More On: Bitcoin
Senators and regulators explain why the $60 billion collapse of a major cryptocurrency is not the industry's Bear Stearns moment
We debunk the most common misunderstandings about what 'minting' entails.
In recent months, it's been impossible to avoid hearing about NFTs. The hype surrounding the tokens, which are marketed as proof of ownership of a digital property, has reached a fever pitch, with billions of dollars pouring into the market. These non-fungible tokens are the hottest new collector hobby for some, a potent investment instrument for others, and the internet's future for others.
As is always the case, reality is more complicated. NFTs aren't capable of achieving much of what they're typically stated to be capable of in their current state. Because of the highly technical nature of NFTs, blockchains, and cryptocurrencies, it's easy to oversimplify the technology's explanation to the point of being deceptive.
It's difficult to explain the challenges with NFTs, but we'll do our best to do it as succinctly as possible. We must approach this with the knowledge that no explanation, no matter how detailed, can ever be completely thorough. With that in mind, there are a few myths surrounding NFTs that need to be dispelled.
NFTs Aren't Legitimate Ownership Tokens
The most persistently false assertion about NFTs is also the one that is most likely to be correct. NFTs are fundamentally unique, and they exist on a trustless blockchain, according to enthusiasts. This serves as proof that you "possess" a digital asset. There's only one token like it, and you have it in your cryptocurrency wallet, therefore whatever it represents must be yours.
For a variety of reasons, this framing is deceptive. To begin with, NFTs can only transfer ownership (or really, possession, but we'll get to that later) of the token. "With NFTs, the object you've bought does not seem to give you ownership of the underlying item (picture, game component, etc.) in any manner you would ordinarily transmit physical or digital art," software engineer Molly White told WIRED.
NFTs, on the other hand, usually contain links to assets that are hosted elsewhere. The NFT does not transfer ownership of the asset's copyright, storage, or usage rights. "They've paid to have their wallet address etched into a database with a pointer to something," White explained when someone buys an NFT. I wouldn't call them 'owners' of anything."
Furthermore, as previously stated, the Ethereum blockchain (currently the most popular blockchain for minting NFTs) lacks a way to distinguish between possessing and owning a token. If your bicycle is stolen, it is typically assumed that the bike is still yours. The "owner" of an NFT is the person who owns the token in their wallet. If someone's ape NFT is taken as a result of a phishing fraud, the blockchain considers the thief to be the new owner.
Although centralized marketplaces like OpenSea have occasionally intervened to halt transactions of stolen assets (on their own platform), this places the ability to determine "actual" ownership in the hands of the marketplaces that sell them rather than the NFT itself.
In addition, an NFT is only unique within the context of the blockchain on which it was produced. When minting a token on the NFT marketplace Rarible, for example, users can choose from three different blockchains, but what happens when two people mint the identical digital commodity on different blockchains? An artist could choose to mint their work on numerous blockchains, creating a "original" on each, but determining which blockchain is the "authoritative" or "genuine" one remains a social and platform issue.
Twitter, for example, has recently begun to allow NFT profile images, which are displayed in a unique hexagonal frame, but it presently only accepts Ethereum-based coins. You won't get that hexagon if you have an NFT on the Flow or Tezos blockchains, which Rarible supports and are frequently cheaper to mint right now. Twitter may alter its mind in the future, and other platforms may opt to support or even develop their own blockchains, but this once again puts the authority in the hands of centralized platforms to decide which chains are the "genuine" ones.
Furthermore, there's nothing stopping someone from creating numerous NFTs of the same image on the same blockchain. Multiple examples of users on the OpenSea marketplace stealing artists' work, producing replica NFTs, and selling them alongside the original have been documented by Twitter user @NFTTheft (or selling NFTs of artworks that the original artist never intended to make into an NFT).
Because the blockchain does not verify that a person minting an NFT has the rights to the asset they are minting, platforms must fix this problem (or not, as it were). "It's more of a social problem than a technological problem to verify ownership of an asset at the moment where it's minted into an NFT," White remarked. "It's difficult to do solely through programming."
Over 80% of the NFTs listed on OpenSea's marketplace were pirated art, false collections, or spam, according to an audit of the marketplace by OpenSea. The firm attempted to address the issue by limiting the number of free listings users could create, but after user backlash, the decision was reversed. Meanwhile, DeviantArt has attempted to safeguard its artists by using automated algorithms to search for theft, which have delivered over 80,000 infringement notifications to artists in just five months, although this technology is clearly limited to DeviantArt users.
