Should creators compensate victims of NFT hacks?

Should creators compensate victims of NFT hacks?

In short

  • Social media accounts for NFT projects, creators and influencers are hacked and used to share scams, which can lead to the theft of users’ NFTs and tokens.
  • Some prominent developers are conflicted about whether they should compensate affected users, citing Web3’s focus on self-preservation and personal responsibility.

Social media hacks are on the rise NFT community, and lately it’s rare for a day or two to go by without some significant project or creator account being compromised.

The consequences for collectors can be significant: Users participating in scams sharing hacked accounts have collectively lost millions of dollars in NFT collectibles and other tokens, all because they linked their wallets to what they believed was a legitimate NFT mint or token claim .

What is the recourse in these cases and what liability do NFT creators have to collectors when their accounts are hacked and used to commit fraud? In some cases, the creators of NFT projects have compensated affected users, usually by repaying the market value of the collectibles in Ethereum.

However, sentiment is growing among creators against compensating users who lose assets by engaging in social media scams. Some see that kind of good effort as a reward for reckless actions by users who don’t take precautions, which goes against the crypto industry’s principles of self-protection, responsibility, and doing adequate research.

As social media hacks grow, here’s how the compensation debate is evolving and what notable builders in the NFT space are saying about it.

Increasing attacks

In the last few weeks alone, the social media accounts of several notable NFT projects, creators, and collectors have been hacked and used to spread scam links. When people come into contact with these links, link a wallet and approve the requested transaction, it opens them up to having their NFTs and other tokens stolen.

Recent examples of such attacks include Ethereum NFT Project Nameswhose Twitter account was compromised on June 27. In total, NFTs worth approximately 42 ETH ($64,000 today) are stolen from 25 users which used the connection shared by the attackers.

The pseudonymous NFT collector and trader Zeneca had his own Twitter account compromised this week, too, although the degree of damage to users is not clear. An artist DeeKayThe Twitter account was also recently hacked, along with the accounts of famous collectors Franklin and Keyboard Monkey.

An artist Mike “Beeple” Winkelmannaccount was hacked in late May, with an estimated $438,000 worth of tokens and NFTs stolen from users, according to MetaMask security analyst Harry Denley. Beeple made no mention of planned compensation for affected users.

Twitter account of Jenkins valetTally Labs project based on a Bored Ape Yacht Club NFT, was hacked and taken over in June. The creators said users lost Bored Apes, Mutant Apesand other valuable NFTs through exploitation, and that it is would compensate users based floor price (or the cheapest NFT available) for each project.

One of the most notable examples of social media hacking from a major NFT project so far is the Bored Ape Yacht Club itself, which had its own Instagram account compromised by a fake mint link in April. Yuga Labs estimated the value of the stolen NFTs at around $2.8 million and said it was working to contact affected users.

Decrypt Yuga representatives were asked Friday if it eventually compensated users, but they did not respond. this week only Yuga tweeted that he was aware of a “persistent threat group targeting the NFT community”, which he believes “could soon launch a coordinated attack targeting multiple communities via compromised social media accounts”.

There have been other examples in recent months, including when the project’s Discord server was compromised, where attackers used access to share links to fake NFT coins or token drops. The Bored Ape Yacht Club’s own Discord was hacked in Junefor example, with about 200 ETH ($359,000 USD at the time) worth of NFTs stolen from users.

Salt flats NFT game market Fractal faced such an attack last December and said it would compensate users worth $150,000 SOL, while the Discord for the NFT game Phantom Galaxies was hacked in November. Publisher Animoca Brands said it would compensate users with $1.1 million worth of ETH in that example.

Just last weekend, Premint—a registration platform for NFT drops—had its website hacked with malicious JavaScript code. Users lost hundreds of NFTs by being involved in the fraud, and Premint decided to reimburse them more than $500,000 worth of ETH based on the minimum price for those NFTs, plus he bought back and returned the two most valuable stolen NFTs.

‘Not a guarantee’

Interestingly, in some of the situations mentioned above, even the creators who were compensating users expressed doubts about doing so, at least in the long term, or said they would no longer do so.

U postmortem account, alias Nouns co-creator 4156 noticed flaws in its security setup, such as a lack of two-factor authentication or a plan to address attacks. He described the compensation as a “one-time act of goodwill” and “not a guarantee” that the Nouns Treasury will reimburse users in similar situations.

