Without a doubt, NFTs have taken the world by storm. However, as they become more valuable and popular, they present a tempting opportunity for hackers, scammers, and other bad actors. The increase in fraudulent activity and the theft of more than $100 million from NFT investors between 2021 and 2022 underscores the importance of protecting our valuable digital assets.
Whether you’re an experienced NFT collector or just planning your first steps in the NFT space, understanding NFT security best practices is crucial to protecting your virtual assets.
In this article, we will describe the existing risks that can threaten your investment and provide you with the best tips to make your digital assets immune to attacks and scams.
An NFT, or non-fungible token, is a unique crypto token stored on a blockchain that can’t be duplicated. NFTs are virtual assets that represent artwork, in-game tokens, memes, music, real estate, tweets, etc. NFTs serve as certificates that prove the authenticity of digital assets and the ownership of real-world objects.
To better understand the concept, let’s define tokens. Tokens are virtual assets that store value on a blockchain and are governed by smart contracts. Most tokens on a blockchain are fungible assets, meaning they are completely interchangeable and indistinguishable from one another.
Non-fungible tokens allow users to create unique data on a blockchain. In other words, NFTs hold their own codes and are thereby scarce. Therefore, an NFT is one-of-a-kind and doesn’t have a recognized market price. It also can’t be exchanged for an equivalent asset.
Yes, your NFTs can be stolen. But the good news is that it’s only possible if you don’t take all the necessary security steps. Most often, bad actors use phishing attacks to gain access to your NFT wallet. For example, if you click on a spoofed link and enter your login credentials, a hacker can access your digital wallet and steal your virtual assets.
Fake NFT projects are another way that malicious entities steal NFTs. Scammers often set up an NFT project and aggressively promote it on various social media platforms. Once unsuspecting users invest their money, the scammers shut down the project and disappear with the funds. This practice is known as a rug-pull scam.
As a result, NFT market participants should not underestimate the value of cybersecurity in the industry.
Although NFTs are built on blockchain, we must admit that NFT security requires careful attention and reliable measures. Even though blockchain technology provides cryptographic security, non-fungible tokens can still be vulnerable to numerous security risks and threats.
NFT security is about protecting yourself and your digital assets while leveraging the power of the Web3 ecosystem. A security-oriented mindset and the adoption of best practices are critical to preventing unauthorized access to your digital assets, fraud, and theft. This is especially important since NFTs are often irretrievable once stolen.
In the crypto world, where virtual assets have significant value, bad actors are constantly looking for more sophisticated ways to exploit vulnerabilities. The most common risk is phishing attacks, where hackers try to trick users into providing their sensitive information. Users, who fall victim, unintentionally reveal their credentials and risk losing their digital assets.
Poor wallet management and storage of wallet credentials can also make your assets more vulnerable to security threats. In addition, compromised digital wallets or platforms can result in the loss of your virtual assets.
Therefore, it is crucial to understand and implement best practices that ensure the security of every aspect of NFT transactions. Make sure you are doing everything you can to protect your NFTs from malicious entities.
To make an informed decision, you need to understand the legal risks associated with NFTs. Let’s discuss them.
Loss of physical asset
Investors need to understand that an NFT and the underlying asset are two different assets. An NFT contains information about its connection to the underlying asset and the ownership of the token. Therefore, if the underlying asset is destroyed, lost, or stolen, the NFT will be worthless.
However, this does not apply to all NFTs. For example, a non-fungible token artwork by Banksy was sold because the original artwork had been damaged on purpose, leaving only the digital edition available.
When buying an NFT, you must carefully review the terms and conditions of the token before making a purchase. You need to understand what privileges remain with the seller and what privileges are being purchased.
Even if you purchase and then hold an NFT, the ownership of the token does not guarantee custody of the underlying asset. Therefore, a new NFT owner may not have the rights to the underlying asset, which often remain with the creator of the NFT.
In addition, smart contracts can be integrated with NFTs to prevent token transfers until certain conditions are met. Smart contracts also help NFT creators preserve their rights to royalties. This allows NFT creators to receive royalties every time their tokens are resold.
