In recent months, it has been impossible to avoid hearing about NFTs. The hype surrounding the tokens, which are marketed as evidence of ownership of digital goods, has reached a fever pitch as billions of dollars have flooded the market. These non-fungible tokens are the newest and most popular collectible hobby for some people, a potent investment instrument for others, and most importantly, the internet’s currency of the future. (If you are still questioning “what are NFTs” – this easy-to-understand crypto handbook article with visual aids will explain all the fundamentals every crypto trader should be familiar with.)
As always, the reality is more complicated. NFTs aren’t truly capable of achieving a lot of the things that are frequently stated they can in their current state. The operation of NFTs, blockchains, and cryptocurrencies is exceedingly complex, making it simple to oversimplify the explanation of the technology to the point of being deceptive.
Although it is difficult to explain the challenges with NFTs, we will make an effort to do so as briefly as possible. No explanation, no matter how in-depth, can ever be entirely thorough, therefore we must approach this with that in mind. With that in mind, there are a few myths concerning NFTs that should be dispelled.
NFTs Are Not Authoritative Ownership Tokens
The NFTs misconception that is most frequently repeated is also the one that is most likely to be accurate. Enthusiasts sometimes assert that the fact that NFTs are essentially distinct and exist on a trustless blockchain serves as evidence that one “owns” a digital asset. Only one token like this exists, and since you hold it in your cryptocurrency wallet, everything it stands for must be yours.
For a number of reasons, this framing is deceptive. To begin with, NFTs are limited to communicating ownership (or really, possession, but we’ll get to that later) of the token itself. To begin with, NFTs are limited to communicating ownership or really, possession, of the token itself. With NFTs, the item you’ve purchased doesn’t typically grant you ownership of the underlying item (picture, game asset, etc.) in the same way that you might regularly transfer physical or digital art.
Instead, NFTs often provide links to an asset hosted elsewhere. The copyright, storage, or usage rights to the asset itself are not transferred via the NFT.
A mechanism for differentiating between possessing and owning a token is also lacking on the Ethereum blockchain, which is now the most popular blockchain for the production of NFTs, as was already indicated. It is common knowledge that your bicycle is still yours even if it is stolen. Anyone who owns the token in their wallet is the “owner” of an NFT. The blockchain will therefore treat the thief as the new owner if someone’s monkey NFT is taken through a phishing scam.
The authority to determine “real” ownership is now not in the hands of the NFT itself but rather in the hands of the marketplaces that trade them, despite the fact that centralized marketplaces like OpenSea have occasionally intervened to freeze sales of stolen assets (on their own platform, at least).
The choice of which blockchain is the “authoritative” or “real” one remains a social and platform issue, even if an artist chooses to mint their work on numerous blockchains and has an “original” on each.
An NFT likewise only has a singularity inside the context of the blockchain it was built on. What happens when two separate people mint the identical digital item on multiple blockchains? For instance, the NFT marketplace Rarible offers users a choice of three different blockchains when minting a token. The choice of which blockchain is the “authoritative” or “real” one remains a social and platform issue, even if an artist chooses to mint their work on numerous blockchains and has an “original” on each.
For instance, Twitter has just begun to allow NFT profile images, which are presented in a distinctive hexagonal frame, although it only presently accepts tokens from the Ethereum network. You won’t receive that hexagon if you have an NFT on the Flow or Tezos blockchains, which both Rarible supports and are currently more cost-effective to mint on. Twitter may opt to modify this in the future, and other platforms may elect to support other blockchains or even develop their own, but once again, this places the ability to pick which chains are the “genuine” chains in the hands of centralized platforms.
Additionally, there isn’t anything stopping someone from creating numerous NFTs of the same image on the same blockchain. Twitter user @NFTTheft has documented multiple incidents of OpenSea marketplace users stealing artists’ work, producing duplicate NFTs and selling them alongside the original, or selling NFTs of artworks that the original artist never intended to transform into an NFT.
Platforms must find a solution because the blockchain cannot confirm that a person minting an NFT has the legal right to the asset they are minting (or not, as it were).
Over 80% of the NFTs offered on the marketplace were spam, false collections, or works of art that were plagiarised, according to OpenSea’s examination of its own market. The company made an effort to address this issue by capping the number of free listings users may create, but it later changed its mind in response to customer backlash. DeviantArt has been attempting to safeguard its artists in the meanwhile by using automated systems to screen for theft. These technologies delivered over 80,000 alerts of infringement to artists in just five months, however, it is clear that this technology is only useful for DeviantArt users.
