Posted By Smple Staff

Rug-pulls, Rampant Fraud and the NFT Wasteland

Just over a year ago, then CEO of Twitter, Jack Dorsey, sold his first tweet as an NFT for $2.9M. It wasn’t just his first tweet, of course, it was the first tweet, which as auctions go for Crypto- and NFT-heads was about as appealing as a hunk of sourdough to a famished goose. The nearly $3M sale was a welcome green flag to early advocates in the NFT space that the winds of blockchainge (sorry, couldn’t help myself) were blowing ever more in their favour. And of course, along with Beeple’s Everydays: The First 5000 Days selling for $69M, the ‘line’ was behaving precisely as was foretold: prices were going up, and only up. But that was over a year ago. Now, the owner of the Twitter-spawned NFT has been seeking to flip his purchase and capitalise on his one-year gains – except there’s a problem. In the first week of open bidding, the highest offer was just shy of $10,000, roughly 0.3% of the original sale value. So what in the hell happened?



This Beeple NFT sold for $29 Million USD in 2021

If there were a stronger word than ‘backlash’ to describe the sentiment toward NFTs right now, I’d use it. In mainstream industries, the bandwagon hasn’t just been jumped upon, it’s been dived upon, and the response from the public has been at best, divisive. Distrust and distaste are so prevalent with some that one popular video game pundit on YouTube now has a segment called, “No Fucking Thanks” dedicated to the AAA studios attempting to capitalise on the burgeoning market. Most consumers, however, have little-to-no interest, or worse, see it as a developer simply trying to make an easy buck on what to them amounts to essentially nothing at all.

There’s been backlash in the movie industry too, and not exclusively from consumers. Last year, Quentin Tarantino announced plans to release NFTs based on his masterwork, Pulp Fiction, including scenes from an early script that were cut from the final version of the film. But the film studio that produced Pulp Fiction, Miramax, is now suing Tarantino in response. Both argue to be the rightful claimants of any proceeds reaped from NFTs made out of the script, and at the time of writing that legal wrangle is still ongoing. That said, the promo for those NFTs is still live on TarantinoNFTs.com.

In the time since we first reported on the rise of NFTs, where I took the Basquiat NFT auction on OpenSea as a case study, the whole market has changed. Back then, NFTs were just on the cusp of blowing up, but no one had the faintest idea quite how or how long the hype would last. Most internet users will at the very least have heard the acronym by now or have a vague idea of what their function is, even if they can’t really explain it. The growing reticence among the general public to embrace this bleeding-edge tech appears to have been borne out of a combination of three factors: that they have grown sceptical of the technology and its products; the legal quandaries of so-called ‘ownership’; and the incessant, rampant and increasingly spectacled-and-lampooned fraud that has swept the crypto space in general. Let’s take a look at the latter first.

The concept of a so-called “rug-pull” is essential in understanding much of the crypto-related backlash in recent years, so let’s break one down: primarily, a rug-pull is when developers create a crypto token, promote it to pump up the price and, finally, pull as much value out before abandoning the project altogether. The price drops to zero, and everyone who invested loses every iota of what was staked. These scams are more than prevalent – they are, in the internet zeitgeist of our time, positively ubiquitous. In 2021, this specific type of scam alone netted fraudsters over $2.5B. No, that’s not a typo. Billion, with a capital B. So, yeah. Certainly ubiquitous. So much so that with NFTs inherently wrapped up in the nature of the crypto space, there are variations of this kind of scam for them, too. One of the largest occurred just last month in a blockchain-based game called Axie Infinity, where players buy NFTs to use in-game where they have utility in battling and breeding cartoon axolotls, much like in Pokémon. Because of a permissions error, however, an as-yet-unknown agent was able to steal $625 million. It is strongly suspected that this “hacker” was a project insider, certainly qualifying it as rug-pull, if true.


The fun-and-friendly-looking Axie Infinity game powered by NFTs

Aside from the rug-pulls that impact the wider crypto space, the NFT market has its own unique fraud to deal with. OpenSea, the leading marketplace for NFTs, reported early this year that over 80% of the NFTs created for free on the platform are “plagiarized works, fake collections, and spam.” Artists from all over the internet are rightfully frustrated to learn that their work is being plagiarised in the minting of NFTs that are then sold under the pretext of legitimately supporting the artist. The blockchain, unfortunately, cannot determine whether a creative work is authentic or not. Some fraudsters are even artificially boosting the value of NFTs they have already purchased by selling it to themselves multiple times through different channels, fabricating a false purchase history that would be appealing to prospective, and unwitting, investors.

The word ‘ownership’ is in inverted commas in this piece because purchasing an NFT gives one no more rights as an owner than say, purchasing an original painting by Gauguin. The work is non-fungible in the sense that only one exists, but the physical painting could also only be recreated and distributed by the copyright holder. Owning the physical work alone does not (necessarily) equate to owning the copyright, and it’s the same with most NFTs. Unless the terms of purchase allow it, the ability for buyers to share the creative work on public platforms or to reproduce it and make it available for others is strictly limited. Most owners do not realise this, and if sharing the likeness of their product openly, could well be breaching copyright.

Then there are the issues inherent on the tech side. We’ve stated it before in one of our videos that purchasing an NFT is not equivalent to purchasing a physical object; one rather purchases something likened to a certificate of authentication, a collection of metadata that defines what you own. But what if you ‘lose’ that certificate? The proof of NFT ownership is often stored on a static URL, wherever it is that it might be stored online. However, the problem is that it has to be stored somewhere, which opens up the risk of link rot. Links can, and do, break. You know this, I know this, we find them what feels every other day, and as Aaron Perzanowski wrote in speaking to The Verge, “That’s an awfully expensive 404 error…” Digital tokens, we should not be shocked to learn, suffer from the same issue that a true archiving of the internet at large suffers from: that anything can break, and when it does, there’s no promise that it’ll ever be fixed. 

So are these the first days in the death of NFTs? Hardly. The first market boom is showing sure signs of contraction, but a market that in 2021 was worth roughly $17B doesn’t just dissipate over a period of a few months. What is more, it is worth highlighting also that just about every market is down right now, course-correcting from a kind of irrational exuberance over the last few years. Like them or loathe them, in one form or another, NFTs are here to stay. As all markets do, the space will experience volatility, it will enter and exit cycles both predictable and not, and most importantly, it will mature, and over time, even become something wholly different. We’ll keep an eye.

Ross lives, works and writes in Manchester, England. When not losing himself in American literary or fantasy fiction, he writes regular tech and culture articles for SMPLE as well as long and short fiction.
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