Therefore, investors need to understand the mechanics of the token they are interested in. Similarly, NFT sellers should be aware that they may be accused of fraud when selling non-fungible tokens. Hence, they need to make the terms of sale clear, paying special attention to critical issues such as ownership history or physical storage.
NFT holders must also be aware of market volatility warnings, as these tokens are a new asset class. Investors need to stick to their goals and avoid short-term market emotions. Overall, they should carefully evaluate the underlying value of each NFT they are interested in.
While blockchain technology helps create accurate and time-stamped audit trails of NFT ownership, it can’t resist all fraudulent tricks. For example, scammers can use artwork to create an NFT without the original creator’s permission.
Likewise, NFT creators may falsely claim to own the copyright to the underlying asset. To avoid these risks, purchase NFTs from reputable creators or perform thorough due diligence when purchasing tokens on the secondary market.
Uncertain regulatory framework
When trading non-fungible tokens on global platforms, creators and buyers need to understand the legal and regulatory requirements of each jurisdiction. However, NFTs are a relatively new asset class, so much of the legal and regulatory framework governing them is still under development.
An NFT scam is a fraudulent activity aimed at misleading users and accessing their digital wallets to steal their digital assets, such as cryptocurrency and NFTs. Bad actors may also try to convince you to invest in counterfeit tokens or buy NFTs from an illegitimate marketplace.
Unfortunately, the risk of getting scammed is directly proportional to the growth of the NFT market. Here are some real-life examples of recent NFT scams:
The easiest way for beginners to start trading non-fungible tokens is through NFT marketplaces. Users can find different platforms and NFT marketplaces, browse through them, and finally choose the most suitable one. However, fake marketplaces have emerged, so it is important to choose a trustworthy NFT marketplace.
Do thorough research before choosing a platform. Pay attention to the origins and goals of an NFT marketplace, as this can help you verify its authenticity. Fake NFT marketplaces will deceive you, steal your credentials, and empty your wallet without warning.
Phishing attacks remain a significant problem in the NFT space. Hackers typically contact their victims via email and use social engineering techniques to get them to click on links that take them to fake platforms.
For example, scammers may impersonate a platform’s support service and ask you to resolve a problem with your account. It may also be a free NFT offer or a tempting offer that encourages you to act immediately. However, if you click on these links, cybercriminals will steal your personal information. NFT phishing attacks typically aim to access your wallet keys and steal your funds.
Scammers may pose as representatives of legitimate NFT marketplaces or platforms to deceive users and compromise their credentials. Bad actors may contact unsuspecting users through phone calls or messages, claiming urgent security concerns or offering hot deals. Overall, they exploit security fears to compromise security by stealing user credentials through deception.
Falling victim to identity theft can lead to the loss of valuable digital assets. Therefore, always verify the authenticity of any emails you receive, stay away from calls claiming to be from reputable NFT marketplaces, and be cautious when sharing personal information or participating in transactions.
Rug pull scams
A rug pull is a scam where promoters attract investors by heavily promoting fake NFT projects on social media to drive up the price. Once the scammers get the investors’ money, they stop supporting the project, causing the value of the asset to drop and investors to lose money.
In some cases, NFT developers remove the ability to sell the token, leaving investors with unsaleable assets.
Similar to other crypto markets, NFTs are susceptible to pump-and-dump schemes. This scam involves a coordinated effort to artificially inflate the value of a particular NFT project in order to attract unsuspecting investors. Scammers buy a large number of NFTs, causing their value to rise rapidly.
As users invest their money in the project, the scammers suddenly sell their tokens, causing the price to plummet. As a result, defrauded investors are left with worthless assets that were recently worth a fortune.
Fake NFT investment scams
Scammers may attempt to deceive investors through social media accounts. Typically, these are fake NFT giveaways or new NFT releases that never happen. These scams may use impersonation, social engineering tricks, and other schemes to gain investor trust. However, once a victim takes the bait, the bad actors disappear with their funds.
NFT-related malware attacks
Because blockchain and NFTs are relatively new technologies, they are still vulnerable to various types of viruses and malware attacks. Most viruses are spread through phishing emails and malicious links. Your devices can also be infected during a fake NFT airdrop when hackers send a promotional NFT with a virus directly to your wallet. This secretly places malware in your wallet and sends your private information to fraudsters.