“While it’s a no-brainer to say that people shouldn’t be reimbursed for fraud through your account, these users engage in zero-analysis activities in an attempt to make a quick buck and end up signing messages that authorize [withdrawals] from their wallets,” 4156 wrote in the next topic last week.

He added that most users seeking compensation were “extremely unsophisticated cryptocurrency users” and that many could not prove they had been affected. He came away from the experience “feeling that compensation was a short-term PR stunt” for the hacks, and that “normalizing compensation removes the incentive for personal responsibility.”

In the case of Premint, founder Brenden Mulligan specifically said the project would reimburse users because the attack happened on his website, not a social media channel. He similarly pointed out OpenSea user fees in January for a user interface issue in its marketplace, which caused owners to inadvertently sell NFTs for below market value.

“For us, someone manipulated a file on Premint and managed to launch the user interface he our website. We will own it. We shouldn’t have let that happen, so we’re trying to make up for it,” Mulligan said Decrypt. “There’s still an argument to be made that people should have been more careful, but in these cases, I think compensation is an option to consider.”

However, Mulligan disagrees with the idea of ​​compensating users who lose NFTs through links clicked on social media platforms. He believes that the attacks via Zenec and DeeKay’s Twitter accounts were not their fault, and tweeted that “in most cases victims should not be paid. It should be the responsibility of the individual.”

“People need to take care of their own safety,” Mulligan said Decrypt. “Ninety-nine percent of scams are because people aren’t paying attention and try to sneak into something without thinking.”

NFT artist DeeKay tweeted last week that he had “started a process to try to compensate” users affected by the scam link shared from his hacked account, but similarly expressed discomfort with the idea.

“To be honest, I’m not sure if compensation is the way forward since then [a] few pretend to be affected and look for opportunities,” he wrote. “This also encourages hackers to keep doing their thing, because I’m the one covering the mess.”

“Part of me says compensation shouldn’t be the default response, and another part of me says I should still find a way to compensate and find balance,” added DeeKay. “There is no right answer.”

‘Expectations should be zero’

Zeneca took a firmer line in his response to his compromised Twitter account. In the autopsy shared in tweets and collected in a blog post titled “Evolving precedents,” Zeneca said Twitter had enabled two-factor authentication and was still figuring out how the hack occurred — but that it had no plans to compensate affected users.

“Somewhere along the way, the projects decided that their response would be to take full responsibility and fully compensate the victims for their losses,” he wrote. “I understand and sympathize with this response.”

But then he wrote that it was “unsustainable” for the projects to continue and that it was “impractical” to sort out the alleged victims. “This and the responsibility lies with each individual participant in this space,” he added, noting that many people are used to “safety nets” in society, such as seeking help from centralized banks and financial services amid fraud.

“With all this in mind, I am making the difficult but I think fair and firm choice – not to significantly compensate those who have lost property as a result of the events that occurred in yesterday’s attack,” he wrote. “I’m honestly, really, really sorry for everyone affected. It hurts and saddens me deeply as I talk and listen to the stories of those affected.”

Zeneca will provide affected users with a free NFT gateway to its private ZenAcademy Discord server, which is currently worth around 0.38 ETH ($580) currently, per OpenSea. He will also maintain a list of victims for potential future benefits or assistance, but noted that “the expectation should be zero” that they will receive anything further.

Reactions to Zeneka’s thread of other NFTs, creators and collectors have been mostly – but not entirely – positive, with crypto stalwarts celebrating the ethos of personal responsibility. It treats self-protection and DYOR (“do your own research”) as standards in a space flooded with new users who may not fully understand the technology or spot red flags.

It’s still relatively early for the big NFT markets. Education can help mitigate the impact of fraud and better prepare NFT traders to remain vigilant, but so can improving technology and user interfaces. Both Mulligan and Zeneca pointed to the need for improved infrastructure and mitigation to limit the impact of attacks.

“The user interface for the most popular wallets needs to be drastically improved to make it almost impossible for someone to connect to the wallet drain,” said Mulligan Decrypt. “This is a solvable problem, but it’s a shame that it’s so easy to empty your wallet and there’s no more warning to protect people.”

Education, technological tweaks and security upgrades could help close that gap, but in the meantime, FOMO (“fear of missing out”) and speculative frenzy are turning some NFT collectors into victims. Creators seem increasingly reluctant to foot the bill.

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