To counteract the problem, OpenSea has begun authenticating accounts and collections, however verification is solely at OpenSea's discretion. As a result, any given NFT is no more reliable proof of ownership of the digital item it refers to than, say, a Twitter handle. Every Twitter username is possibly unique, and claiming yours first may imply that you're the true person behind the account. However, because a spoof account claimed @DonaldTrump first, the 45th president of the United States kept "real" in his username. Twitter's manual verification procedure, like OpenSea's, is the only reliable means to determine which account belongs to a real person. It's not a flawless system, to be sure.
To add to the confusion, marketplaces are merely one way to connect with the blockchain, but anyone can do it. So, even if every major NFT marketplace implemented measures to prevent stolen artwork from being minted and vetted all of its creators—a huge and difficult undertaking in and of itself—no there's way to prevent someone from minting stolen artwork on a blockchain like Ethereum with reasonable simplicity.
NFTs can only ever be proof of ownership of themselves in the best-case scenario. External data—artwork, digital objects, and so on—that NFTs refer to must still be verified by third-party systems.
Digital Items Cannot Be Transferred Between Games or Apps Using NFTs
One of the more far-fetched promises about NFTs is that they'll assist enable the actual metaverse by allowing users to transfer digital things from one game or platform to another. While this is technically doable for extremely simple data such as photos (which are already quite easy to move from one app to another), it is nearly difficult for complicated goods such as video game stuff.
In a lengthy Twitter thread, game developer Rami Ismail illustrated some of these issues, using the example of a simple six-sided die. Even the simplest 3D model contains sophisticated data, such as the object's geometry and textures, physics and motion information, and deceptively simple information like which direction is up. Because some game engines use Y as the vertical axis and others use Z, transferring a game from one engine to another may result in a model that is upside down.
A human game developer or animator can make changes to the 3D model asset to make it function in a different game or engine, but this takes time and effort (and labor). The presence of an NFT of an item from one game does not imply that it will be supported by another game.
Aside from that, there's the issue of intellectual property. In World of Warcraft, say you own Thunderfury, Blessed Blade of the Windseeker. Blizzard owns the model, texturing, and all related materials for that item. Blizzard could theoretically give gamers an NFT for the item, but no other game could import it without the company's consent. Even if Blizzard granted permission to another developer, they would have to work closely with that company to provide assets and ensure that everything runs smoothly.
Crossovers like these are already prevalent in games like Fortnite, which has teamed with franchises like Marvel, Star Wars, and God of War to bring characters from different games together. Developers have also given promotional gifts to gamers who have owned specific games for a long time or who have achieved certain achievements. However, none of these collaborations require NFTs to achieve, be marketable, or prosper.
Even if NFTs could be used to create a hypothetical external inventory system—assuming that this is something developers or publishers would desire in the first place—it would only be a small part of the labor required to transfer things, characters, or outfits from one game world to another. The majority of the job still relies on unique humans choosing to collaborate with other specific humans, and no level of future development automation will be able to prevent this.
NFTs have the potential to cost artists more money than they earn
Another advantage that proponents of NFTs claim is that they can assist artists in making money by selling NFTs of their own artwork, however demand for that NFT artwork may be fictitious. In March 2021, for example, the jaw-dropping $69 million NFT sale from artist Beeple made news. However, a project named Metapurse had purchased 20 other unrelated Beeple artworks a few months before to this sale, grouped them together, and sold 10 million fractionalized ownership tokens of the collection, known as B20 tokens, in January 2021. The goal was, ostensibly, to let those who couldn't afford to buy pricey artworks to purchase pieces of the collection and participate in the art market speculation.
Angel investor Vignesh Sundaresan, popularly known as Metakovan, who purchased the $69 million Beeple in March also held 59 percent of the B20 coins. B20 tokens were first sold to the general public on January 23 for 36 cents apiece before reaching a high of $23.62—a 6,461 percent increase—just days before the two-week-long $69 million Beeple auction ended. By the end of May, B20 was trading for less than a dollar. The coin is now trading for 40 cents as of this writing.
Beeple also held a 2% stake in the B20 tokens. This means that both the seller and the buyer of the most notable NFT sale at the time had a strong interest in increasing demand for the artist's work, with the buyer standing to profit more than the seller—the artist himself.
More broadly, according to an analysis by the Alan Turing Institute based on data from OpenSea, 75 percent of NFTs that sell at all sell for less than $15, and the majority never sell at all. Only 1% of stocks traded for more than $1,500. Mauro Martino, the head of IBM's Visual AI Lab and one of the study's researchers, says, "It's extremely evident that very few people can really go beyond $1,500 in selling." "This isn't a magical land where everyone becomes wealthy." In any other form of business, the situation is essentially the same."
Wash trading, in which one person sells an item to their own sock puppet accounts to create the illusion of high demand, makes it impossible to determine how many of the high-value NFTs sold are genuine. CryptoSlam, an analytics startup, discovered more than $8 billion in wash trading on the NFT marketplace LooksRare, which had only roughly $9.5 billion in total deals at the time.
