For several months, it’s been near impossible to talk about Blockchain without mentioning Non Fungible Tokens (NFTs) in the same sentence. Currently, the industry is witnessing the growth of NFTs amid hype cycle, similar to how IPOs were back in 2017. This blog will discuss major NFTs loop holes.
Being sold for millions of dollars, NFTs have become a center of attraction for investors, gamers, artists, and even tech lovers as well as people who are not even associated with this space but enjoy reading astonishing news. Especially after the news regarding a piece of digital art that was sold at Christie’s for $69 million dollars and one of Jack Dorsey’s tweet-based NFT that was also sold for millions came out, NFTs took the world by storm. Soon after that, constant innovation and hype made this concept so big that at one time, NFTs were the most searched concepts on google, surpassing Blockchain and DeFi.
NFT, unlike fungible tokens like Bitcoin, is one-of-a-kind and has its value associated with an underlying asset. It serves as proof of ownership for digital assets including images, tweets, and in-game assets among any assets that can be represented with unique properties. Since each NFT is a one-of-a-kind cryptographic entity, it cannot be swapped with another or can not be divided.
Even though artists have a thorough understanding of their work, the inner workings of NFTs remain a mystery to many. Numerous layers within an NFT are hidden beneath the more common term “token.”
There are various types of tokens add more confusion to the concept of NFTs. To read about the various types of tokens, please refer to our blog here.
These layers have certain “loopholes,” and they can cause complications for artists selling or buying tokens and the same goes for NFTs. A perfect example of this statement is the exploit of Meebits on the evening of May 8. Meebits is an $85 million NFT project and it experienced an exploit of $700,000.
The technicality behind the attack was that the attacker was able to mint rare NFTs from the Meetbits collection. The attacker found a way to reroll the NFT minting process because there was no condition on minting an NFT in the smart contract.
This brings us to an important question – Does your NFT has a loophole?
Everyone wants NFTs, but not every NFT is valuable and secured.
It is, therefore, vital to identify and address these loopholes and ensure that your NFT is secured.
Major NFTs loop holes
Lack of Contractual Rights
The lack of information on contractual rights is one of the most serious loopholes in NFT. You might not be aware of the NFT’s legal restrictions, particularly when it comes to copyrighted content.
When you acquire an NFT, you may not be aware of the permissions you have, and you may mistakenly believe you’ve purchased the underlying art associated with it.
However, the original creator might still be the copyright owner and hold rights to copy, modify, and even usage of the NFT.
The solution to this gap is to become explicit about the rights and privileges that come along with the ownership of an NFT.
Duplication of Tokens
Uniqueness and scarcity are the two major factors that established the value of an NFT. However, the same piece of digital art can be two different NFTs created on two different minting platforms. It would result in the duplication of NFTs, causing the NFT’s value to be uncertain.
Even the artwork that was sold at Christie’s was subject to millions of copies and sharing.
If you’re buying artwork that has been minted without authorization, leveraging several index platforms and having a consistent technique to hash can protect you.
Presence of Pre-loaded Smart Contracts in NFTs
If you purchase an NFT with a pre-loaded smart contract that transfers a 30% royalty to the original minter on every sale, the percentage of the sale will be transferred to the original minter automatically.
In this instance, depending on the conditions of the smart contract, you may be entitled to far less than you anticipated, and you will be required to share earnings with an anonymous partner.
As a result, before purchasing an NFT, you must be aware of the smart contracts that are currently associated with the NFT.
Centralized Minting Platforms
When you don’t own the code that renders your NFTs, you have another loophole to address. The current minting platforms are centralized in nature and allow applications to render the accompanying content to create a specific user experience. Therefore, you’ll rely on the regular upkeep of the application on the platform to be able to see your NFT.
However, if the minting platform decides to update the application, certain NFTs, such as videos or games, will cease to function as they did before the update.
An open-source ecosystem will help in preserving the history of the NFTs and, therefore, continue to provide the same structure as before.
To enable diverse sorts of material such as video, art, or music, NFT minting platforms develop a specific sort of metadata. These metadata records are either preserved on the hosted servers or decentralized protocols such as IPFS. IPFS’ functionality allows these records to get manipulated or deleted.
Furthermore, if the server hosting the NFT goes down, the link will be broken, rendering your NFT useless due to the lack of a backup method.
NFT minting platforms should allow owners to partially store metadata information on a local storage device to reduce the danger of tampering with metadata.
Deterioration in NFTs
As far as the computer files are concerned, they can be moved from one place to another but there’s no provision regarding the migration of NFTs from one storage device to another.
On-chain records are included in NFTs, but they are insufficient to contain the metadata entries required to characterize the content asset. Therefore, if the structure of the NFT minting platform changes or if it undergoes a fork, NFT will deteriorate over time and possibly lose value.
Only by allowing your NFT to move from one storage device to another, it will be able to maintain its metadata and content in the face of constant technological change
Paying Unfair Market Prices
Concerning terms and conditions, fees, and even sign-ups, there is a big discrepancy among the NFT marketplaces. Some of them have set limits on the types of media that may be minted, and the majority of them only allow invite-only users to buy and sell NFTs.
As a result of these discrepancies, existing marketplaces are highly fragmented. Therefore, the market does not reflect a fluid market where you can be confident you’re getting the best deal on the NFT.
Another major thing to consider apart from the aforementioned points is that NFTs are created using a standard such as ERC721 or ERC1155. These standards have some predefined functions and some custom functionalities. Just like other smart contracts, they need to be audited properly by a team of expert who understands the core concept.
Therefore, a traditional smart contract audit is the first step in establishing the security of an NFT marketplace but the space is too young to be sure.
It is in both buyers’ and sellers’ best interests to grasp the dynamics of NFTs and assure a long-term NFT market.
Since the NFT market is still in its early stages, its infrastructure, including marketplaces, minting platforms, distribution methods, storage, and legal and regulatory challenges, is likely to alter frequently.
Despite the lack of clarity and loopholes, the NFT market is continuing to explode. New NFTs will be launched as more people become aware, and competition on marketplaces will expand dramatically.
The only thing to remember is that precaution is always better than cure. Either you are a seller or a buyer or someone creating an NFT marketplace, ensuring security and considering various factors before engaging in the NFT ecosystem is paramount.
To gain a deeper insight into the NFT ecosystem and the various steps you can take to ensure a seamless experience, reach out to the team at Quillhash for a free consultation.