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The NFT you have just purchased to make a fortune may be fake – here’s why

Amid all the excitement and promises, there are scams and frauds undermining the big promise NFTs holds for artists and creators

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Ever imagined images of “bored” apes and “lazy” lions could sell for millions of dollars? In the unbelievable world of non-fungible tokens (NFTs), anything seems to be possible.

Images that you may have laughed off just a few years back are selling for millions of dollars. Not just that. Their duplicates can be minted too to lure gullible buyers and there is no way this duplicity can be stopped. But then the NFT market is booming all over. So much so that even multinational tech conglomerates like Meta (previously Facebook) are reportedly planning to dive into the world of NFTs. 

“The trading volume of NFTs increased up to $23 billion by 2021, with thousands of blockchain wallets participating in NFT buy-sell globally. Global fund participation in NFT was less than $100 million a year ago, in 2020. And By 2022, NFT Space is expected to grow exponentially as Firms like Microsoft, Snap, Nvidia, Tencent, etc., backing the Metaverse hype,” said Shivam Thakral, Member of Blockchain and Crypto Assets Council (BACC) and CEO, BuyUcoin.

According to a report by Chainalysis, users sent at least $44.2 billion (approx Rs 3,29,102 crore!) worth of cryptocurrency to ERC-721 and ERC-1155 – the two types of Ethereum smart contracts associated with NFT marketplaces and collections – in 2021. 

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ERC721 is used where one NFT contains just one item. It is mostly used for paintings or physical assets. ERC1155 is used where multiple copies of an NFT is needed. These may be tickets for an event or an opportunity. ERC1155 also gives a chance to fractionalise certain assets. For example, you can have one painting and mint 100 copies of it. The owner of one copy may be considered as a one per cent owner of that particular asset.

Globally, the involvement of celebrities is adding to the hype surrounding NFTs, which gains much of its spike from social media communities and word of mouth. Even in India, a number of celebrities from the film and sports worlds have jumped to the NFT bandwagon. (See this, this and this).

However, amid all the excitement and promises, there are scams and frauds undermining the big promise NFTs holds for artists and creators – i.e. of being a digital means to showcase or sell their works as unique and irreplaceable.  

It is generally understood that NFTs are blockchain-based tokens representing ownership of unique items. It could be a work of art, collectibles or even real estate. But what is worrisome for creators and buyers is the fact that this “unique” NFT can be copied and minted easily on different Blockchains. 

ALSO READ | NFTs generated over $23 billion in trading volume in 2021 amid craze for digital assets

“An NFT can be created across multiple Blockchains. And that’s where the problem starts. If the issuer creates the ‘same’ NFT across multiple Blockchains or even marketplaces, it is almost impossible to track it. There is no solution to this,” Rohas Nagpal, Chief Blockchain Architect at Wrapped Asset Project, told FE Online. 

It is easy for anyone to copy an NFT art. It is even possible to convert someone else’s artwork into an NFT and sell at online marketplaces. Artists have always grappled with the problem of copy-pasting of their works in the internet era. NFTs too don’t appear to be solving this issue, at least currently. 

“Theoretically, anyone can copy a digital file umpteen times, including the art contained in an NFT. This, however, does not establish ownership. An NFT owner owns the original piece of hex values signed by the creator. One should bear in mind that the ownership of NFT does not necessarily give the ownership of an underlying asset,” said Sharat Chandra, VP- Research and Strategy, EarthID, a self-sovereign Identity Management Platform.

“An NFT owner can just stake claim to the original piece of hex values of the linked asset, be it digital art or collectibles. Similarly, buying an NFT does not guarantee the rights associated with intellectual property or licensing,” he added. 

Offline contracts, gatekeepers

Experts say that most of the NFTs today are goodfaith assets. They agree that duplicity is a big problem. And there is no solution to this problem in sight currently. Hence, a number of high-value NFT transactions these days are being accompanied by offline contracts among buyers and sellers to ensure authenticity. 

With no solution in sight, some marketplaces are forced to play the gatekeeper role since the authenticity of NFTs is important from a collectors point of view. 

“We at WazirX NFT Marketplace have literally handpicked our creators…It is important for us to do this sort of gatekeeping to build the culture because we are in such a nascent stage,” Vishakha Singh, VP, WazirX NFT Marketplace, recently said at the Digital Currency Conclave 2022 organised by financialexpress.com. 

The unlinked global NFT ecosystem further makes it easier for anyone to create duplicates. 

“Duplicity is a problem because any digital asset is intangible and can easliy be replicated. So that’s where is a big challenge now. The entire ecosystem is not linked properly, it is still evolving,” Amit Jaju, Senior MD at Ankura Consulting, said at the FE Online event. 

“Right now, the person, who is buying a high-value NFT, should be aware of the process. In most of the cases of high-value transactions, which I am seeing, there is an offline contract as well, outside the Blockhain, parties are signing to kind of safeguard themselves,” he added. 

According to Amit Jaju, there is no foolproof solution for duplicity available right now but there are certain checks and balances that can be built-in.

Take legal advice

According to Sharat Chandra, as far as IP rights are concerned, ownership of the underlying rights are transferred only when the creator of the original work explicitly states his/her willingness to transfer those rights to the NFT owner. 

“Such terms should be executed by an agreement. In the absence of such an agreement, any monetary exchange between willing parties will not hold ground in courts of law. Buyers need to understand these legal nuances clearly to safeguard themselves from fraudulent NFT transactions and protect their rights,” Chandra said. 

He also suggested to always seek legal help while making high value NFT transactions.

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