Unless you've been living under a rock, you've probably heard of NFTs, cryptocurrencies, digital art, and a whole slew of other dizzying terms. Every cool kid on the block is wearing chains, trading bits for coins, and hoarding digital collectibles. It can all seem like a lot to keep up with, especially if you have no clue what's going on.
Companies are investing considerable sums of money in NFT marketplaces like OpenSea, and startups are racing to capitalize on the hype before it dies down. To onlookers, this may seem like a golden opportunity to break out those hard-earned savings and finally put them to good use.
But while NFTs are being hailed as the future of digital ownership, they're also the source of many problems. NFTs are artificially scarce, don't represent true ownership, threaten the intellectual property rights of content creators, enable counterfeiting and money laundering, and encourage consumptive mining practices.
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It's an age-old problem: You approach a seller directly and make an offer on an item they've listed on a marketplace. But you have no way of verifying the seller's identity or the authenticity of their item. What if you're being conned?
NFTs were created in an attempt to solve this problem (although whether they succeeded is an entirely different matter and something that we'll discuss later).
An NFT (non-fungible token) is a unique identifier for a piece of digital content, like artwork, music, writing, and so on. At the end of the day, an NFT is really a hash, along with some other metadata about the purchased work—like its title, the author, and the date when it was created. The algorithm accepts an input (the digital work being sold) and produces a hash (the NFT) that uniquely identifies the good and its relevant metadata. NFTs are most commonly associated with digital works because it's easy to feed them into a hashing function. But in theory, NFTs could also be associated with physical goods; you would just need to represent the item digitally, like with the deed to a home.
Fungibility is a key topic concerning NFTs (it's in the name, after all). In sort, a fungible good is one that can be exchanged for an identical good of the same value. The best example of a fungible good is an electronic dollar—one electronic dollar can be traded for another electronic dollar because they're indistinguishable and identical in value. By contrast, most goods are actually non-fungible because there's some degree of variation, rarity, or wear and tear involved, such that there would be a loss (or gain) of value if you were to exchange one copy of the good for another. Moreover, depending on who you ask, the real value of a good may differ from its perceived value. Practically speaking, two pennies are worth the same, but some are rarer than others—and this makes them more valuable to collectors.
The same principle carries over to NFTs. By definition, an NFT is not fungible because it's the output of a hashing function. In other words, it's exceptionally difficult to find another item that can trigger a hash collision, such that two different assets share the same NFT. Thus, the only thing that's identical to an NFT is the original NFT itself. You can't trade NFTs; you can only buy and sell them. This uniqueness is also what makes NFTs so valuable (at least in theory).
Because of their perceived rarity, NFTs are currently selling for outrageous prices. Naturally, this means that they're all over the news. Here's a small sampling of the stories out there:
- Jack Dorsey sells his first tweet ever as an NFT for over $2.9 million
- Grimes sold $6 million worth of digital art as NFTs
- Ethereum CryptoPunks Are Selling for Outrageous Sums of Money
- Teen Artists Are Making Millions on NFTs. How Are They Doing It?
- So Snoop Dogg just claimed to be a prominent NFT booster
No article about NFTs would be complete without mentioning Beeple—an artist who made one drawing a day for 20 years and compiled them all into a single JPG, selling it for $69 million.
But nevermind having any real artistic talent, putting in decades of hard work to achieve success, or having any sort of business acumen when it comes time to market your work. Because in the golden age of NFTs, a simple PNG image of a rock will do the trick, selling for $1.3 million.
Of course, all of these transactions are carried out using cryptocurrencies like Ethereum—because let's face it, not even thieves want your worthless fiat money anymore.
I would wager that the typical response to these stories is not one of excitement or optimism—it's bewilderment. Most Americans are struggling to get by or suffocating under a mountain of debt. Veterans are kicked to the curb, health care is unaffordable for low-income families, and mental health problems and various other issues are plaguing this country. And yet NFTs are what make the front-page headlines because apparently that's what we should care about. We're trapped in the belly of this horrible machine, and the machine is bleeding to death.
The sobering truth? Most Americans don't even save up this much money by the time they've reached retirement. In 2019, the median net worth for people ages 55–64 was just $212,500, according to the latest Survey of Consumer Finances conducted by the U.S. Federal Reserve.
The wealth gap is very real, and NFTs are shining a spotlight on just how much of that wealth is being funneled into worthless stores of value.
Stories of NFTs selling for this much money may get your blood boiling, and you may be tempted to write up a storm about how the world has lost its mind. But the truth is that we lost our minds long before NFTs went mainstream. We should've suspected that something wasn't quite right when people started spending a fortune on artwork.
