Thefts, fraud and lawsuits in the world’s largest NFT marketplace

Chris Chapman used to own one of the most valuable items in the crypto world: a unique digital image of a spiky-haired monkey dressed in a spacesuit.

Mr. Chapman bought the non-fungible token last year, when a much-hyped series of digital collectibles called the Bored Ape Yacht Club became a phenomenon. In December, he listed his Bored Ape for sale on OpenSea, the largest NFT marketplace, and set the price at around $ 1 million. Two months later, as he was getting ready to take his daughters to the zoo, OpenSea sent him a message: The monkey had been sold for about $ 300,000.

A cryptocurrency fraudster exploited a flaw in OpenSea’s system to buy the monkey for significantly less than its value, said Mr. Chapman, who runs a construction business in Texas. Last month, OpenSea offered him around $ 30,000 in compensation, he said, which he declined in hopes of negotiating a larger payout.

The company has made “many stupid, stupid mistakes,” said Mr. Chapman, 35. “They do not really know what they are doing.”

Mr. Chapman is one of many crypto enthusiasts who have asked about OpenSea, an eBay-like site where people can browse millions of NFTs, buy the pictures, and post their own for sale. Over the past 18 months, OpenSea has become the dominant NFT marketplace and one of the highest-profile crypto-startup companies. The company has raised more than $ 400 million from investors, valued it at a staggering $ 13.3 billion, and recruited executives from technology giants such as Meta and Lyft.

But as OpenSea has grown, it has struggled to prevent theft and fraud. The mistake that cost Mr. Chapman his monkey has led to months of accusations, forcing the startup to make more than $ 6 million in payments to NFT traders.

Customers also complain that OpenSea is slow to block the sale of NFTs seized by hackers, who can earn quickly by turning the theft. And plagiarized art has spread on the site, outrageous artists who once viewed NFTs as an economic lifeline. The company is facing at least four lawsuits from traders, and one of its former executives was indicted this month on charges related to insider trading involving NFTs.

OpenSea’s problems are piling up just as demand for NFTs is cooling amid a crash in cryptocurrency prices. NFT sales have fallen around 90 percent since September, according to industry data tracker NonFungible. OpenSea is also struggling with competition from newer marketplaces built by established crypto companies such as Coinbase.

The company’s clash with users illustrates some of the key tensions of web3, a utopian vision of a more democratic internet controlled by ordinary people instead of giant technology companies. Like many crypto platforms, OpenSea does not collect the names of most of its customers and advertises itself as a “self-service” gateway to a loosely regulated market. But users increasingly want the company to act as a traditional business by compensating for fraud and cracking down on theft.

In three interviews, OpenSea executives acknowledged the scale of the problems and said the company was taking steps to improve trust and security. OpenSea, based in New York, has hired several customer service staff, with the goal of responding to all complaints within 24 hours. The company freezes lists of stolen NFTs and has a new screening process to prevent plagiarized content from circulating on the platform.

“Like all technology companies, there’s a time when you catch up,” said Devin Finzer, 31, OpenSea’s CEO. “You try to do everything you can to accommodate the brand new users who come into the room.”

OpenSea was founded four and a half years ago by Mr. Finzer, a Brown University graduate whose previous startup, a personal finance app, was sold to financial technology company Credit Karma, and Alex Atallah, a former software engineer at Palantir. They are now among the world’s richest crypto billionaires, according to Forbes.

Their business model is simple. OpenSea takes a 2.5 percent cut every time an NFT is sold on the platform. Last year, business grew as NFTs became a cultural sensation and the value of Bitcoin and other cryptocurrencies skyrocketed.

Practically overnight, OpenSea went from an obscure startup to one of the most powerful middlemen in the crypto industry, which soon led to problems.

“It would be difficult for any company to swing and accommodate that kind of increase so quickly,” said Carrie Presley, who worked for OpenSea for a few months last year. – It was very chaotic.

Because OpenSea charges a fee from each NFT sale, some users claim that the company has a financial incentive not to crack down on the sale of stolen goods. This year, Robert Armijo, an investor in Nevada, sued OpenSea for not stopping a hacker who had stolen several of his NFTs from selling one of them on the platform. (OpenSea’s lawyers called the complaint “a non-starter” and said the company acted quickly to stop the other stolen NFTs from being sold.)

