Three Easy Ways to Defraud Any NFT Marketplace

The NFT craze has attracted big names, and big money, to the world of digital collectables. One attraction of NFTs is the hope of turning a profit, reselling to another collector in the future. Like stamps, coins, trading cards, beanie babies and other collectables; high priced NFT sales are highly publicized, but rare. A lesser known feature of NFTs is the commission mechanism. This returns a percentage of "all future trades" of the NFT to the original seller, or "minter" of the NFT. Touted as the basis of a revolution in artist compensation, it is all too easy to circumvent.

1. Shorting the commission

Take a fine art NFT offered for sale for $10M. The NFT contract stipulates a 10% commission to the minter, and another 2.5% to the exchange. This means that the seller would only net $8.75M from the sale, while the buyer pays the full $10M price. A buyer more interested in owning the NFT than recording a high transaction price can offer the seller $1M on the exchange plus $8M off-chain. The seller realizes a higher net income of $8.875M and the buyer saves a cool $1M on the purchase. Meanwhile the artist receives $800K less commission than they would expect for a $9M transaction.

This is not a new concept. Real estate contracts recorded in official record books often contain language like: "In exchange for $10, plus other good and valuable consideration." Blockchain records are conceptually very similar to official record books. They are both supposed to be immutable and available to everyone for reading. The "$10 plus" language conceals the actual price paid which might save the buyer from a raised tax assessment.

2. Boosting the (recorded) sale price

Some (many?) buyers want to record a high price in a transaction to create an illusion of value, to justify a higher price when selling. To record a higher than actual transaction price in the blockchain they can do the same thing in reverse. Record a high sale price and receive "other good and valuable consideration" from the seller in addition to the NFT. How often are the buyer, seller and even the NFT minter, the same person or group using multiple anonymous wallets?

3. Welcome, Anonymous.

Has everybody forgotten? On the internet, nobody knows you are a dog; unless you tell them. Not long ago, Snoop Dogg came out as the real person behind the NFT pseudonym Cozomo di' Medici. Snoop's transactions may be 100% legit, but then, we all know what he's been smoking. Similarly, Visa famously paid $150,000 for an 8-bit style portrait NFT. Not surprising, with an annual advertising budget over $100M, $150K is trivial. It was also likely the best exposure per dollar advertising move Visa made this year. I'm sure there are plenty of other examples of verifiable legit high priced NFT transactions. Meanwhile, lookup the transaction records of some higher priced NFTs. See how many anonymous wallets you find.

Don't get me wrong, I'm enthusiastic about digital currencies. I'm a huge fan of increased transparency. I'm hopeful that NFTs lead to more direct compensation for artists. I'm also concerned that too many people participating in the new digital economy are also unaware of all the possibilities it represents.