In addition to hype and fraud, these security risks of digital collections cannot be ignored

Today is the third post in our series on digital collections. The last two articles have popularized the basic knowledge, development status and application of digital collections:

As an immature emerging market, the digital collection industry also faces certain security risks. Next, let's take a look at the security issues of digital collections.

What are the security risks of digital collections?

At present, security incidents of NFT projects in foreign countries are frequent. According to the security public opinion monitoring data of Chengdu Lianan, since the beginning of 2022, more than 20 NFT security incidents have occurred, and the loss amount has exceeded 85 million US dollars.The main reasons for the occurrence of NFT security incidents are: project contract loopholes, phishing attacks, private key leaks and Rugpull (the project party running away), etc.

We often see foreign media reports on NFT security incidents, such as the most well-known Boring Ape, the ensuing theft often appears in the headlines of major news, and the Boring Ape NFT of many users including Jay Chou has been stolen. Theft, the loss is heavy.

Compared with foreign NFTs, digital collections developed on the alliance chain are more in line with regulatory requirements and have higher security. But this does not mean that there will be no security problems and hidden dangers in digital collections.

As a new thing, digital collections are hot, but their security risks cannot be ignored, such as: technical risks, financial security risks, price speculation risks, network fraud risks, rights infringement risks, regulatory compliance risks, etc.

If divided according to the participants , issuers, buyers, and developers of digital collections may face security risks . The specific risk content will be explained in detail below.

What are the security risks for issuers of digital collections?

Issuers of digital collections mainly involve security risks such as regulatory compliance risks, financial security risks, and cross-chain property rights protection risks.1. Regulatory compliance risk  

At present, although my country has a positive attitude towards blockchain technology and its functions, its supervision is still in the preliminary exploration stage. As an emerging technology and business form, digital collections based on blockchain technology are still in an ambiguous and immature stage in terms of laws, regulations and regulatory policies.

1) Issuing platform license compliance issues: China Science Network's "2021 China Digital Collection (NFT) Market Analysis and Summary" reported that: as of the end of 2021, only the Hainan International Cultural Art Trading Center has issued digital art trading licenses in China, respectively. It is authorized to two platforms of Hi.com (self-operated by Haiwenjiao) and Yiyi NFT, including Whale Explorer, Magic Core and other digital collection (NFT) sales platforms, whether they have digital art transaction licenses, and it is unknown.

2) Issues of content compliance: In addition to the issue of platform license compliance, issuers should also pay attention to the issue of legal compliance of content. At present, there are many and complicated industry participants and various business forms. Digital collections should take advantage of the advantages of the alliance chain to conduct compliance testing on the content of the platform to ensure that the content on the chain is legal and compliant.

2. Financial security risks

NFT is inherently financial , and when the secondary market is open, it is easy to be abused to threaten financial security.

In order to strip off the financial attributes of digital collections, it is especially restricted that they cannot be circulated in the secondary market .

But from a regulatory point of view, although digital collections have tried to avoid their financial attributes through various methods, due to the uncertainty of their value and the large number of subjects involved, once digital collections generate a high premium, they are likely to be illegally Molecular use, causing a series of financial security risks such as illegal fund-raising, money laundering, and cross-border asset transfer .

3. Risks of cross-chain property rights protection

In the previous article, we have mentioned that digital collections are of great significance in the protection of copyright confirmation, but under the current actual market conditions and legal constraints, digital collections cannot fully guarantee the originality of works and the complete rights of creators .

For example, there are multiple alliance chains in China, and there are multiple distribution platforms on each chain. Unless the issuer restrains itself, no one can prevent the issuer from re-selling the same digital collection on multiple platforms on multiple alliance chains. , which leads to the uniqueness of the digital collection only on one chain .