Fake Pixelmon is an example of a fraudulent website that infects users’ devices with viruses, while the legitimate Pixelmon is a popular metaverse game. However, the original game has been impersonated by bad actors. The fake copy of the original site installs password-stealing malware on users’ devices.
Cybercriminals have adopted NFT airdropping to spread malware. This process involves sending a free NFT directly to your crypto wallet. NFT creators usually do this to promote their upcoming projects. As for cybercriminals, they airdrop viruses and malware masked as NFTs to unsuspecting users.
If you accept an airdrop without knowing who sent it, you may later find that the malicious software has stolen your private keys, seed phrases, and other sensitive information.
Social engineering attacks
Social engineering attacks rely primarily on data collection. Bad actors learn about you and your habits to gain your trust and make you do something you wouldn’t normally do. Overall, social engineering exploits human nature and our desire to help trusted friends and colleagues.
This scam often targets people and businesses around the world, so be wary of messages from strangers who are unusually friendly or ask for something out of the ordinary.
Fraudsters can copy someone else’s artwork and list the plagiarized NFT on an NFT marketplace. Since the token was created using stolen or counterfeit artwork, it has no value. By the time the defrauded buyer realizes this, it’s too late, and the seller has made off with the investor’s money. Tracing the fraud back to the counterfeiter can be nearly impossible.
Pay attention to the price of an NFT, its trading volume, and the seller’s contact information. Remember, if something seems too good to be true, it probably is.
You should follow best practices to ensure the security of your digital assets. Let’s take a closer look at the steps you can take to significantly reduce the risk of losing your tokens.
Pay attention to each authorization and signature
Before proceeding with a transaction, take the time to thoroughly review each authorization request and signature prompt. Make sure the actions you are about to take match your intentions. Fraudsters often use techniques to trick users into authorizing unintended transfers or giving them unauthorized access to users’ digital wallets.
Good wallet classification
Even though the most popular digital wallets are convenient and easy to use, they may not have the advanced features needed to protect large asset holdings. For significant NFT investments, it’s better to use a hardware wallet because it stores private keys offline. Therefore, using a hardware wallet reduces the risk of unauthorized access.
Use trusted crypto wallets and marketplaces
Store your non-fungible tokens in reputable and well-established crypto wallets. Using a hardware wallet is an even better option, as it keeps your private keys offline, providing an extra layer of security for your assets.
You should also only buy, sell, and trade NFTs on reliable NFT marketplaces such as OpenSea. In general, you should thoroughly research the platform’s reputation and security features before engaging in transactions.
Exercise caution with links and emails
Don’t click on links from unverified sources, especially in emails or direct messages on social media. Remember that phishing attacks often rely on fake links that take users to fraudulent websites designed to steal your personal information. The only advice here is to always verify the legitimacy of the source before clicking on any links and never share your private keys and seed phrases with anyone.
Protect your seed phrase
Always remember that your wallet seed phrase is a password recovery tool. If hackers know your seed phrase, they can set up your wallet on another device and access your private keys. Therefore, you need to protect it.
First, avoid writing your seed phrase in registration forms and other application prompts. Second, never store your seed phrase on a device that is connected to the Internet. Instead, write it down on a piece of paper or metal and store it in a secure offline location.
Regularly update software and firmware
Be sure to keep your crypto wallet’s software and firmware up to date, as developers often release security patches and updates to increase the wallet’s security and make it less vulnerable to various attacks.
Stay informed and educated
Stay informed and educated on the latest news, trends, and security practices within the NFT community. This can help you stay ahead of potential threats, make informed decisions, and ensure you are doing everything possible to protect your virtual assets.
Always conduct thorough research
Before investing in an NFT project or participating in a giveaway, conduct extensive due diligence. Research the project’s background, team members, future development plans, and community feedback. The team should have experience in the field and a reputation in the community. Also, all details about the project must be transparent. It’s also a good idea to look for independent reviews and audits of the project.
