Earlier this month, Cameron Hejazi made a difficult decision: He was stopping the buying and selling of NFTs on his company’s platform.
It was a stunning move by Hejazi, the CEO and co-founder of the NFT marketplace Cent. The previous March, the U.S.-based company had garnered national attention after then-Twitter CEO Jack Dorsey sold his first tweet on the platform for a whopping $2.9 million, an amount that woke many people up to the financial weight of the NFT marketplace. Less than a year later, the company was admitting something had gone fundamentally wrong.
Cent had started to see a rash of what Hejazi described as “bad actors,” who were selling counterfeits or artwork they did not own. The company had initially tried to “ban the offending accounts” but found the response to be inadequate and unsustainable. “It was like we're playing a game of whack-a-mole,” he told Reuters. “Every time we would ban one, another one would come up, or three more would come up."
So have many others, as reports of scams and "wash trading"—in which someone sells and buys something in order to create the illusion of demand—have become harder to ignore inside the $25 billion NFT space. At the start of the year, the largest NFT marketplace, OpenSea, made news when investors valued it at $13 billion. Weeks later, the company admitted publicly that four-fifths of the NFTs minted for free were “plagiarized works, fake collections, and spam,” and the problem was growing “exponentially” worse. (A hacker also stole a number of NFTs from OpenSea users.)
On Feb. 6, Hejazi announced the company had no choice but to close NFT sales as it figured out a new, perhaps more centralized solution. “We do not condone this behavior,” he said in a post announcing the decision. “[E]thically, legally, and philosophically, it goes against our values and what we stand for as a company.”
Now, Hejazi is trying to figure out a solution, telling Motherboard in an interview that he sees Cent’s issues as part of an “ecosystem-wide problem” in the NFT marketplace (and broader web3 nexus).
“Do we have challenges to solve? Yeah, but we're smart people,” he said. “We can come together, and we can fix the problems inherent to the systems that we've created.”
The conversation below has been edited for clarity.
Motherboard: What was Cent when you first started? What did you hope it to be?
Cameron Hejazi: Our original vision was actually a response to traditional social media, where people create all this value and don't get any compensation. You'd have the Facebooks, which are worth billions or, in some cases, hundreds of billions of dollars, and the creators on the platform struggling to make any sort of income off of that. Our original product was a network similar to these other networks where you can post, reply, and follow. But we wove together financial compensation with traditional social actions. So if you saw something you liked, you could upvote it with money, which went to the creator. Then, if someone came after you and upvoted the same content with money, the creator received a portion, but so did you. So it’s not just altruism. It’s incentives at work, trying to cultivate a more equitable social media landscape for creators.
How did you feel about the NFT space and blockchain space last January?We were very bullish on it. Between when we started and 2019, NFTs became a thing that crypto artists, in particular, used to mint and sell their work digitally, and a lot of the early crypto artists were members of our community. Our response as a company was to embrace that technology. And we rolled out minting across our social network. And then we also extended it to another social network, Twitter, where you could turn your existing content there into NFTs. That was really meant as a statement to creators to say, “If you're out there creating work and you're interested in NFTs and monetizing, the work is already done. You’ve already done the creating. It's just a matter of reclaiming that value.”
“We believe a lot of the market activity we're witnessing is reminiscent of the bubbles that we've seen time and time again.”
From the get-go, it was clear that it's about more than just selling art. It's actually about data ownership. We've heard a lot of people say, “Why do I care if I own my data? Why do I care if Facebook has it or not.” That data, apparently, based on some massive study, is only worth $20 per user per year. But it's all about the framing. What we were able to reveal with the Twitter example is that there are more ways to value data than just what an advertiser thinks.
In March, when Cent sold then-Twitter CEO Jack Dorsey's tweet for $2.9 million, what was that like for the company? How did that change your business?
In the moment, it was very exciting. That wasn't the first big personality to come onto the platform and use it. We had had other figures like Gary V. and Mark Cuban, who are entrepreneurs in their own right but also crypto-adjacent. But [Jack’s] tweet was arguably the most valuable tweet that will ever exist. That point was really peak NFT hype. We were thinking about all the different directions that we could go and where our peers were going.
