid schemes, although legitimately many free projects use it as an effective marketing strategy to remain sustainable. In the case of NFTs it is different, as it is impossible for profits to come from the number of referred users.
On the other hand, there are projects where the promoters claim that the profits do not come entirely from the referral system, but a significant part of them do. These are clear indications that the project in question is based on a pyramid scheme.
4. Multi-level referral system
Referral marketing often uses a couple of different levels to gain more money and followers by giving contributors an incentive. However, scammers often employ up to twelve different levels of referrals in order to be financially able to respond to early investors. In this way, using the referrals’ contribution, the participant who attracted them is rewarded. Also, any project that requires a referral from a third party in order to participate is very likely to be a scam.
5. No control over tokens
One of the most notable elements in identifying NFT frauds are projects where ownership of the tokens remains in the hands of the developers or that require control over the private keys of the wallets where they are stored.
Today, there are many noble projects that delegate their digital assets to nodes or masternodes; but in no case do users lose or relinquish ownership of their tokens. The only action that is carried out is delegation through a smart contract that protects the cryptocurrencies from any action that a third party may take, with the owner having total freedom to dispose of them as he or she sees fit.
6. Overestimating the scope of the token
One of the most common tactics used to deceive people who are just starting their adventure in the world of blockchain and NFTs is to overestimate the scope of the tokens belonging to a project. In most cases, promoters will use one of the following claims: their assets are superior to others, they have a large volume of transactions, the token will appreciate in value even when it loses utility, and so on. As you can see, these are phrases designed to attract users, but which in reality hide alarming figures and bad intentions.
7. Companies registered somewhere in La Mancha
One of the most difficult points to detect in scams are the registration seals since in many cases they appear to be legitimate and in reality hide illicit actions. It is a mistake to pigeonhole the countries with the most fraudulent registrations, as some projects developed in those nations may be legal.
Additionally, when projects boast about their legality in an exaggerated or blatant manner, it tends to set off even more alarm bells, as a serious company will not convince anyone of its legitimacy. In some cases, scams may be registered and supported by other institutions, which only demand the payment of a commission and the fulfilment of a series of minimum requirements, so it is essential to pay attention so as not to be fooled.
8. Administrator permissions
NFT projects whose developers have the power to suspend users’ accounts without prior consent to access their funds or their wallets are highly likely to be fraudulent. This happens because the scammers can wait for a large number of users to acquire assets and then keep them for themselves, claiming that they broke some regulations and keeping the funds for themselves.
9. Need to defend the project
Sometimes, everyday situations give signals about what is going on around a person, having the ability to show situations that they would otherwise never notice. Thus, someone may participate in an NFT project and receive their payments on time, thinking that they have made a very good investment and are willing to share their profits with others.
However, when recommending the project to their friends and acquaintances, they point out that it is a scam and brand the investor as a scammer; the latter having to defend the legitimacy of the project for hours. If this situation occurs on a regular basis, they may find themselves in a scam even if they have not noticed it.
While this situation is difficult for any investor, it is even more difficult for those who recommend projects to others, as it will directly affect their reputation. By promoting an NFT scam, they will lose people’s trust and it will be very difficult to win them back. Therefore, if you have any doubts about the project you want to invest in, it is best to do good research or look for another one.
Investing in NFTs: Keys to knowing if an NFT is legal and safe
The nine keys explained above can be very useful in identifying scam NFTs, but there are also characteristics that indicate when a project is legitimate and safe.
On the other hand, it is necessary to remember that any NFT investment comes with its share of risk; it could suffer a severe fluctuation that could cause you to lose your investment. However, such a potential scenario would be governed by market movements and not by fraud.
However, viable CFN projects have the following characteristics:
1. Development team
The teams behind the NFT projects usually have a proven track record of other work, so it is possible to verify their legitimacy and reputation in the field. In addition, it is an excellent alternative to do some research on the founders to learn more about their backgrounds. Similarly, projects should be able to answer the most basic questions about their development to interested parties.
2. Smart contracts
When NFTs are created and minted, unique code is executed and stored in smart contracts, information that is automatically added to the blockchain on which they are hosted.
Thanks to the transparency that blockchains handle, anyone can check that the NFTs are linked to a smart contract. In addition, they can check the history of the token on websites such as OpenSea.
The whitepaper is the calling card of any crypto project; it contains information about the development of the project, its technique and value proposition compared to others. Therefore, if the project in question has a properly written and informative document, it has points in its favour in terms of transparency.
Legitimate projects have a good amount of information provided by the promoters and developers; this usually clears up any doubts that potential investors may have. Transparency is the key to any blockchain development, which is why many even publish the code developed on sites such as GitHub so that interested parties can audit it and corroborate its progress.
5. Decentralised projects
As mentioned in the key points to consider when identifying NFT scams, no respectable project is designed under the centralised concept. On the contrary, blockchain technology seeks to incentivise decentralised trading to provide greater transparency; hence its premise is to give ownership to its rightful owners. They also ensure that if a person does not hold the keys to the assets, they are not theirs; as a third party, custody is not allowed in the digital asset ecosystem.
In general, blockchain technology tends to provide security to people investing in blockchain-related projects; this creates overconfidence that can be dangerous if the reputation of the counterparty is unknown. This is similar to exchanging cryptocurrencies for fiat money using P2P trading on exchanges, where the platforms themselves, however secure they may be, warn about having certainty before releasing funds.
In other words, although blockchain technologies are secure and innovative in terms of their development, we should not forget that they are still used by humans; therefore, we need to be cautious when choosing the NFT projects in which to invest.
On the other hand, some experts advise paying particular attention to white papers when investing in NFTs, saying that developers should provide information on the total potential losses of the invested capital. Similarly, they believe that any project that does not provide relevant information to users and only promotes the sale of tokens shows strong signs of becoming an NFT scam; although there is also the possibility that it is a project that is very likely to fail.
However, while there are many NFT scams on the web, you need not fear; in most cases, it is very easy to identify such intentions. As you gain experience in the blockchain ecosystem and participate in more NFT developments, you will notice that it becomes easier and easier to identify the elements that lend legitimacy to a project or flag it as a scam.
By taking advantage of all these tips, you will be able to invest safely in the NFT projects that catch your attention. Be cautious and enjoy making money by playing.