NFTs were barely a blip on anyone’s financial radar two years ago, but thanks to multi-million-dollar artwork sales and the popularity of collections like Bored Ape Yacht Club, the market has now soared as high as $41 billion.
What hasn’t grown nearly as fast is the arsenal of tools to combat an inevitable downside to the sudden surge of value in these digital assets. Fraud and theft remain persistent concerns for people who buy and sell NFTs. Like the rest of the crypto space, the NFT. or non-fungible token market, is largely considered to be like “the Wild West,” without much in the way of regulation or enforcement.
Yes, federal officials are making some progress with investigating NFT scams. Notably, in March, the FBI made its first ever “rug pull” bust and arrested two 20-year-olds accused of defrauding investors in an NFT project called Frosties. But the government has a long way to go to make a meaningful dent in the purportedly millions of dollars of fraud and theft that afflict the NFT market.
That’s where HonestNFT comes into play. Launched by blockchain security firm Convex Labs, HonestNFT is an initiative that seeks to incentivize efforts to uncover fraud and theft in NFTs. In other words, the group recruits vigilante hackers.
We caught up with one of the organizers of HonestNFT, Convex Labs co-founder Chinedum (CK) Umachi, to explain what the initiative is all about and how it can help clean up the market.
This interview has been condensed and edited for clarity.
The Business of Business: What is HonestNFT and what are you guys trying to do? Can you explain it in a nutshell?
CK: It started off as a project from a group called Convex Labs. We're all Stanford engineers, studying for PhDs and MBS. And we all believe in the future of Web3 [a decentralized vision of the internet]. And so at a core, we try to focus on vulnerabilities of Web3, with a keen eye on how to get to this future that we're all envisioning.
There's a lot of roadmaps and a lot of things that need to be sorted out to get there. So with NFTs being so popular, we’re really trying to deep dive and understand the trading and the technical complexities of everything. And one of the common themes that we noticed is that there were a lot of insiders who were gaming stuff to their advantage.
We released a report last year [on cheating in the NFT space] and it got a really positive reception. And we opened a lot of people’s eyes to what people were doing and how they were doing it.
And so for us, we spent a lot of time just trying to figure out how we can help make the space more efficient to get rid of some of these issues. So we started off with auditing projects. And I've done some bounties where we pay people to help build tools and whatnot. So that's kind of been most of the work to date.
What we're really focused on now is actually building solutions. So we're working on something called the Honest Protocol And what that's focused on is a process, a decentralized process, by which you can come up with high trust information and map it. And so the idea is that by having this information, having it in a way that is kept evergreen, there's incentive mechanisms, and there's a consensus mechanism. All of this comes together in a manner that keeps this list as accurate as possible.
"Imagine if you could label an NFT as stolen, and provide the evidence to show that it's stolen in a manner that immediately is recognized by [major NFT marketplaces]."
It’s so easy to get hacked. So imagine if you could label an NFT as stolen, and provide the evidence to show that it's stolen in a manner that immediately is recognized by [major NFT marketplaces]. So what we're building is a way for high trust information to be propagated to all the different endpoints, the marketplaces, the applications, and the wallets. And we have the consensus mechanism, the incentives and the dispute process keeps this as accurate as possible.
What's your background? And how did you get into crypto and NFT's in the first place?
I got into crypto back in 2017. My younger brother just kind of introduced it to me. And back then, we were in a bull market, people were making money, and you could kind of throw a dart at whatever was in the space. And you were gonna make a little bit of money. And then I spent a little bit more time trying to understand what the heck this was that I was investing my money in. And just kind of went down the rabbit hole and started learning so much. So I just spent so much of my time just trying to learn that. And then at the same time, I was actually working at Pacific Gas and Electric.
So I was working for them. And they actually were creating a team to explore blockchain and how that could apply to the future of the energy grid. I was able to work my way onto that team, and that was my first foray into actually working in the blockchain space. I did that for a couple of years prior to cofounding Convex Labs, the favorite job I’ve ever had. This is a blessing when you can do what you want to spend your free time doing and get paid to do it.
