Validating NFTs

The market for non-fungible tokens (NFTs) exploded last year, reaching a trading value of more than US$23 billion, up from just $100 million the year before, according to tracking firm DappRadar.

NFTs, unique digital tokens that cannot be replaced by or exchanged for another token of the same value, are governed by smart contracts and are verified and powered by blockchain, the distributed ledger technology in which a network of computers records transactions and provides buyers with proof of ownership and authenticity.

Yet the rapid growth of the NFT market has also given rise to scammers and fraud, largely due to the decentralized nature of blockchain, and the anonymous nature of "minting" or creating a digital file as an NFT, whether or not they have the rights to it in the first place. This has become especially apparent in the world of digital artwork, where NFTs serve as a unique, permanent record of ownership linked to the work.

An artist can mint a digital file (such as a video or digital image) as an NFT, and then sell it on an NFT exchange, with a record of the transfer of ownership automatically recorded on the blockchain, which maintains an immutable record of all transactions related to that piece of digital content. Transactions recorded on the blockchain provide full transparency as to when the NFT was minted, as well as a digital trail of every transaction associated with it, which cannot be modified or altered.

By itself, blockchain technology, while extremely transparent, does not have a built-in mechanism for transferring ownership of NFTs. That's where technology called distributed key generation (DKG) is used to automate NFTs' access control on the blockchain, according to Dragan Boscovic, a research professor in the Arizona State University's School of Computing and Augmented Intelligence. DKG can create a re-encryption key for an owner and issue it to the network, and in the event of a sale or ownership transfer of an NFT, can also be used to grant access to encrypted NFT content, or simply to transfer the access control and IP management to the new owner.

Increasingly, digital creators and purchasers of legitimate original NFTs are finding the market flooded with digital copies of their artworks, each with their own NFT claiming ownership. This is because even with DKG, an individual without proper rights of ownership to that digital artwork can simply save a copy of the digital file and then mint their own NFT, which they can pass off as authentic to unsuspecting or unsophisticated buyers. The nature of the current NFT market is such that the minting process can be carried out anonymously, as cryptocurrency wallets (which are used to send and receive funds) can be utilized without being linked or associated with an individual artist or purchaser.

That is why it's important for artists to clearly link their NFTs with their personal cryptographic wallets, and then to publicize this information widely in order to distinguish their authentic works from fakes, according to Matthew Dweck, founder of Doodlelabs.io, an NFT minting platform. Dweck says transactions recorded on the blockchain allow anyone to easily see which entity created an NFT, when it has changed hands, and a history of all owners of that digital asset.

"It's very important for artists to register their names, and make it known that this is their authentic account, even putting it on social media accounts to [publicize] that, 'this is my wallet'," Dweck says. "I think once people really understand of how to look at a blockchain, it's very clear to them when you're buying something that's authentic or not authentic," Dweck adds, noting that scammers tend to use anonymous wallets, and may not have established histories purchasing or selling other digital assets.

Doodlelabs, says Dweck, incorporates a verification solution akin to the blue checkmark used by Twitter to indicate a celebrity's account is, indeed, linked to that celebrity. "Every time we create [an art NFT], it gets put into a verified collection," Dweck explains. "So when you're dealing with some of the bigger [art] drops, which are the ones that tend to have fakes come out around them because everyone's trying to get in on something, you'll see which of those accounts are not verified," so prospective buyers can avoid purchasing from them.

Dweck says greater efforts are being expended by Doodlelabs and other NFT platforms to police themselves and remove fraudulent NFTs from the marketplace.

Ultimately, the onus is on the buyer to investigate the source and chain of NFTs being sold or traded, given that digital copies are likely indistinguishable from the original. The important things to ascertain include verifying that a piece of digital art is initially associated with a specific NFT wallet that belongs to an artist, and that the blockchain looks reasonable (for example, multiple transfers between fully anonymous accounts should raise a red flag).

Despite the 'buyer beware' marketplace that exists today, Boscovic says digital rights management (DRM) tools also may be used to aid in the description, identification, trading, security, monitoring, and tracing of usage rights for both intangible and tangible assets.

"New tools and services being developed around the OpenDRM standard for blockchain will enable authors to retain control over their IP while still participating in open, public blockchains NFT marketplaces," Boscovic says. These tools will need to address digital rights as an irrefutable claim to ownership, and include frameworks for licensing, attribution, and access of NFTs and NFT-verified digital assets.

 

Keith Kirkpatrick is principal of 4K Research & Consulting, LLC, based in New York, NY, USA.