In addition, when defining rights, the intellectual property rights of digital collection trading platforms are divided into seller's rights and buyer's rights. At present, trading platforms all mention that the copyright of digital collections is owned by the issuer or original creator, but the seller may misappropriate digital assets without authorization. Publishing, causing infringement ; and buyers who currently purchase digital collections generally only mention that they are restricted from using digital collections for commercial purposes, resulting in blurred definitions of rights owned by buyers, which may lead to improper use and infringement.

What are the security risks for buyers of digital collections?

As an important participant in digital collections, buyers face security risks mainly including: phishing and fraud risks, hype and market bubble risks, etc.

1. Phishing and Scams

In April, the BAYC#3738 Boring Ape NFT held by Jay Chou was stolen due to a phishing attack, which sparked a lot of discussion. And Jay Chou is just one of many stolen NFT users. According to relevant statistics, recently, on the NFT trading platform OpenSea , 17 users had their NFT assets stolen in phishing attacks, involving a total value of about 1.7 million US dollars.

In addition to phishing attacks, there are also many methods of NFT fraud, such as: wash trading, fake NFT platforms or projects, fake NFT airdrops, stealing other people's works and pretending to be your own NFT, etc.

It can be speculated that after domestic digital collections become more and more popular, they will also encounter the same security risks as foreign NFTs such as fraud.

In addition, there is no perfect secondary market trading platform for digital collections, and the risk of fraud in transactions will exist for a long time, because there are still digital collection transactions on some second-hand trading platforms or communities, but the transaction behavior will not be protected by the platform and the community , at your own risk. Therefore, as a buyer of digital collections, we must be alert to related risks.

2. Hype risk and market bubbles

According to a digital collection player, after the sale of a digital collection priced at 19.9 yuan, its quotation has been rising all the way on a second-hand trading platform. The final bid of more than 900 yuan was finally purchased successfully. But shortly after he bought it, the quotation of the digital collection on the second-hand platform fell all the way. Unfortunately, he became the player who took over at a high position.

This is the hype and bubble risk of digital collections!

At present, most of the calligraphy collections are basically sold out as soon as they are sold, and the market performance is extremely hot, and the popularity remains high. However, the current market’s understanding of digital collections is not comprehensive, and there is no public and unified measurement standard for the value of digital collections with digital works as content, which leads buyers to be easily attracted by fluctuations in transaction prices, while ignoring the real truth behind digital collections. Art value and collection value , in this way, there will be some hype and speculation in the market, and over time, market bubbles will be inevitable.

What's more, there are still informal manufacturers producing fake or shoddy collections under the banner of digital collections, and there are also illegal exchanges that secretly open the secondary market driven by interests. Buyers of digital collections need to keep their eyes open and be vigilant. To hype risks and market bubbles, you need to know that "no snowflake is innocent in an avalanche".

What are the security risk issues for digital collection developers?

Developers of digital collections include developers of underlying chain platforms, system developers, and smart contract developers related to digital collections. The security risks that developers of digital collections may encounter include: traditional network security risks and blockchain security risks.

Blockchain-based digital collections are currently in the early stages of development, and from a technical point of view, there are still some security risks. The following figure is the main security risk points summarized by Chengdu Lianan based on the security analysis of the alliance chain:

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At present, most manufacturers and developers focus on traditional network security such as communication and network security, host security, and mobile security, while not paying enough attention to blockchain security.

However, the digital collection itself is developed based on blockchain technology, and its business is also realized through smart contracts , so the security of blockchain and smart contracts should be regarded as the core security issues in digital collections.

Domestic digital collections are not much different from NFT in technology , and business logic is also implemented through smart contracts. Therefore, the contract loopholes encountered by NFT also exist in domestic digital collections, and we need to be cautious.

References:

"The Key to the Value of the Metaverse: A Report on the Development and Application of Digital Collections" Gyro Research Institute

"Research Report on Digital Collections Based on Blockchain" TBI

"Analysis and Summary of China's Digital Collection (NFT) Market in 2021" China Science Network

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