Then I came to Stanford. Right now, I’m getting my MBA, which has been a complete game changer for me in so many ways. I met the rest of my co-founders, through the Stanford Blockchain Club. And also, I've [worked with] venture capital. I’ve worked with FX, with Galaxy Digital, CX Ventures and some early stage blockchain stuff.
You were looking for white hat hackers, too, right? What were you looking for them to hack?
So, the early ethos of the project that's kind of shifted a little bit was, we see this problem. How do we address the fact that people are gaming NFTs and like? There’s so much scamming happening in the space. So the idea was, we would audit projects, and we would build out tools. When we say “white hat hackers,” [we are referring to] folks who are willing to help us on projects.
"There is just so much money in the space. And it’s just so new that there’s a lot of people who don’t understand it from a technical standpoint, how to avoid these scams."
What we were hoping to get was the people with the tools and the knowledge to do these searches, because without anybody pushing back, or calling things out, there is just so much money in the space. And it’s just so new that there’s a lot of people who don’t understand it from a technical standpoint, how to avoid these scams.
So that's kind of why we wanted to focus on bringing those people in. Instead of “white hat hackers,” we call them “vigilantes.” We have an NFT collection called Vigilantes. The idea is that these vigilantes are watching the NFT space. But like I said, since then, we've pivoted more to wanting to focus on actually building out solutions. The beauty of blockchain is that you can build the solutions.
Interesting. How do you see this effort making money?
So we're building a protocol. How the protocol works is that we have different actors that are incentivized for either keeping the information accurate, or calling out when something is inaccurate, and they're incentivized they'll be paid to play those roles. And then there's a dispute mechanism process. Hopefully, everything that we're including in this can be objectively figured out to some extent. And then there's like a consensus mechanism to make sure that that's all being propagated. And that's as accurate as possible.
So if you have a project and you want to label one of the things that happens, that happens pretty often, is when fraudulent projects pop up. Even for us, when we released some of the previews of our NFT collection. Immediately, somebody created an NFT collection with the sample that we put out there for projects to be able to call out other projects as fraudulent. That's something that I pay for, for projects to be able to mark stuff as stolen. That's something people want to pay for. There's other stuff on the customization side that we think will be interesting.
Does it surprise you that there's still such this yawning demand for the expertise you're trying to provide at this point? I mean, the market seems to have gotten pretty well developed really fast. But it doesn't seem like there's enough people doing what you do.
One of the issues is that the NFT market is sexy. It’s a sexy market, and people want to get int. That's how you really build hype. Less people care about [the kind of work that we do] until they get hacked, or until they get reported. Then they want to figure out how to recoup their stuff, or if there's a way to recoup it.
"If we don't come up with solutions, the regulators will set solutions, and we will have less of a say in those unless we are able to do this proactively."
We're betting on the fact that if we can tell the message in the right way and get our message out there, wide enough and broad enough, then we can really open people's eyes up. Maybe individual collectors don’t care as much, but maybe projects will be able to keep their people safe, and do right by their communities and have long-term sustainable communities. We think that there is definitely a need for this in the market. And we've heard a lot of positive feedback.
And you touched on this a little bit earlier, but what do you think is the danger for the NFT market as a whole, if there isn't, you know, better policing, and better tracking of this kind of fraud?
More and more people are going to get scammed, and more and more people are gonna lose money. And then they're going to be turned off to the space. There's a lot of people here who are just here to make some quick money, which I’ve got no qualms with that. But there's absolutely a need for the long term sustainability and longevity of the space that we allow newcomers to, to come into a safe place to a safe market.
Second is regulatory. Like we already saw the Biden administration put out their executive order to spend more time focusing on this market. Maybe we can be part of the solution. I was able to talk to Barack Obama [and people affiliated with him] last week. They're focused on disinformation. But some of these tools that we're using could be used for good [for that purpose].
If we don't come up with solutions, the regulators will set solutions, and we will have less of a say in those unless we are able to do this proactively.