Like this work titled Onement VI, which sold for $43.8 million:
Or the classic Orange, Red, Yellow by Mark Rothko, which sold for $86 million in 2012:
To the untrained eye, these may appear to be canvases smeared with paint. But to a seasoned art connoisseur, they embody the human condition, eternal themes like love and loss, and all sorts of hand-waiving pretension. Modern art has always eluded basic human reasoning. The more uninspiring a piece of artwork is, the more it's worth, and the more people are afraid to criticize it for fear of being branded as simpletons who "just don't get art." One man's seven-legged spider is another man's treasure, so to speak.
NFTs are a natural evolution of the world of fine art. If you can collect real paintings, nothing can stop you from collecting digital ones. A market will always exist for something, even if not everyone is able to appreciate its value, and even if its perceived value is exaggerated or misunderstood. At the end of the day, buyers and sellers will always manage to find each other.
At first glance, there don't appear to be any drawbacks to buying digital art as NFTs, and this technology actually makes buying and selling art more accessible to people who want to participate in this market. But there are actually quite a few problems with NFTs.
When someone purchases a physical piece of artwork or some other collectible, the seller must relinquish ownership of that item to the buyer, and the asset physically changes hands. In some cases, the item is the only one of its kind in existence, which means it's highly valued and irreplaceable.
But unlike a physical collectible, a digital asset associated with an NFT is not rare or exclusive. The creator still retains the original work after the sale, so there's an infinite supply of it—they can continue sharing and selling their work. Since there's no true scarcity involved, the value you've attached to the NFT is artificially inflated. Anyone can find a copy of the artwork online for free—all you need to do is right-click, save as.
Despite the fact that NFTs don't really represent true ownership, scarcity, or value, people are already cashing in on a wide variety of worthless trinkets, including tweets and memes. Classic memes like Disaster Girl, Doge, Success Kid, Nyan Cat, and many others have been sold by their creators for outrageous sums of money—as much as $4 million.
This is what the Charlie Bit My Finger auction had to say about the virtues of meme ownership:
Bid to own the soon-to-be-deleted YouTube phenomenon, Charlie Bit My Finger, leaving you as the sole owner of this lovable piece of internet history (while also getting the chance to say Charlie bit your finger, if you want to see what all the hype is about).
If you understand what an NFT is, then this should make very little sense. By definition, nobody "owns" a meme. The whole point of a meme is dissemination, not ownership. You don't create a meme so you can claim it as your own—memes are meant to spread and be shared and repurposed. When you buy a meme, it's almost like you're buying air—does anyone really own it?
Taking down the original source of a meme also accomplishes nothing. For one, the Internet Archive's Wayback Machine has likely already documented it. And there are innumerable copies of it all over the internet. The only thing that's impressive about selling memes as NFTs is that people have managed to get away with it—that there are actually buyers out there who are willing to spend money on these sorts of things.
Physical art is tangible—up close, you can marvel at the brush strokes and smell the unholy cocktail of paint, sweat, and blood that brought a painting to life. But with NFTs, you own a string uniquely identifying a work of art—you don't own the artwork itself. Anyone can find and consume the original content for free, so this kind of "ownership" is meaningless.
If someone wants to spend their money on digital collectibles, they have a right to do so, even if it makes no sense and even if it's wasteful. Artists are paid for their work, and collectors scratch that insatiable itch of ownership. No harm done, right?
Unfortunately, it's not that simple. And this is where things start to quickly fall apart.
Once an asset has been sold on an NFT marketplace and a unique identifier has been generated for it, it's recorded indelibly on that particular blockchain, and there's no way to tamper with it or misrepresent the product to future buyers. Everyone can easily look up an NFT and compare it to the NFT of an item currently listed on the marketplace.
That's all good and well, but it's also a circular problem for first-time NFTs. Because unless you know the seller, you have no way of verifying the authenticity of the listed item. For all you know, you may be buying the NFT for a counterfeit. The NFT is technically valid because it's just a hash; in this case, it happens to uniquely identify a counterfeit. But that's not exactly helpful, is it?
In fact, this has already happened.
The incident undermines one of the things that make NFTs so attractive: the fact that they offer cryptographically secure authenticity. But the problem is that authenticity is dependent on the seller being who they say they are.
Where there is money involved, there will always be scammers trying to exploit people. If NFTs are unable to prevent counterfeiting, then of what use are they to anyone? A proof of ownership is meaningless if the underlying asset is a fake.
Suppose you're able to verify that an asset listed on an NFT market is legitimate and not a counterfeit. Are you in the clear then?
The bigger issue is that anyone can sell a digital work as an NFT. While this is true even for real-world art, you at least have to put in the effort to steal or counterfeit those items. Sure, you can find a photo of the Mona Lisa online, but you're going to have a really hard time convincing someone to pay you for it. On the other hand, it's trivial to steal and sell digital artwork.
This is not a new problem, but NFTs open up a whole new world of theft and make it easier for people to impersonate artists and sell their work. In fact, you don't even have to be an artist—any piece of digital content is up for grabs, like when someone sold one of Terence Eden's tweets as an NFT.
