Early Investing

The Dark Side of NFTs

The Dark Side of NFTs
By Adam Sharp
Date September 17, 2021

A few weeks ago, I wrote a piece about how NFTs (non-fungible tokens) are the perfect viral asset.

NFTs have a lot of interesting characteristics. They’re speculative, subjectively valued and community-based. You could say they’re the perfect viral asset. And because it’s art, there are far fewer regulatory concerns than many crypto projects face.

There will be price crashes — and huge rallies. Models will evolve and change. But I’m sure that in the long run, art NFTs are here to stay. They’re just too good of a fit for what the world wants.

While I did say there will be price crashes and huge rallies, I didn’t talk enough about the potential risks and downsides of NFTs.

This week we got a prime example of the dark side of NFTs. Nate Chastain, a now-former employee of NFT marketplace OpenSea, was apparently buying art just before it was promoted on the OpenSea homepage. He would then flip the art for a quick profit after it was featured.

This questionable activity was revealed on Twitter by user ZuwuTV.

Tracking down this activity was possible due to the open nature of the Ethereum blockchain. Sleuths were able to track the transactions through multiple wallets back to one owned by the OpenSea employee. His wallet was easily identifiable because it held his cryptopunk (a uniquely generated character that is also an NFT), which he uses as his avatar on Twitter and elsewhere.

Investigating Questionable Activities

Alleged perpetrator Nate Chastain was no small fry at OpenSea. He was the head of product, meaning he played a key role in driving and managing the development of the platform. He was very active on Twitter, engaging with users and taking feedback.

Chastain didn’t make much of a profit from his frontrunning — a few ethereum worth perhaps $10,000. His equity stake in OpenSea, however, would likely have been worth millions of dollars. Maybe tens of millions. Now he appears to have been fired and will probably lose most of his equity.

Why he did it is less important than the fact that this activity was discovered. I suspect it will set off a huge decentralized investigation into similar activity. And I think there will be a LOT more questionable activity found over the coming days and weeks.

It’s important to note that Chastain may not have done anything illegal. Art NFTs are not securities, so using insider information doesn’t appear to be against the law. But it’s clearly an ethical minefield and a horrible PR incident for OpenSea, which is one of the fastest-growing crypto startups in the world. 

OpenSea posted an announcement on its site about the incident and promised a full independent investigation. But I suspect the crypto community will do much of the investigating for it.

Be Wary

Newbies in the NFT space should take this news as a clear warning. There appears to be a ton of money being made by questionable activity in the NFT space. 

There are organized pump-and-dump operations, wash trades, money laundering schemes and likely many more activities that haven’t been discovered yet.

Despite this dark side of NFTs, I stand by my conclusion that they hold immense potential and are here to stay. Questionable actors are increasingly being exposed by the vigilant crypto community. Projects without staying power are dissolving. High-quality projects with strong communities continue to thrive. Photography NFTs are coming on strong.

NFTs share many qualities with the broader crypto community. There are heroes and villains, winners and losers. It’s the wild west out there, but that’s simply the nature of the beast.

Top Posts on Early Investing