NFT Security

Non-fungible tokens or NFTs are a form of digital collectables that are designed to track the original ownership of each digital artwork or content.

Anyone, who created content digitally, is capable of earning extra money through NFTs.

NFTs have captured the attention of both consumers and businesses alike within a very short period of time, largely due to few big-ticket sales of NFTs.

With physical assets, the value of the NFTs are linked to the value of the physical assets.

NFTs have gained huge momentum in recent times because of their unique feature to attach value to any digital asset while recording its ownership in the blockchain.

Experts in the field believe the opportunities and possibilities of NFTs are beyond art or celebrity tweets/photos and would eventually extend to business applications.

Many companies and brands are already experimenting with NFTs for business use cases. Regulators in different jurisdictions may soon find the need to regulate this emerging asset class.

While NFTs and cryptocurrencies are both stored on blockchain, the key difference between NFTs and cryptocurrency is that NFTs are unique tokens.

They cannot be replicated or traded with another similar NFT while cryptocurrencies like Bitcoin are fungible because you can spend one Bitcoin, buy another Bitcoin and you will still have one Bitcoin.

NFTs extend the concept of a cryptocurrency by encoding information about a digital asset along with the other information.

The real power of NFTs is granting authenticity and facilitating the transfer of its ownership.

If you find it weird to buy any digital creation that can be copied, think of NFTs as a certificate of authenticity for that particular asset.

Other people can have copies of it but only you have the original piece. Add to that, the value in the smart contract logic that powers the digital collectables.

Are NFTs safe?

We are aware that art collectors, art galleries and museums spend a lot of money and resources to secure their invaluable artwork from thefts or heists.

However, in the digital world or, specifically, in the world of NFT security, the safety systems currently in place is like the digital equivalent of storing cash inside a room with open access for all.

While in theory, non-fungible  tokens are considered to be the digital equivalent of a certificate of authenticity for those digital collectables, the ease of replicating from the digital creation does not guarantee that the NFT was minted by the original creator and, hence the issue of NFT security becomes paramount.

Hence, it is quite possible that you have purchased an NFT from someone who does not have the legitimate right to sell it.

As NFTs are built on blockchain, the big feature of which is anonymity, NFT security is a pertinent issue because it is difficult to track down and hold the copyright violators accountable.

In blockchain, the person who has control of the ‘secret key’ has full ownership of the digital item – be it cryptocurrency or non-fungible tokens.

Currently, many NFT owners write their ‘secret keys’ manually on a piece of paper or store it digitally on USB drives and hide them strategically in different places. That’s the most they do for their NFT security.

Both the above strategies have inherent risks as there are no backups in case the ‘secret keys’ get lost or damaged and NFT security gets compromised.

Besides, if the NFT owner is somehow incapacitated and didn’t leave any instructions for others to access the NFTs in his absence, it would be difficult to retrieve it.

Meanwhile, hackers are already active in the NFT world and have already succeeded in breaching NFT security systems and have stolen few NFTs worth few million dollars. The rapid growth in the popularity of NFTs has opened up a brand new avenue for the hackers.

They usually do so by stealing the user’s credentials and/or implanting malware.

Other strategies include using remote access trojans to gain full control of a compromised machine. The latter enables them to intercept passwords and keystrokes too.

Watch this video: Security Architect Talks About NFT’s Internet Security And Privacy (41mins 52secs)

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Marketplace NFT Security

Non-fungible tokens thrive on centralized platforms or marketplaces that seamlessly allow buying and selling of NFTs.

Most of the well known NFT marketplaces have the legal systems in place for NFT security and report about NFTs that infringe on copyrights.

Despite that, it is quite difficult for an artist to prove that the original creator of the artwork and the person who minted the NFT are different.

Moreover, despite all the strong security measures implemented by the NFT marketplaces, individual hacks or NFT security breaches can still happen due to weak security practices adopted by platform users.

Smart Contract Vulnerabilities

Smart contracts are sophisticated programs stored on the blockchain and are typically used to automate the execution of an agreement without the need of any intermediary or of the counter-parties to trust each other.

The outcome of smart contracts are certain and its execution will correspond to the exact predetermined logic. Hence, the elimination of the need of trust among the counter-parties.

Smart contract execution can result in exchange of money, delivery of services, unlocking of content protected by digital rights or any other data manifestation such as changing the name on a land title.

However, despite the name, smart contracts are not legally binding contracts and appropriate legal steps must be taken to link them with legally binding agreements between parties.

Moreover, even the correct execution of the smart contract code cannot ensure its complete safety.

Ethereum blockchain is currently the most used platform for smart contract implementation.

Security issues in smart contracts are serious because most smart contracts deal with financial assets and errors in those smart contracts, once published, cannot be corrected due to the nature of blockchain.

Developers are human beings and human beings do make mistakes. In such cases, the smart contracts would continue to execute in an automated way that may lead to some incorrect transactions. A serious drawback of smart contracts.

Some of the most common security issues related to smart contracts are:

  1. Possibility of indirect execution of the code due to the presence of the fallback function feature in smart contracts. There are several technical reasons why this feature can be called.
  2. Most modern Decentralised Finance (DeFi) smart contracts deal with huge amounts of money, depicted in tokens or ETH value. Hence, a lot of operations in contract logic is related to transfer of tokens to and from the contract.

This opens up the possibility of various mistakes, especially those related to fees, correct percentages, profit calculations, among others.

