What are the risks involved in NFTs?

With NFTs making a significant impact in 2021, there has been a substantial interest in NFTs and marketplaces. However, alongside the advantages of NFTs, which are considered as the foundations of the Metaverse and the future of the internet and digital world, are there not also risks involved ?

1-) Regulations

While NFTs have many positive features, there are individuals who may use them with malicious intent. For example, due to the anonymity of buyers and sellers in NFT transactions, money laundering incidents may arise. Governments might introduce various regulations to prevent such situations and enact laws specifically for NFTs. These regulations could potentially have a negative impact on the NFT sector.

2-) Valuation

While some view NFTs purely as pieces of art, others emphasize the commercial aspect. People attempt to earn money by buying and selling NFTs, but this can sometimes lead to negative outcomes. The reason behind this is the highly sensitive value structure of NFTs. For instance, an NFT that initially holds a value of 10 ETH could later be traded for only 1 ETH.

Despite various parameters like scarcity and rarity systems, the value of NFTs is largely dependent on the value assigned to them by the buyer. For example, a project called EtherRock offers a collection of only 100 rocks. These rocks serve no purpose and have no functionality. However, one of these rocks was sold for approximately 1.3 million dollars. As you can understand, people can pay large amounts just to brag, even if there is no inherent functionality, and this can make NFTs appear more valuable than they actually are.

3-) Storage and Retention

How the NFTs you purchase are stored and preserved is crucial for security. NFTs can be stored in physical wallets like Ledger, on decentralized networks like IPFS, on centralized stable servers, and in crypto wallets.

Forgetting the seed key, which is the passphrase for your wallets, means you won't be able to regain access to your wallet. Storing your purchased NFTs on a centralized, stable server like IPFS, while decentralized, poses a risk of losing your NFTs if the server is attacked or experiences any form of failure.

4-) Smart Contracts

Smart contracts are contracts that facilitate transactions on the blockchain network. However, sometimes smart contracts can have vulnerabilities. On August 10, 2021, Poly Network was attacked by hackers. Exploiting vulnerabilities in the smart contract, the hackers stole approximately $610 million worth of tokens in this attack. Although the hackers returned some of the stolen funds, this incident raised questions about blockchain security. The networks where you store your NFTs may also be susceptible to such attacks.

5-) Fraud

While the traceability feature of NFTs helps prevent the occurrence of copy or counterfeit artworks, fraudulent activities can still take place. Some individuals attempt to deceive others by producing copies of original artworks, while others try to sell works by impersonating a famous artist. While the ease and low cost of NFT production can be an advantage, in such cases, it can lead to negative consequences.

How do you minimize these risks ?

In all the mentioned situations, since there is no illegal activity involved, there is no obligation for any authority to assist if you become a victim of such incidents. To avoid falling victim to these situations, it is beneficial to review the platform you are buying from, the artist of the NFT, the associated project if applicable, and, if you have coding knowledge, the smart contracts before purchasing NFTs.