For us, we actually backed away from monetization and this incredible obsession with financialization, mainly because we believe a lot of the market activity we're witnessing is reminiscent of the bubbles that we've seen time and time again.
Now, there’s artificial hurdles to tokenization—be it the high transaction costs, the technical know-how—and that has created this scarce asset pool of Bored Apes or crypto punks. But we saw a future where there's actually a digital asset explosion, meaning that there are many, many more digital assets being created than we can even think about investing in. So shortly after the Dorsey tweet, we started to build toward that future. And we started to think what can we do to really kind of accelerate the adoption of digital ownership as a principle.
How and when did you sort of start to realize that people were kind of abusing this platform you'd built?
The community is really active in signaling bad behavior to us, and we started getting reports around October that people were taking other people's content and re-uploading it, taking other existing assets, like a Bored Ape, for instance, and re-minting it. We take that seriously because we're here to help anyone make a creative income. But that includes people that might be creators who aren't on our platform. We want to protect the people in our network, but also we can't enable behavior that violates other people's IP even if they haven’t signed up for Cent.
You tried to police the bad behavior actor by actor. I believe you compared it to whack-a-mole. When did you realize that that wasn't going to work?
We realized it wasn't going to work because our team is not growing at the rate that new users are coming in. The opportunity to make money is continually incentivizing these bad actors and short of some sort of friction, they’d come in and keep overwhelming us.
“There was this contagion effect, where it's actually going to take down the whole network if we don't address it.”
The whole time we had been optimizing for How can we remove the friction in the NFT process? How can we make these things as seamless as possible? We did a really good job. We made it very easy to come in and start minting. So easy that not just good people but bad people could create multiple accounts and have at it. It's unfortunate that it played out like that, but I'm just grateful that we have a strong community. They made it very clear that this type of behavior that they’re witnessing is not acceptable. We feel similarly from the perspective of protecting creators and abiding by the law. So it was an easy decision. I wouldn't say that we were drowning or just totally overwhelmed. It was more just we had to send a strong signal and show that we have the best intentions of our users and creators at large at heart. So we shut it off.
Was there a particular point when you decided this is the best decision for us?
It really came back down to the users. We had an inkling that this problem wasn't going to go away. But as our users kept complaining about it, it became very clear that this is the right thing to do. That this is damaging our community. It is making people not want to stay. It’s making people turn away. It was turning from something that in an isolated case is bad to now, there was this contagion effect, where it's actually going to take down the whole network if we don't address it. And so once we kind of woke up to that crisis, we realized we had to take action.
You said that you're considering centralized controls as a sort of short-term measure in order to reopen. What controls? And was it tough to consider them since the key word in the web3 world is decentralization?
It is really tough. The short-term control would be some sort of identity verification. It is a point of contention because of the decentralized nature of these systems. We want anyone to be able to come in and start contributing and adding value. But at the same time, there needs to be controls. There needs to be protections. So that is something that we're looking at.
“It's very clear, if you've been in the crypto space long enough, these are investment contracts. You just put JPEGs on them.”
We’re also looking at other options in the short term, such as limits and potentially introducing the notion of costs to transactions. Crypto loves to talk about staking as a concept. It’s just an unnecessary invention of a new word that we already know of as a security deposit. Security deposits are very common things in the traditional world.
How much are the issues that we're speaking about today specific to your company versus the broader sort of NFT Space?
I would say that it's very applicable to a lot of the NFT space. There's cases where it isn't: Nifty Gateway is a good example. Nifty Gateway, in order to mint there, you need to be approved by them. It's a very manual process, But they kind of get to avoid those issues. Contrast that with someone like OpenSea or Rarible, where it's permissionless and anyone can just go and mint, which we really love as a company. We want to invite as many people [as possible] into the space. It's too early to close up the doors and say you're not allowed in. But the biggest players in the space, like OpenSea, definitely have a very real problem. And I know that they're working on solutions. But it's just very difficult. Everyday you're hearing a new story.
OpenSea recently said that something like over 80 percent of the items minted for free on its platform were plagiarized workspace and spam.
Yeah, and it took real balls to say that.