Such mistakes may lead to loss of funds for the users or locked tokens.

  1. Sometimes, the logic of smart contracts can be time sensitive or with a timestamp. This opens up opportunities for the miner to abuse his/her position due to the freedom associated with setting a timestamp.
  2. Using the blockhash function is similar to reliance on timestamp, as miners can manipulate these functions and change the withdrawal of funds in their favour.

Writing a completely secure smart contract is a complex and painstaking task and requires a thorough audit before it is published on the network.

How Valid Data helps

The risky nature of blockchain technology highlights the significance of doing your own research and of taking a closer look at the reliability and security of the asset before investing – be it any crypto project including non-fungible tokens.

Valid Data helps investors, exchanges, wallets and vaults by providing real-time alerts and predictive insights on asset credibility and security.

With Valid Data, you can get a quick Valid Score indication or dig deeper to understand the smart contract vulnerabilities behind any NFT and get alerted for any suspicious activity or NFT security breaches.

This can give you some peace of mind while buying NFTs or any other digital assets.

Will regulations save the day?

NFTs are an emerging asset class with lack of regulation or oversight by design, because it is based on blockchain technology,  just like cryptocurrencies.

The areas where regulations may be extended to cryptocurrency exchanges, are most likely to be the historical transactions associated with digital wallets linked to a customer.

This is quite similar to what traditional banks do to report suspicious activities in any account.

Other possible regulations or regulatory oversights over the crypto industry including NFTs are being considered by regulators and governments of different countries to avoid any loopholes in their financial regulations.

How do you take protection into your own hands?

The first and most important step that users can do towards enabling their own NFT security is to enable multi-factor authentication.

Add to that, is a strong password which should ideally be of sufficient length and complexity and should not have been used by you anywhere else.

These simple steps by users can go a long way in ensuring NFT security and prevent frauds involving NFTs or, for that matter, any digital asset.

For companies and/or platforms, there should be multiple layers of security checks for NFT security such as employee background checks, securing sensitive communication, vulnerability testing, encryption of the drives, third-party invasion testing, among others.

Over and above the above measures, individual users as well as companies and platforms alike must have a cold (offline) storage of digital assets to create an additional layer of NFT security from internet-connected thieves.

Needless to mention, the cold (offline) storage must be physically secured to protect against loss, theft or damage.

Security Token Offerings (STO) for NFTs

You should be aware of the fact that issuance of NFTs may, in some cases, constitute the sale of securities, which may require registering the securities with the US Securities Exchange Commission (SEC) or risk litigation in future.

All digitized units offered at the fund raising stage in the US are considered as securities and are commonly referred to as security tokens.

If you are planning to sell NFTs, you should consider doing so through a Security Token Offering (STO) – a process that quickly enables entities to raise funds while being compliant with US securities laws and regulations.

Thereafter, the tokens can be issued on a tokenisation platform and traded on the secondary market through an Alternative Trading System (ATS).

ATS are not exchanges but operate on similar lines and essentially act as a compliance platform for issuing and managing digital securities.

Companies targeting non-US investors can split the offering, using an SEC exemption that allows securities offerings to foreign investors.

Since certain NFTs may qualify as securities under US SEC jurisdiction, it is fair to assume that the rules and regulations that apply to STOs will also apply to NFTs, which are deemed securities.

NFT Security Registration

Since the sale of NFTs may, in some cases, constitute the offering of securities, therefore NFT platforms, marketplaces and service providers may be subject to liability if they fail to comply with the proper rules and regulations related to securities.

Individuals and entities dealing with NFTs as securities would also be required to be registered as broker-dealers.

Non-compliant NFT projects may be found in violation of the anti-fraud provisions of securities law and face civil and criminal penalties.

NFT issuers must be particularly cautious about offering NFTs that could potentially be considered as securities, so as to not fall within the definition of broker-dealers under the SEC Act.

Meanwhile, a company does not necessarily have to be incorporated in the US for it to offer STO, as US securities laws allow foreign issuers to conduct offerings by registering their securities.

Uncovering NFT vulnerabilities and NFT security concerns

If an NFT is found to be based on stolen artwork, then the marketplace that sold the NFT, will have to take it down as they don’t have the right to host the artwork.

Any buyer who had bought the NFT could have possibly downloaded it and view it on his/her computer but can never sell that particular digital artwork or collectible.

When you buy collectables, the general psychology is to sell them at higher prices in future. It is rather easy with physical collectables, as long as you keep them safe and secure.

However, with NFTs, you need to worry that the URL should not stop working and, for that, you must trust the person from whom you are buying the NFT.

What is  the difference between a token and an NFT ?

Tokens contain randomly generated numbers that have no value or association with the original data and hence cannot be deciphered.

This is different from encrypted data which can be deciphered by a skilled hacker.

An NFT, on the other hand, is a unique digital asset that is owned by any one person or group. These digital assets represent real world items and have unique identifying codes.

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As more of our contents become digital, it is inevitable that collectables too become digital eventually.

While there are genuine concerns about NFT security and copyrights issues with NFTs, there are people who are already spending millions of dollars on NFTs.

Innovation is evolving and new utilisation of non-fungible tokens are still being explored and should be examined on a case by case basis.

Nonetheless, blockchain technology, that powers both non-fungible tokens and cryptocurrency, is here to stay and the world is yet to explore its full potential.