In an effort to address this issue, OpenSea has also begun to verify accounts and collections, however, verification is entirely at the company’s discretion. As a result, any given NFT is no more credible evidence of ownership of the digital object it refers to than, for example, a Twitter account is. Every Twitter username might be unique, therefore if you claim yours first, it may imply that you are the person who is actually using that account. However, the “real” prefix remained in the handle of the 45th president of the United States because @DonaldTrump was first claimed by a spoof account. Similar to OpenSea, the only reliable way to determine which account belongs to the genuine person on Twitter is through the manual verification process. It’s not exactly a failsafe mechanism.
NFTs can only ever serve as ownership proof of themselves in the best-case scenario. The external data that NFTs refer to, such as artwork, digital items, etc., still has to be verified by third-party systems.
Marketplaces are just one way to connect with the blockchain, but anyone can do it, which only serves to muddle things more. There is also no mechanism to stop someone from minting stolen art on a blockchain like Ethereum with relative ease, even if every major NFT marketplace put measures in place to block stolen artwork from being coined and validated by all of its creators—a very vast and complicated operation already.
NFTs can only ever serve as ownership proof of themselves in the best-case scenario. The external data that NFTs refer to, such as artwork, digital items, etc., still have to be verified by third-party systems.
You Can’t Take Digital Items Between Games or Apps with NFTs
One of the more absurd assertions made about NFTs is that by enabling players to transfer digital things from one game or platform to another, they will enable the actual metaverse. And while it is technically possible to transfer extremely basic data, such as photographs, from one app to another, it is practically not possible to transfer complicated data, such as goods from video games.
Rami Ismail, a game developer, discussed some of these difficulties in a lengthy Twitter conversation using the example of straightforward six-sided dice. Even a very simple 3D model contains sophisticated data, such as the model’s structure and materials, information about its physics and motion, and seemingly straightforward details like which way is up. When importing a game from one engine to another, a model that is turned on its side may result since some game engines use Y as the vertical axis while others use Z.
The 3D model asset can be altered by a human animator or game developer to function effectively in a different game or engine, but doing so takes time and labor. It’s not a given that another game will support a model just because it has an NFT of an item from one of its games.
Intellectual property is another issue. Take Thunderfury, Blessed Blade of the Windseeker from World of Warcraft as an example. Blizzard’s IP includes the model, textures, and other associated assets for that item. Theoretically, Blizzard could grant people an NFT for the item, but no other game would be able to import it without the company’s consent. Even if Blizzard did grant authorization to a different developer, the firm would still need to be contacted personally in order to deliver the necessary assets and guarantee that everything functions properly.
Even if NFTs could be utilized to create a hypothetical external inventory system—assuming developers or publishers would desire this in the first place—this is a very small portion of the labour required to transfer objects, characters, or outfits from one game world to another.
Games like Fortnite, which has teamed with brands like Marvel, Star Wars, and God of War to introduce characters across games, are already well known for these kinds of crossovers. Players who own specific games or even have specific achievements have received promotional gifts from developers for years. However, none of these collaborations depend on NFTs to flourish or be commercially viable.
Even if NFTs could be utilized to create a hypothetical external inventory system—assuming developers or publishers would desire this in the first place—this is a very small portion of the labor required to transfer objects, characters, or outfits from one game world to another. No amount of automation in the future is positioned to sidestep the fact that the majority of the labor still depends on specific humans deciding to cooperate with other specific humans.
NFTs Can Cost Artists More Than They Make in Revenue
NFT advocates also claim that by selling NFTs of their own artwork, artists can make money, but the demand for that NFT art may be illusory. A stunning $69 million NFT sale by artist Beeple, for instance, made news in March 2021. However, a project by the name of Metapurse had already acquired 20 additional unrelated Beeple artworks, grouped them all together, and sold 10 million fractionalized ownership tokens of the collection—referred to as B20 tokens—in January 2021. The concept was to allow those who couldn’t afford to purchase expensive artworks to purchase a share of the collection and participate in the speculating game.
The investor known as Metakovan, who purchased the $69 million Beeple in March, also owned 59 percent of the B20 tokens. B20 tokens went on sale to the general public on January 23 for 36 cents apiece, reaching a high of $23.62 just a few days before the $69 million Beeple auction’s two-week end—a 6,461 percent rise. B20 has dropped back to trade for less than a dollar by the end of May. The token is currently being sold for 40 cents.
Additionally, Beeple held 2% of the B20 tokens. This means that the seller and the buyer of the most notable NFT sale at the time had an equal stake in increasing interest in the artist’s work, with the buyer—the artist himself—standing to benefit more from the deal than the seller.
More generally, a study from the Alan Turing Institute, which mostly used data from OpenSea, discovered that the majority of NFTs never sell and that 75% of those that do sell do so for less than $15. Only 1% of trades were above $1,500.