"Many people connected the concentration that we observed—that 90% of transactions are conducted by 10% of wallets—as a signature of wash trading," says Andrea Baronchelli, an associate professor at City University of London who also worked on the investigation for the Alan Turing Institute. "Can we say that this is correct?" "I'm not sure," Baronchelli adds. "A market with a lot of wash trading wouldn't necessarily appear any different." So far, what we've observed is consistent with a lot of wash trading; nevertheless, we can't prove anything."
When gas expenses (money paid to the miners and validators who make up the Ethereum blockchain) and fees paid to marketplaces that advertise the NFTs are factored in, the low yield for smaller sellers can wind up costing artists money. There is an added step of changing money into cryptocurrency for buyers and sellers who only have traditional currency like US dollars to deal with—which is to say, most people—just to interact with the system. Currency exchanges, which facilitate the trades, take a share as well. "It's not enough to pay the cost of gas, for example," Martino says of the 75% of sales that are less than $15.
"The biggest winners are the exchanges and marketplaces," says Dan Olson, a video essayist and internet researcher who recently released Line Goes Up, a feature-length deep dive into NFTs on YouTube. "Transaction fees, service fees, and a percentage cut of royalties are all taken." They're the ones who are making money by the bucketload."
In principle, marketplaces like as OpenSea and Rarible provide "free" NFT minting for artists, although there are significant restrictions. For starters, the NFT will not be built unless it is purchased. The minting fee is also passed on to the buyer (increasing the buy-in price for each transaction), and because gas prices fluctuate over time, even the cost of carrying out the transaction can be difficult to forecast.
The average fee for an Ethereum transaction over a moving 30-day period was hovering around $14 to $15 at the time of writing, but individual transactions can and do spike so dramatically by the hour that the same transaction can cost several times more depending on the time of day or week it occurs.
Most artists who want to participate in NFTs face a difficult decision: they can either invest a large sum of money to mint their work as NFTs in the hopes that an audience will come along and buy enough to make the fees worthwhile, or they can pass those costs on to the buyer, pricing out a portion of their potential customers—and in the meantime, they won't have a record of their NFTs on the blockchain at all.
Another annoyance is the royalty function. Royalties are not built into NFTs by default. Instead, royalties might be included in the "smart contract" that administers the NFT. But, like any other piece of software, these contracts are prone to flaws, compatibility issues, and manipulation.
NFTs don't understand the difference between being sold between two persons and being transferred from one wallet to another held by the same person in general. Instead, markets such as OpenSea must arbitrate a sale and notify the NFT of the transaction. Although a marketplace can impose royalties on NFTs created and sold on its own platform, trade on other platforms can completely exclude royalty payments, whether by accident or design. This makes it quite simple to avoid paying royalties entirely.
While there have been proposals to standardize royalty payments across marketplaces, they can be difficult, if not impossible, to implement. NFTs can cause more hassles for artists than benefits when combined with the prevalent fraud in the NFT space—and the extra time it takes artists to issue takedowns and notifications to prevent fraud of their work.
The devil is in the details, and they're always changing
The majority of this article has focused on Ethereum's issues, as well as NFTs built on it and the largest exchanges that employ them. Due to the highly particular characteristics of how each project and blockchain operates, it's difficult to map the exact structure of how each specific NFT or crypto project might be exploited or downright scammed.
For example, when the US Postal Service printed roughly 25,000 NFTs of their Day of the Dead–inspired stamps, it used a less well-known mobile app platform called GoChain, which is Ethereum-compatible but not Ethereum-based. The app merely offers $1 "gems" (which serve as a user-friendly interface for the underlying OMI tokens), which users can then use to purchase NFTs within the app. The Day of the Dead NFTs each sold for 6 gems.
The hitch is that cashing out gems earned from selling NFTs is still "under testing," after being completely unavailable for nearly a year. Users can buy NFTs with the app's special currency, but they can only be swapped with other app users for more gems after that. Despite users requesting a means to cash out their gems for at least a year, the functionality has yet to be implemented, despite the platform attracting brand deals such as Marvel, DC, and Star Trek during that period.
Because the NFT and crypto space is dominated by technical details, projects and news coverage that explains them are frequently motivated to simplify. To reduce complexity to easier-to-understand phrases and concepts, and to frequently depict vastly disparate projects as a monolith, despite the reality that services like the one mentioned above can operate very differently than, example, OpenSea, despite the fact that both "sell NFTs."
This simplification might often come at the cost of fully comprehending the technology. Which, at the moment, is fraught with fundamental security and privacy vulnerabilities baked into the design of most major systems, a confusing and misleading feature set, and aspirational claims ranging from moonshots to the practically unattainable.
** Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of USA GAG nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.