NFTs, or non-fungible tokens, have caught the attention of consumers and businesses around the world. In a very short period, NFTs have gained huge popularity and have become one of the most promising uses of blockchain technology. However, they do come with significant security risks and this is a large business. They are also part of a massive high-value blockchain-based network that could open the door to new security threats.
NFTs are a booming industry with a lack of regulations and oversight by design. Therefore, there is no secret among threat actors that legal escape exists in the industry, which would enable particular people to operate with exemption in certain scenarios. If you are a current owner of NFTs or are thinking of buying, the best way to proceed is to prepare yourself for the vulnerabilities and this blog helps you to secure your domain.
What is NFT?
For those who are new to NFT, NFT stands for non-fungible tokens, which are unique assets in the crypto world. Just imagine owning a home on the blockchain or owning a unique avatar in your favorite video game. With NFTs, this may be possible. The growth and clarity of NFTs also open up possibilities for trading, staking, and providing liquidity. While NFTs are still a new and growing technology, they are changing the crypto ecosystem. However, anything involving money, technology, and humans comes with intrinsic security risks.
How Secure are NFTs?
The growing popularity of NFT has expanded the effective discussion of NFT security. Since it is a new technology, the level of NFT security is not so much that it can not guarantee the complete security of property investors. One of the major NFT risks threatening investors and projects is scams. Malicious actors are required to gain access to the popular platform, exchange, or their virtual property to steal users' data using the wallet and thus NFT affects safety.
NFT security largely depends on the ability of centralized platforms to preserve the private keys of all assets stored on them. Even when platforms implement the most advanced security measures, a serious NFT risk is associated with the failure of their users to securely store their passwords and other private data, in which malicious actors can steal their nonfungible tokens.
In some cases, NFTs purchased by individual art lovers may become unattainable. When a user buys an NFT, he gets a reference to the file where the artwork is stored. This artwork is not logged into the blockchain, it can be stored anywhere. NFT platforms can supposedly close their windows whenever they want. As a result, the user cannot display his file, although it still occurs.NFT security also depends on the ability of users to implement critical thinking. Malicious actors prefer to organize so-called giveaways that offer users NFTs for free. However, users must send a specified amount of cryptocurrency to participate in these giveaways. Of course, in most cases, users do not receive any NFTs.
What are the key NFT vulnerabilities?
It is worth remarking that the underlying blockchain technology has nothing to do with discord phishing attacks and blockchain can control whether a published work of art belongs to the NFT issuer. Also, when developing and maintaining your NFT marketplace, you should be aware of all potential vulnerabilities.
So what are the major risks of NFTs? Let's find out!
Smart contract vulnerabilities
A smart contract is the main and most important feature of any blockchain. When it appears to NFTs, smart contracts assist process transactions and manage the transfer of ownership.
If smart contracts are programmed well and successfully pass an independent audit, it will be extremely hard for attackers to tamper with them. On the other hand, if security exposures are unaddressed, smart contracts can be influenced to support hackers. NFT holders will lose their tokens and huge sums of money, while the reputation of the market will be ruined forever.
Marketplace and NFT security risks
NFT marketplaces are based on blockchain technology, they are considered decentralized. Some marketplaces are centralized, meaning that events are listed in an off-chain database organized by the NFT Marketplace. Nifty is an instance of such a marketplace. A centralized marketplace typically stores all the private keys of digital assets on its platform, so, if an attack occurs, hackers can steal a lot of tokens in a short time. In addition, many users neglect additional security measures: they set weak passwords, forget about two-factor authentication, and click on suspicious links.
Cybersecurity issues and NFT fraud
Hackers always try to access users’ personal information through malicious emails. Those emails look like they come from legal sources such as Coinbase, for example. Fraudsters inform users that there has been suspicious activity on their accounts and they need to provide a login and password to assess their identity. The scammers then access users’ accounts on the NFT platform and can do whatever they need there. The researchers studied the problem and found significant security vulnerabilities which allowed scammers to hack into accounts and steal crypto from digital wallets after a user clicked on a link to gifted NFTs on OpenSea. Luckily, as soon as Check Point noted the issue to the platform, OpenSea remedied the vulnerabilities.
Authentication process and current concerns
Conventional art has been used for money laundering for years. NFTs can make this process even easier. For the time being, NFTs may be anonymous, and you may not know who is behind the artist's nickname and avatar. There are no laws or restrictions for NFTs either. These realities make NFTs ideal for hiding illegally earned money.