It is also challenging to determine how many of the high-value NFTs sold are genuine due to the problem of wash trading, in which one individual sells an item to their own sock puppet accounts to create the appearance of great demand. The NFT marketplace LooksRare, which at the time had only accumulated about $9.5 billion worth of trades overall, was the site of more than $8 billion worth of wash trading, according to one analytics company, CryptoSlam.
When gas fees (the money paid to the miners and validators who make up the Ethereum blockchain) and fees paid to marketplaces that advertise the NFTs are taken into account, the poor yield for smaller sellers may also wind up losing artists’ money.
When gas fees (the money paid to the miners and validators who make up the Ethereum blockchain) and fees paid to marketplaces that advertise the NFTs are taken into account, the poor yield for smaller sellers may also wind up losing artists’ money. There is an additional step of changing money into cryptocurrency only to interact with the system for buyers and sellers who have just traditional currency like US dollars to deal with, which is to say, the majority of people. These transactions’ facilitators, currency exchanges, also take a share. Martino claims that 75% of sales that are under $15 are “not enough to cover the expenditure for the gas, for example.”
Theoretically, NFT minting for artists is “free” on marketplaces like OpenSea and Rarible, however, there are some restrictions. To begin with, the NFT won’t exist until someone purchases it. The buyer also pays the minting fee, which raises the buy-in price for any transaction. Additionally, because gas prices fluctuate over time, it might be difficult to forecast how much it will actually cost to complete the transaction.
Most artists who choose to participate in NFTs have a difficult choice: they can either front a big sum of money to mint their work as NFTs, hoping that an audience would come along and buy enough to make the fees worthwhile, or they may pass those not-insignificant charges on to the buyer, pricing out segments of their prospective customers—and in the meantime, they won’t have any trace of their NFTs on the blockchain.
Another problem area is the royalty function. NFTs do not naturally include built-in royalties. Instead, royalties could be included in the “smart contract” that controls the NFT. But just like any other piece of software, these contracts are prone to errors, incompatibilities, and manipulation.
NFTs typically don’t distinguish between transfers from one wallet to another held by the same person and sales between two users. As an alternative, online markets like OpenSea must mediate a sale and notify the NFT that it is being sold. While a market can require royalties for NFTs created and sold on its own platform, trading on other platforms has the potential to completely eliminate fees, either unintentionally or on purpose. It is rather simple to avoid royalties altogether as a result.
NFTs can cause more problems for artists than advantages when combined with the widespread fraud in the NFT market—and the added effort required by artists to issue takedowns and notifications to prevent fraud of their work.
Although there have been several suggested strategies to maybe unify royalty payments across marketplaces, they can ultimately be challenging, if not impossible, to enforce. NFTs can cause more problems for artists than advantages when combined with the widespread fraud in the NFT market—and the added effort required by artists to issue takedowns and notifications to prevent fraud in their work.
The Devil Is in the Details, Always Changing
The majority of this article has concentrated on the problems with Ethereum, NFTs based on it, and the largest marketplaces that employ them. Due to the incredibly specialized intricacies of how each project and blockchain operates, it is challenging to map the precise structure of how any particular NFT or cryptocurrency project may be abused or an outright hoax.
For instance, the US Postal Service used a less well-known mobile app platform instead of Ethereum when it released about 25,000 NFTs of its Day of the Dead-inspired stamps. Instead, it used the Ethereum-compatible GoChain. The software only offers “gems” for $1 each, which serve as a user-friendly interface for the underlying OMI tokens. Users can then use these “gems” to purchase NFTs inside the app. The Day of the Dead NFTs each cost 6 gems to purchase.
that employ them. Due to the incredibly specialized intricacies of how each project and blockchain operates, it is challenging to map the precise structure of how any particular NFT or cryptocurrency project may be abused or an outright hoax.
The catch is that after being completely unavailable for more than a year, paying out gems users earn from selling NFTs is “currently in testing.” NFTs can be bought using the app’s unique money, but after that, they can only be exchanged for more gems with other app users. The function hasn’t been implemented despite customers asking for methods to cash out their gems for at least a year, even though the platform has attracted brand deals over that time, including Marvel, DC, and Star Trek.
The NFT and crypto field is dominated by technical complexities, hence projects and news coverage that explains them are frequently driven to simplify. Despite the reality that services like the one mentioned above can operate considerably differently than, say, OpenSea, even though both “sell NFTs,” the complexity is typically reduced to language and concepts that are simpler to understand, and frequently, wildly disparate projects are characterized as a monolith.
Sometimes, this simplicity can get in the way of comprehending technology as it actually is. Which, at the moment, is plagued with fundamental security and privacy problems that are built into the design of the majority of the major systems, a perplexing and misleading feature set, and unrealistic claims that vary from moonshots to the practically unachievable.