This is nonsense. Let's ignore the fact that some random company has taken my copyright and indelibly stored it on a 'chain. Let's ignore that someone else is claiming my content as their own. Heck, let's even ignore that someone else is monetising my content without permission or recompense.
Why can't these people see that digital ownership is a con? The only value these tokens have is in their scarcity. Digital tokens cannot ever be scarce.
What do you get if you "buy" my Tweet? You didn't write it - so you don't have copyright. You don't get an exclusive use of it. And anyone can make their own copy of it!
It's true that NFTs make it easier for artists to monetize their own work. But NFTs are also threatening to rob those very same content creators of their intellectual property rights. Because unless you sell your work as an NFT, someone else may very well beat you to it.
[W]hile the very technology of NFTs prevents them from being duplicated without permission, there’s nothing inherent to the sector that controls who can make an NFT in the first place – a fact that has caused dismay to some artists, who have found their work ending up in the “control” of people who had nothing to do with its creation.
Digital art is trivial to steal, especially in a world where bots can already put your artwork on a shirt and sell it. NFTs only make it easier to profit off of other people's hard work. There are countless stories about scammers selling NFTs of artwork that they don't own:
- NFT Mania Is Here, And So Are the Scammers
- People Are Stealing Art and Turning It Into NFTs
- NFTs are generating huge paydays for some artists, others feel under siege
- Artist is forced to shut down their DeviantArt gallery due to theft
This completely undermines the value of NFTs because they're supposed to be verifiable tokens of ownership. But if the original transaction was fraudulent to begin with, this raises an important question: What is the utility of an NFT if it could represent something that wasn't for sale in the first place?
Unsurprisingly, NFTs can also be used to launder money. It goes like this: You've acquired a large sum of money illegally, but you want the authorities to think that you earned it by doing business legitimately. To that end, you create two separate accounts on an NFT marketplace like OpenSea. One of the accounts is under your real name and auctions off a low-effort piece of "art." You then use the other account to purchase the artwork from yourself, funneling those ill-gotten gains into your own wallet under the guise of a seemingly legitimate transaction. Since the value of a piece of artwork is completely subjective, and NFT marketplaces are freely accessible to anyone with an Ethereum wallet, there's no reliable way to differentiate between legal and illegal transactions. Regulatory oversight of NFTs is lagging behind, making the NFT market a temporary safe haven for criminals.
One of the key concepts of Ethereum is the proof of work, where a network of miners compete to verify transactions on a blockchain by solving cryptographically difficult problems. This is what makes it possible to create an NFT in the first place and record it on a blockchain.
Unfortunately, computationally difficult problems require tremendous amounts of computing power—and more computing power means more energy consumption. By some estimates, the amount of energy consumed by cryptocurrency mining may be comparable to the energy generated by the London metro area in a single year.
Granted, this is not an entirely black-and-white problem because of emerging green mining practices, like how 62% of global miners claim to use hydropower rather than coal or electricity, according to a 2020 study by Cambridge University.
Even so, crypto mining still continues to generate large amounts of energy. NFTs are not entirely to blame for this problem—it existed long before this market emerged. But as NFTs grow in popularity, they're going to encourage these sorts of consumptive practices.
This whole NFT craze reminds me of the poem Ozymandias by Percy Bysshe Shelley:
I met a traveller from an antique land,
Who said—“Two vast and trunkless legs of stone
Stand in the desert. . . . Near them, on the sand,
Half sunk a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them, and the heart that fed;
And on the pedestal, these words appear:
My name is Ozymandias, King of Kings;
Look on my Works, ye Mighty, and despair!
Nothing beside remains. Round the decay
Of that colossal Wreck, boundless and bare
The lone and level sands stretch far away.
Ozymandias was a powerful ruler who was once revered for his wealth and influence. But now, all that remains of him and his kingdom are two leg stumps and a shattered head, drowning in a sea of sand that stretches in every direction. The inscription on a nearby pedestal may have once struck fear into passersby, but now it's downright laughable. Ozy who? It's a powerful story of impermanence and a cautionary tale against trying to immortalize oneself through material possessions and monuments.
Surely the meaning of life isn't to amass a fortune of NFTs that you can show off on Reddit for karma, until one day you die and leave nothing behind but a digital token. Will your children treasure this heirloom and pass it on to future generations? Will your name resound throughout the history books for your contributions to society?
When you consider that NFTs are digital tokens representing digital goods sold in a digital marketplace and recorded in a digital ledger—and that the underlying asset may have been counterfeited or claimed by someone other than its true owner—then you start to wonder why we care so much about escaping the real world and digitizing every possible aspect of our lives.
Don't buy into the hype. NFTs don't represent true ownership and are not an investment in the future—they're ineffective, wasteful, and speculative.