How one of the largest token trading venues found itself at the center of scandals
NFT’s marketplace for trading, OpenSea, has gone from creation to a capitalization of $13 billion in just five years. Recently, however, the service has been regularly at the center of scandals, whether for NFT theft, fraud, or plagiarism. Most recently, an OpenSea employee was arrested for the first ever insider trading in digital assets.
NFT Insiders
Last week, the U.S. Attorney’s Office for the Southern District of New York charged and arrested Nathaniel Chastain, a former employee of OpenSea, one of the largest NFT trading platforms in the world. As the U.S. Department of Justice notes, this is the first case of an indictment for insider trading in digital assets. According to the investigation, Mr. Chastain “used confidential information about which NFTs would be exposed on the OpenSea homepage for personal financial gain.” He is also charged with fraud and money laundering. Each of these charges carries a maximum sentence of 20 years in prison.
The essence of the scheme is very simple. The Marketplace kept the information about which tokens would appear on the home page secret, as this usually increased their price, as well as the price of other NFTs by the same author. Mr. Chastain was in charge of selecting NFTs for the home page. Knowing which tokens would appear on the home page, he would buy them before posting them through an anonymous account and then resell them at a higher price.
NFT – Popular product
OpenSea was created in 2017, the same year that NFT itself came into existence. NFTs (Non-Fungible Token) are based on blockchain technology, but are different from other tokens. Whereas, for example, various cryptocurrencies are interchangeable (like regular currencies), NFTs are unique and are created directly for a specific digital object. Initially, NFTs were most often used to purchase items in computer games, and later became popular as a way to collect digital art. Anything digitally, from texts and photos to videos and clips, can be converted into NFTs.
OpenSea is often compared to eBay, only for NFT is an easy-to-use platform where you can sell and buy tokens through both an auction and a fixed price. The marketplace makes money by earning a 2.5% commission on every sale.
Within a few years, NFTs, which started out as CryptoKitties, the most popular option at the beginning of these tokens, have grown into a very promising market. NFTs saw serious growth in popularity last year: according to Nonfungible and L`Atelier BNP Paribas, their sales reached $17 billion in 2021 – a growth of almost 21,000% compared to $82 million in 2020.
At the same time, the popularity of OpenSea was growing, as was the valuation of the platform. In June last year, the company was valued at $ 1.5 billion. And in February of this year, following the last round of funding, in which the company raised $ 400 million, the valuation of OpenSea reached $ 13.3 billion. The company itself does not publish financial statements. According to OpenSea, during the existence of the marketplace on it have sold more than 80 million NFT for a total of over $ 20 billion, and by the calculations of the service Dappradar, sales in the last 30 days (by June 10) exceeded $ 1 billion.
Scammers, thieves and plagiarizers
OpenSea has been in constant trouble lately and has been at the center of scandals. Insider trading by a service employee was just one of them. In January, many users temporarily lost NFTs they owned from their Twitter accounts, online wallets, and so on. Then the site reported a “crash in the databases,” and some users jokingly suggested renaming it from OpenSea (“open sea”) to ClosedSea (“closed sea”).
In February, it was reported that hundreds of NFTs had been stolen through the site (254 tokens, according to PeckShield). Although there have been thefts before, this case was especially large-scale – some experts estimated losses from this attack at $2.9 million. The site itself admitted the theft of several dozen tokens. Users accused it not only that hackers managed to steal tokens belonging to them, but also that OpenSea does not block the possibility to sell stolen NFTs fast enough, so that hackers have time to resell them. Several lawsuits have already been filed against the company.
According to Eli Shapira, an IT professional and former top executive at several technology companies from whom hackers also stole NFTs through OpenSea, the platform is not doing too well with security.
“It’s very easy for hackers to come in and create an account there and immediately trade or sell what they stole. The marketplace needs to improve its security,” he said.
“Some users believe the service isn’t doing enough to combat hackers because it’s not interested in that: it gets a commission on any sale, regardless of whether it’s honest or not.”
In some cases, users said, the tokens they put up for sale were fraudulently bought at a price much lower than the one they set. Collector Chris Chapman, in particular, complained about this – he owned a token from one of NFT’s most expensive collections called the Bored Monkey Yacht Club.
Last December, Mr. Chapman put his token up for auction with a minimum bid of $1 million, and soon discovered that attackers had bought it for $300,000 by exploiting a vulnerability in OpenSea’s security systems. The service offered Mr. Chapman compensation of $30,000, he rejected the offer, and negotiations are continuing. Other users of the service have also reported similar cases.
Another problem is the proliferation of plagiarism on OpenSea. Some users have converted other people’s art into NFTs without asking, or copied other NFTs – and sold them on the platform without paying anything to the creators of the original works. The online gallery DeviantArt developed software that scanned millions of NFTs every day and looked there for plagiarized works by its artists. It ended up finding more than 290,000 cases of plagiarism on OpenSea and other similar marketplaces. “They have perverted the very idea of what NFTs should be. They dilute and degrade the market for my work,” said artist Aya Trier of Texas, whose work was also displayed on the platform without demand.
Competition and regulation
According to experts, the case of OpenSea illustrates how the concept of more free and self-regulating Internet collides with users’ desire for security. The platform positions itself as a self-service marketplace and does not collect personal data from the majority of users, but users want it to be more active in the fight against fraudsters and better protect customers.
OpenSea acknowledges that there are vulnerabilities and security problems – though not in all cases – and promises to work on the bugs. Among other things, the platform has expanded its customer service team so that it now responds to complaints within 24 hours and blocks lists of stolen NFTs fairly quickly. In addition, in May OpenSea introduced new verification procedures to combat plagiarism, using an image recognition system. For now, though, only the platform itself is being compared with other NFTs.
In addition, OpenSea faces increasingly fierce competition – both with other well-known marketplaces, such as SuperRare and Rarible, and with new NFT trading platforms. This competition is all the more dangerous as interest in the NFT marketplace declines: according to the same NonFungible data, sales have dropped 90% since September.
