NFT security: What are the legal and cyber security risks?
Are you thinking of buying NFTs and want to make sure that they are safe? Well, it is one of the best investments you can make in 2023. NFTs are one of the popular and high-return investments that are garnering attention all over the globe. These crypto-assets offer their users prolific benefits such as enhanced control and ownership.
Non-fungible tokens also serve a significant part in increasing the liquidity of typically illiquid entries. Despite the hype surrounding NFTs, innumerable risks and security problems may go unnoticed. However, this article will assist you in identifying some of the most notable flaws and potential issues associated with NFTs. Know more about NFT scams attacks.
The tremendous growth of non-fungible tokens has attracted hundreds of trailers worldwide to create a tokenized economy. In fact, NFTs are changing the definition of asset ownership and altering the virtual world’s landscape. Nevertheless, despite all these positive developments, non-fungible token security concerns are some unavoidable factors that must be appropriately addressed.
Understanding the negative side of NFTs and determining the risks in NFTs to avoid unnecessary hitches.
Are NFTs really secure?
“Are NFTs secure?” is among the first queries that arise in any debate concerning NFTs.
To address this issue in a single sentence, one may say that non-fungible tokens are not entirely safe and secure.
However, that does not mean that one must completely give up on NFTs. Instead, one must make an effort to comprehend the risks and vulnerabilities associated with NFT to avoid any adverse consequences.
NFT images are not stored on the Blockchain due to storage issues, which is one of its unique challenges. Instead, an image identifier (such as the image’s web address or hash) should be stored in the Blockchain. Know how to store your NFTs properly.
Thus, when someone buys an NFT, they are buying an identifier that can lead to a URL on the internet or the Interplanetary File System rather than the image itself. For the uninitiated, IPFS is one of the NFT storage options available for users.
In many cases, the IPFS node is operated from an NFT platform, which is where NFTs are purchased. As a result, if the platform from which you bought the NFT fails, the NFT sometimes becomes inaccessible and loses all value.
To conclude, NFTs are similar to any other asset of value and are prone to attacks from malicious elements. Since the assets are stored virtually, the threats also come from the same place. There were several incidents pertaining to security in NFTs in 2021. One of the cases occurred in Nifty Gateway, where hackers gained unauthorized access to a number of user accounts.
During the attack, hackers used payment cards on file to transfer previously acquired NFTs and to purchase more NFTs for transfer. The attackers sold the NFTs to a third party on a different platform.
Users were unable to retrieve NFTs because Nifty Gateway maintained the private keys for the affected NFTs on the platform. Such events shed light on NFT security flaws and other issues in the NFT ecosystem.
Let us go through other risks associated with non-fungible token security in the following sections:
Legality risks in NFTs
When purchasing an NFT, it is crucial to understand the rewards and risks to make an informed decision. Here are some vital legal risks of NFTs that you need to keep an eye on:
Loss of physical asset:
The buyer must know that an NFT and the underlying asset are two different assets. NFT will contain information regarding its connection to the underlying item and the NFT holder’s ownership of the NFT. Thus, if the underlying asset is destroyed, lost, or stolen, the NFT will be deemed worthless.
As a trader, you must be aware of these implications when a physical asset comes into the picture. However, this is not true for all NFTs. For instance, a non-fungible token artwork by UK artist Banksy was marketed on the grounds that the original artwork had been intentionally damaged, leaving only the digital edition available through the NFT. In fact, these kinds of NFTs do get great value and can help you gain profits too.
A purchaser of an NFT, like any other contract of sale, must carefully examine the terms governing the token before buying it. The buyer must know what privileges are being purchased and what privileges will stay with the seller.
Even as the purchaser of NFT purchases and then possesses the token, custody of the underlying asset is not implied by possession of an NFT. As a result, the purchaser of an NFT may not have rights to the underlying asset, which often stays with the inventor of the NFT.
Smart contract technology can be integrated with non-fungible tokens to prevent the NFT from being transferred unless specific criteria are met. Moreover, it helps preserve the minter’s rights to royalties so that they receive a royalty fee every time the non-fungible token is resold.
Investors must comprehend the mechanics of the non-fungible token they wish to invest in before purchasing.
Likewise, NFT sellers should be conscious that they may be accused of deceit while attempting to sell non-fungible tokens. Therefore, they must make the terms of a sale explicit, giving special care where issues such as ownership history or physical asset storage are critical.
NFT holders must also heed market volatility warnings, particularly given that NFTs are a new asset class with no track record. Investors must avoid being swept away by short-term market emotions, stay focused on their investment goals, and carefully evaluate the underlying value of any NFT they wish to purchase.
Although NFTs use blockchain technology that helps produce unambiguous, time-stamped audit trails of ownership, it is not immune to fraudulent means.
Fraudsters could create an NFT involving work that is not their own and was not created with the authorization of the original creator.
For instance, despite a link to the NFT auction on the artist’s website, an online auction of an NFT allegedly by Banksy (a different Banksy NFT from the one mentioned above) was later revealed to be a forgery unrelated to the artist (which was added by the fraudster).