In February, Eli Shapira, a former technical manager, clicked on a link that he said gave a hacker access to the digital wallet where he stores his NFTs. The thief sold two of Mr. Shapira’s most valuable NFTs on OpenSea for a total of more than $ 100,000.

Within hours, Mr. Shapira contacted OpenSea to report the hack. But the company never took action, he said. Since then, he has used public data to track the account that took his NFTs and has seen the hacker sell other images on OpenSea, possibly from several thefts.

“It is very easy for these hackers to go and open an account there and immediately trade or sell what they have stolen,” Shapira said. “All these guys need to increase security.”

Last month, after The New York Times asked OpenSea about the case, the company responded to Mr. Shapira and froze any future sales of the stolen NFTs.

Anne Fauvre-Willis, who oversees OpenSea’s customer support work, said the company had worked to improve response times when users reported thefts.

“Getting faster is important,” she said. “This is something we are investing in today and will continue to make a huge investment going forward.”

OpenSea has also seen a wave of plagiarism, as sellers convert traditional artwork into NFTs and then display the images for sale without compensating the original creator.

DeviantArt, an artist collective owned by web development company Wix, runs software that scans millions of NFTs every day to detect images plagiarized from the artists’ work. The program has identified more than 290,000 cases of plagiarism on OpenSea and other NFT marketplaces.

“There is almost no accountability,” said Liat Karpel Gurwicz, DeviantArt’s Marketing Manager.

OpenSea offers a tool that allows people to create NFTs with a few clicks, and converts ordinary images into unique objects whose authenticity is registered in a public ledger called a blockchain. In January, the company said it would limit the number of NFTs users can create with the tool. But after a setback from NFT fans, OpenSea reversed of course and said in a tweet that it would eliminate the ceiling, even though many of the new creations had turned out to be “plagiarized works, fake collections and spam.”

“They have bastardized the concept of what NFTs should be,” said Aja Trier, a Texas artist whose work has been copied and sold on OpenSea. “It dilutes the market for my work.”

In May, OpenSea announced that they are using image recognition technology to crack down on plagiarism. However, the scanning service only compares recently uploaded images with other NFTs listed on OpenSea, making it unlikely to detect artwork plagiarized from other sites.

Shiva Rajaraman, a former vice president of Meta and Spotify who works on OpenSea’s product team, said the company hoped to expand its drag network against plagiarism. “We want to work in partnership with other people to get the original work,” he said.

Mr. Chapman, a former college basketball player, began experimenting with crypto last year. He bought a Bored Monkey for a few hundred dollars, and later exchanged it for the monkey in astronaut equipment because it evoked the history of the space age to Houston, his hometown. He started wearing a Bored Monkey sweater, and his mother-in-law bought him a bottle of monkey brand water.

In September, Mr. Chapman listed his romape on OpenSea, setting the price at 90 Ether. Three months later, he raised the price to 269 Ether, or about $ 1.1 million, in line with the sky-high value of other Bored Ape NFTs. He planned to sell the NFT for enough so that he could immediately buy another, less valuable romape and make a profit from the trade.

In February, the monkey sold for the original listing of 90 Ether, or about $ 300,000. Experienced traders had exploited a bug that allowed them to enable outdated sales listings on OpenSea.

On February 18, Finzer announced that OpenSea had updated its technology to prevent thieves from reactivating old listings. The company refunded some victims and asked them to sign confidentiality statements in exchange for payments.

Mr. Chapman said that OpenSea had initially offered him a refund of only the 2.5 percent fee it received when his space monkey was sold. Last month, he said, OpenSea increased its offer to 15 Ether, or just under $ 30,000 at current prices, after his lawyer wrote to the company. OpenSea declined to comment on his case.

Mr. Chapman is awaiting a major refund. As the owner of a Bored Ape NFT, he would be entitled to a large share of ApeCoin, a cryptocurrency launched in March. Monkey NFT owners each received more than $ 100,000 worth of coins at the time.

Because he had lost his monkey, Mr. Chapman missed the expected ApeCoin decline, which he had planned to use to buy a house near his wife’s family outside downtown Houston.

“I could have ApeCoin right now, and have a down payment for my house,” he said. “It’s all gone.”