You also saw that people were selling sets of NFTs which resembled a security.
We haven't really witnessed too much of that happening on our platform. It's more the industry at large, where you’ll see projects launch basically providing a roadmap for what they're going to do. Making promises about future value. It's very clear, if you've been in the crypto space long enough and you remember 2017-2018, these are investment contracts. You just put JPEGs on them. But it doesn't change the fact that underneath the hood, it's an investment contract, and those are heavily regulated. The SEC hasn't really taken action yet, but I feel like some sort of policy or guidance is really imminent, and I don't want to get caught on the wrong side of that.
For people who might not be as knowledgeable about crypto, when you make reference to that 2017-2018 period, what specifically are you talking about?
The ICO boom. Ethereum showing its strength. Ethereum innovated on Bitcoin in that Bitcoin is all about one currency: Bitcoin. Ethereum is a platform for many things. But the use case that really stood out in 2017-2018 was the ability to launch a new token. What happened as a result of that is all of these companies were launching new tokens on Ethereum and raising a lot of money toward these really grand visions. That is very much a crowd sale, and those are regulated. The U.S. has exemptions that you can raise money under—for instance, Reg CF and the Blue Sky Laws—and they're clearly regulated.
But then Ethereum created this parallel path for fundraising, and it was completely out of control. People were throwing in money in hopes of being able to make a quick 10x and then doing the same thing with another project and the whole thing unwound. It crashed. And in the midst of the crash, the SEC laid out very strong opinions and guidance on what targets are for enforcement action really helped deflate the bubble. So I think that there's a lot there's a lot of parallels with what we're seeing, and what we saw a few years ago.
When that was happening, what was your sort of reaction?
There was a lot of irrational exuberance, and it was dizzying. Everyone around you is making money. That's a very exciting place to be. But it's also very scary, because you know that you're ultimately playing a game of musical chairs. We thought about launching a token, but it just didn't make sense for us. It seemed like we would be taking on too much risk as a company tying our success or failure to this asset that we don't really know the future of. That was a very risky maneuver, and a lot of companies subsequently folded after the bubble burst.
Why did you decide to come out and make these report remarks? So publicly? What caused you to do this?
This is an ecosystem-wide problem. Any single platform that wants to help solve it really needs to come together with other platforms to think about how we can create systems in a decentralized way that bridge the data that we have in our web 2-esque platform onto the blockchain in an interoperable way. If Cent wants to share data with OpenSea, how do we do it? What is the standard for flagging a user that acts badly on Cent? How can we tell the wider world that this Ethereum address has done some bad behavior? What kind of data do we include?
“We can fix the problems inherent to the systems that we've created.”
The impetus was us having a problem at our doorstep and having to choose between going straight to something like KYC [know-your-customer verification standards] or trying to make a broader ecosystem play, where we stay true to our values and bring other companies into the conversation.
What's the response been like so far?
Honestly, the media has latched on to it more than other platforms. I will say I am in a conversation with one of the cofounders of OpenSea, and we're doing some brainstorming, but it’s very early. This is an issue that platforms are thinking about, and a decentralized solution is possible but requires a lot of collaboration.
I assume that because you're trying to de-financialize NFTs there will be some backlash there from people who have benefited from the financialization of them.
There are people who have a vision of how things should be. And that vision can oftentimes be heavily amplified by the fact that they [benefit from] that particular view. I'm not personally against NFTs being traded for money. I think it's cool that creators make an income through it. What I think, though, is that there's a more fundamental opportunity here around ownership that isn't being fully tapped into. We're going to be focused on expanding the market, not necessarily detracting from the one that already exists.
Do you feel more optimistic or pessimistic about this space than you did a year ago?
More optimistic for sure.
And why is that?
With these new paradigms, the longer they exist, the more it validates that they’re here to stay. We saw the same thing with crypto and Bitcoin in the early days. People weren't sure whether it was something that was going to be a flash in the pan or something that endured. Each day that the systems continue to exist and people continue to use them, I believe the more robust they become. So I haven't been more optimistic about the future of this space.
Do we have challenges to solve? Yeah, but we're smart people. We can come together, and we can fix the problems inherent to the systems that we've created.