Similarly, NFT minters may incorrectly claim to have copyright in relation to the underlying asset. These risks can be mitigated by purchasing NFTs from reliable creators or conducting adequate due diligence on their provenance if acquired on the secondary market.
Uncertain regulatory framework:
When trading NFTs on global platforms, issuers and purchasers must be aware of the legal and regulatory requirements of each jurisdiction. However, because NFTs are a new asset class, much of the legal and regulatory framework governing them is still being developed globally.
Smart Contract risks in non-fungible tokens
Smart contracts are an important component of NFT design and the source of substantial NFT security flaws. Indeed, smart contract risks and NFT maintenance concerns are significant factors in today’s NFT industry.
CryptoPunks, a popular NFT project, was hit hard by a smart contract issue in 2017. A bug in CryptoPunks prevented ETH from being transferred into the seller’s wallet. The bug was used by attackers to purchase CryptoPunks NFTs and recoup the money from the contract. As a result, CryptoPunks was forced to relaunch with an entirely new and updated smart contract.
Another recent incident involved a hack on the Poly network, a well-known DeFi protocol, in which hackers stole nearly $600 million.
NFT Cyber securities
As mentioned earlier, NFTs are virtual assets. Thus the NFT problems are bound to happen in the virtual ecosystem. The cyber threats that NFT is vulnerable to are:
Phishing: Most virtual transactions are affected by phishing, and NFT is no exception. Usually, the hacker sends a fake site link through Discord, email, or text message. The link will lead the user to a fake website similar to the original one, and upon entering the website, the user is asked for a recovery phrase.
If the user enters the phrase, the information is obtained by the hacker who uses it to gain control over the user’s wallet. Apart from sending links over text messages, phishing can also happen over phone calls, where hackers impersonate technical support personnel and try to obtain the phrases.
Counterfeit NFT artwork: Because of the popularity of NFT art, plagiarists from all over the world have begun to plagiarize famous digital art and sell it on other platforms. People who have acquired counterfeit or infringing NFTs suffer mental anguish and monetary losses as a result of the ambiguity of NFT owners’ rights and the difficulty in pursuing them.
Since NFT is still in its infancy, there are no proper regulations that would govern NFT trading. Thus, it can confuse the public, who may not know enough about trade regulations.
These are some of the prominent risks that are associated with NFT assets. As a buyer, you must be aware that every asset comes with risks and vulnerabilities. Understanding the threats beforehand can help you prepare better for securing your assets well. Let us look at how you can secure your NFT assets in the following section.
How to keep the NFTs safe?
Here are 10 tips to keep your NFTs safe from attacks:
Please do not share your secret recovery phrase:
It may sound cliche, but one cannot stress enough the importance of securing your recovery phrase. Please that your wallet’s recovery phrase is PRIVATE, and it should never be shared with anyone.
Get support from official channels:
Always go for official support whenever you want any help with your wallet or marketplace. Seeking help on social channels or Discord can make a target for scammers easily.
Do not click on unknown links:
Be alert when browsing websites and interacting with others on social media or Discord. Avoid clicking on links, images, or ads sent by strangers.
Ensure to download the official app extension:
When downloading a wallet browser extension, use the link from the official website. Check the reviews and developer information before downloading an app to ensure it is genuine.
Do not reuse passwords:
This is one of the common mistakes committed by most people. However, reusing the same password across several accounts compromises the account.
Use cold storage hardware wallet:
Storing NFTs in a hardware wallet provides additional security for the assets. You can also use an “air-gapped” computer with your hardware device for extra security. However, like with any other piece of hardware, you must keep your wallet secure and avoid losing it. Most people use Ledger or Trezor to store NFTs.
Use Two-Factor authentication:
Enable two-factor authentication using Google Authenticator and Authy, and avoid SMS 2FA as it is subjected to attacks. Consider upgrading to a hardware-based 2FA device for additional security. Some options include Thesis, Google Titan, and Yubico.
Avoid downloading unknown files:
Do not interact with QR codes, emails, links, and files sent by strangers. It is believed that attachments such as these, including PDFs, contain malware or harmful viruses.
Add restrictions on smart contract approvals:
When approving transactions in MetaMask, be careful and review your spending limit constantly. To review, go to “Edit on Permission” and adjust the spending limit for each currency.
Beware of fake sellers:
Before you buy an NFT from a seller on any NFT site, make sure you do your homework on the seller, the collection, the NFT, and the NFT’s history. Because blockchain transactions are irrevocable, doing your homework is essential.
These are some tips that can help minimize the risks associated with NFTs. There’s no doubt that NFTs present fascinating potential to digital artists and traders alike. Nonetheless, as the market evolves, purchasers must be informed of and appreciate the dangers of these items.
Buyers should carefully analyze what they are purchasing, check that any embedded smart contract appropriately reflects the rights they expect to receive, and only purchase and trade NFTs in trustworthy marketplaces. While NFTs are still in their early stages, it is critical to recognize the risks associated with NFT ownership and to take the necessary precautions to increase profitability.
Whether you wish to learn about NFT, Blockchain, Web3.0, Metaverse, or other emerging technologies, we have the vital resources that will enlighten and help you make an informed decision.
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