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How bots exploit NFT sales

Guest author Tony Klor from PerimeterX dives deep into the intricate world of bot manipulation

Virtual NFT museum, illustration. BIGSTOCK/Copyright: digitalista
Virtual NFT museum, illustration. BIGSTOCK/Copyright: digitalista

In December 2021, Adidas released 30,000 non-fungible tokens (NFTs) into the market. For those who might be scratching their heads, NFTs are cryptographic assets on the blockchain that point to a file that renders an artwork, such as a video, picture or sound.

Adidas minted the NFTs on the Ethereum blockchain platform, which is just one of many — including Solana, Tezos and Cardano — with NFT minting capabilities. The company netted $23.5 million from the sales event, which had historic implications for the metaverse beyond just revenue.

“The sale of NFTs by Adidas is a clear indication that major brands are widely adopting NFTs,” said Scott H. Weissman, CEO and co-founder of Well-known companies across industries — from fast food chains like Taco Bell and Pizza Hut to luxury fashion brands like Cartier and Prada — are getting in on the action.

But back to Adidas. The sports fashion retailer assured eager fans that there would be a two-per-customer limit on the NFT drop. However, when the sale day came, their platforms just could not keep up with the sophisticated bots that visited their site. One visitor used bots to purchase 330 tokens with an alternative smart contract that bypassed the rule.

How do scalping bots manipulate NFT prices?

Scalping bots are nothing new. Bots are notorious for buying up limited-edition sneakers, concert tickets and other hot items, which scalpers sell at an inflated price on third-party sites. As NFTs have grown in popularity, scalpers have expanded their focus from fashion and entertainment to NFT auctions.

Scalpers use bots to manipulate the prices of NFTs, guaranteeing a sale at a favorable price and an even better resale value. There are three key ways that bots affect NFT prices:

1. Driving NFT prices down

In this scenario, bots place bids below the asking price on a large number of NFTs. If a bid is accepted, the bot cancels. This drives the value of the NFT down when it is relisted, so the bot operator can bid lower than the original asking price for the NFT, ensuring an even bigger payoff when they resell the NFT on a secondary market.

This is particularly disastrous on platforms that are not using smart contracts — programs that assign ownership and manage the transferability of NFTs — because both the NFT’s and corresponding crypto assets to pay for it are locked up in escrow for up to 24 hours.

2. Driving NFT prices up

Scalpers may intentionally raise NFT prices by using bots to “sweep the floor,” i.e., purchase all NFTs that are currently for sale at the lowest price. This artificially raises the popularity and resale value of the NFT.

Customers cannot buy the NFT at the low price it was selling for previously. They have to pay more, often on a secondary market where they cannot see how low the original price actually was. This leads buyers to think the value of an NFT is greater than it is and they bid at the inflated price, allowing bot operators to collect a profit.

3. Fake bidding

Fake bids are used to manipulate prices up and down. Often, it is the sellers themselves who place fake bids on their own NFTs to create artificial market trends. High bids can make prices look really high when they are really not. The sellers can then reject the bid so the transaction does not go through.

In another case, sellers may bid on their own NFTs below market price. Other holders who bought at or above market price see the potential losses and panic sell at a lower price than they originally paid. This causes the price to drop, allowing fraudsters to “sweep the floor” and resell the NFTs for a profit.

What other scams can NFT bots pull off?

In addition to manipulating NFT prices, bots can be used to sell fake projects, which fraudsters create in order to sell non-authentic NFTs for a profit. These are created by listing NFTs that do not match policy IDs. When a consumer goes to buy a project, they may mistakenly buy a fake. In addition, because NFTs are not copyrights, selling fake projects might not even be a crime.

There is little chance of getting a refund once someone has bought a fake project, and there is zero resale value. Thus, it is critical to certify that an NFT is legitimate before buying it. One way to do this is to match the policy ID to the blockchain, but most users are completely unaware of this.

NFT bots are not illegal. So, what is the problem?

Using bots to buy NFTs is not a crime as bots and their operators do pay for their purchases. However, the practice of using bots to manipulate NFT sales negatively affects user retention and growth rate.

Just like any other e-commerce brand, NFT marketplaces need to attract and retain buyers. This involves fighting competitors, building brand reputation and improving the user experience. When bots use price manipulation and bidding to snag desired NFTs, potential customers are left disappointed and forced to shop elsewhere — and they may not return to your site if a competitor can better meet their needs.

If your NFT marketplace becomes known for bot sales, it can damage your brand reputation and discourage users from visiting your site. This is especially relevant to NFTs, as many are new business entities with no established brand reputation and little customer loyalty.

How brands come onto the NFT scene will leave a lasting impression on consumers. Take, the highest volume NFT marketplace to date. Customers have complained about the pervasiveness of bots, which gives the opportunity for new entrants to gain a share of the market.

On the flip side of user retention is artist retention. NFT marketplaces cater to both buyers and sellers — and if the buyers leave, so will the sellers. Because of this, scalper bots have the potential to drive away not only consumers, but the very source of the market’s existence: the NFT artists themselves.

What is the future of NFT bots?

Even with the bumps in the road, it is clear that Adidas’ first NFT sale was a huge success — and that there are going to be many more NFT sales to come from both Adidas and other major e-commerce brands.

The NFT bots we have already seen are born from the same type of cybercrime that has long existed in more saturated markets for hot products like limited-edition sneakers, concert tickets and collectibles. No matter the item, if there is a profit to be made, there will be bots and abuse. So, expect more sophisticated NFT bots to emerge in the months ahead.

As your business enters the NFT market, it is critical to establish a positive brand reputation from the get-go. This means positioning your NFT collection as a fair auction for human buyers, not a hub for NFT bots.

How can you stop scalping bots?

The simple answer is, you cannot. However, you can mitigate, deter, and block them.

PerimeterX has robust capabilities to protect hype sales from scalper bots through our work with leading marketplace brands that use the limited release drop model — and no sale has more hype than an NFT auction.

The solution leverages machine learning, behavioral analysis and predictive methods to detect and block bots with unparalleled accuracy.

The NFT space is scaling immensely, bridging the gap between web2 and web3 environments. PerimeterX is platform agnostic, so it can be seamlessly integrated with your existing CDN and deployed in both web2 and web3 environments.

As the cyber threats against the Internet itself continue to evolve, brands must adapt in order to combat the threat of sophisticated NFT bot operators.

Tony Klor is Product Marketing Manager at PerimeterX. Klor’s photo is courtesy of company

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