The Most Effective measures to protect NFTs
In the NFT domain, both the Marketplace and the users have to take more precautions to preserve themselves, their tokens, and their money. Even if the Marketplace is entirely secure, a small mistake on the part of the user – such as not setting up two-factor authentication or clicking on a malicious link – will enable scammers to reduce users' digital pockets.
Let's discover what NFT projects and marketplaces can do to protect their users and themselves.
Instruct your users about necessary security measures
Prevention is better than cure. Whether your users have just joined the world of NFTs or are already experienced players in this field, it is your responsibility to teach them about security measures.
Give your users main security instructions on your platform, for example:
Allow two-factor authentication (2FA).
Create a powerful password and store it offline.
Use merely NFT hardware wallets purchased from official manufacturers.
Hard wallets occur physically and are not connected to the Internet until users plug them into a computer. When using a hard NFT wallet, the user accepts each transaction by tapping physical buttons. They are much safer than hot wallets and protect users from losing their crypto and NFT assets. When buying one, make it obvious it is the latest firmware version.
In addition, remind your users that they should:
Never share your secret recovery phrase with anyone, not even your closest friends.
Never store your secret recovery phrase on any device.
Never share your screen while using your crypto wallet and NFT marketplace.
As a marketplace creator, you can also suggest NFT holders using Shamir's Secret Sharing (SSS), a leading distribution algorithm that allows you to protect a secret into multiple parts and store it in different locations.
Perform smart contracts audit
NFT smart contracts should be evaluated for vulnerabilities. Before implementing a project, you will need to turn to a smart contract audit company to assess the code, analyze the design and architecture of smart contracts, and detect any flawed features or potential threats.
A professional audit assures that your smart contracts are safe and that the code is bug-free and works as it should.
Adhere strictly to the decentralization principle
When a platform is unified, all private keys are stored within the platform. This puts users' private keys and digital assets at harm. Ideally, NFTs should not have permitted private keys to the market and should not violate the principle of decentralization. It is also recommended that contracts holding NFTs be accessed through multi-signature.
Legal Considerations to take into account
When designing your marketplace, it is essential to take into account not only security vulnerabilities but also possible legal issues. Here's what you need to consider.
Company formation
To launch an NFT trading platform, you first want to build a legal entity to give strong liability protection for business owners and preserve your assets.
Platform Terms of Service
Since NFT Marketplaces generally contain user-generated content, there is a high chance that one user's behavior may negatively affect another user.
To protect both your company and your users, it is significant to carefully design your terms of service. This is a governing legal contract between your marketplace and your users, i.e. NFT artists, supporters, buyers, and holders.
The Terms of Service will protect the company from several legal issues. Commonly, the document will include a disclaimer of any warranty concerning users, constraints of the company’s general liability, etc.
Intellectual-property protection
Fake NFT assets are everywhere. As the creator of the NFT Marketplace, you must assure that your platform can affirm and protect the intellectual property rights of each participant: creators, buyers, and other parties involved.
The copyright usually belongs to the creator of the original artwork. If an NFT is created and sold, the buyer will also earn a set of intellectual property rights from the producer.
When tokenizing an artwork, it is also necessary to take into account supporting parties such as studios, record companies, producers, etc.
Data privacy
Developing a privacy policy and publishing it is essential not only to comply with legal requirements but also to build trust among your NFT community. If your privacy policy is well-drafted, you will attain trust and relate to yourself as a developed company.
A poorly written and contentious privacy policy can undermine user trust in your marketplace. Be transparent about your data collection, and users will admire it.
To End things off
As of today, the majority of NFT scam cases are not associated with the blockchain. While the technology is fairly secure, users continue to lose their tokens and crypto after clicking on a malicious link or because they have not set up 2FA or only used a hot wallet.
Marketplaces need to work harder to assure that they are technically secure and that their users are conscious of all protective measures. Soon, in the future NFT marketplace will also have to come up with solutions to preserve creators and check whether NFTs come from genuine authors. At the same time, they will need to stick to the principle of decentralization.
If you already have an NFT marketplace but have vulnerabilities or you want to build a new platform you can read this blog and it will help you bring your ideas to life and build a strong and secure NFT Marketplace.