Look carefully where you put your money
NFT collections are extremely popular with crypto enthusiasts and new users. The most popular collections, such as BAYC or CryptoPunks, have shown exceptional performance in secondary sales. On the other hand, the craze for NFT collections has attracted scammers to the industry.
To protect your non-fungible tokens, research the NFT project you’re interested in thoroughly. Pay attention to the project’s goal, details about its founders, and its roadmap for the future. Legitimate NFT collections have all of these details, as well as a clear purpose for users and the decentralized ecosystem.
Avoid clicking on links in DMs
Direct messaging on social media is a relatively new way of deceiving NFT users. Scammers tend to create fake websites and send the link to victims to get them to interact. Random links from strangers in your DMs are a red flag, so avoid them at all costs.
Protect your privacy
In digital communities, owning an NFT is a status symbol. Many NFT owners proudly display their tokens without thinking about the possible consequences. To protect your non-fungible tokens, don’t use NFT avatars or domain names that can be interpreted by hackers.
Stay updated with trends
Being aware of the latest industry trends will also help you keep your assets safe. Overall, you need to keep your finger on the pulse of the NFT industry and news about security breaches. All in all, update your knowledge of current security threats and prepare for every possible scenario.
Opt for a secure crypto wallet
A well-protected NFT wallet is an essential rule for holding digital assets. The majority of cyber attacks and hacks target hot wallets that store tokens online. Therefore, keeping your virtual assets in a cold (offline) wallet makes sense. Remember that the wallet you choose must be supported by the marketplace you use.
Think of a strong password
Your password is your main line of defense against bad actors, so you must be sure that your wallet keys aren’t easily compromised. For example, you can use a special tool that helps you create, store, and manage unique passwords for each of your accounts and wallets. It’ll also generate public and private keys for you.
Enable two-factor authentication
Two-factor authentication is an essential security measure for storing cryptocurrencies and NFTs. It combines your password with an additional layer of security, such as a code, application, or biometric authentication. This second layer of verification prevents hackers from accessing your account or digital wallet, even if they’ve stolen your password.
Update your antivirus software
To improve your cybersecurity, use a high-quality antivirus tool and keep it up to date. This software scans the system deeply and helps you detect NFT-related threats, such as airdrop malware and various viruses.
A virtual private network, or VPN, is a must-have tool that protects you from spoofed links, NFT scams, and man-in-the-middle attacks. A VPN also encrypts your data and sends it through a secure tunnel. As a result, you don’t have to worry about personal information leaks, third-party trackers, and infected websites. However, you should choose a trustworthy service provider, as free VPNs are not always as secure as paid ones.
Use a hardware wallet or delegate a wallet
Another good idea to improve security is to store your NFTs in a hardware wallet. You can also use an air-gapped computer with your hardware device. Still, you need to keep your hardware wallet safe and avoid losing it. Most NFT owners store their NFTs in Ledger or Trezor.
If you have fallen for the scammers’ tricks, your further steps will depend on the type of hack you have been subjected to. For example, if you interacted with a fake mint and signed a transaction, the only thing you can do is accept it. Once your digital assets have left your possession, there is nothing you can do about it. This is why you should understand other users’ security mistakes in order to protect yourself from being hacked.
The NFT marketplace security teams may help you in some cases, especially if they are at fault. However, in most cases, the responsibility lies with the user. You should educate yourself to be better equipped and keep your digital assets safe. By the way, you can read our article about NFT scams and how to spot them. Another good solution is to implement the security measures discussed in this article or take additional steps described by trusted members of the NFT community. Don’t put it off!
Currently, most NFT scams are not related to blockchain. NFT holders tend to lose their digital assets because they only use hot wallets, click on fake links, or fail to set up 2FA.
By following the above tips and best practices, you can significantly reduce the risks that threaten your NFT cybersecurity. However, protecting your virtual assets goes far beyond practicing caution and securing your NFT wallet. It requires a forward-thinking approach, ongoing education, and leveraging the expertise of industry professionals.
If you are experiencing NFT security issues or need a comprehensive audit to ensure the safety of your digital assets, ND Labs is here to help. Don’t hesitate to contact our team if you need our assistance.