NFTs (Non-Fungible Tokens) are the latest crypto craze that has been growing for the last few years and largely took over from the previous bubble of ICOs (Initial Coin Offerings) as a way for people to "get rich quick" in the crypto space.
But what are NFTs? Why are they important? and why do some people think they are a scam?
What Are NFTs?
Non-fungible tokens or NFTs are blockchain-based assets. That asset could be the equivalent of a Pokemon card or a theatre ticket, with more innovations coming all the time.
Already we have a few words to define.
Non-fungible - This means you can't easily replace one NFT with another. It's not like having a dollar bill where each dollar bill while having a unique code stamped on it, can be swapped for any other dollar. In practice, you can't take this at face value, but in theory the idea is you own something unique that nobody else can have. $HIVE is fungible, an NFT made with Hive Engine is Non-Fungible.
Token - The Token part of NFT means it has a unique fingerprint (identity, meta-data, ownership, etc) stored on the blockchain it was created (minted) on. This means owning an NFT says you have a token that represents that ownership. Your actual asset might be physical real estate, or a binary file sat on Google Drive. Like poker chips, tokens can be more easily transported and exchanged than the "thing" they represent.
Why Crypto?
While really the underlying technology of an NFT is a bundle of data, so could just as easily be a text file, and could be traded with traditional currency (people buy watermarked PDF files and art prints every day using PayPal or credit cards), having the cryptographic signing and blockchain adds consumer confidence.
While most people now think of NFTs as collectibles, it is best to think of an NFT being a digital tracker. Anyone can see the history of the token from creation through to every change of ownership. Nothing in an NFT says the creator had the legal rights to sell the asset, of course. No part of the NFT standard disallows someone from creating an NFT (or 10) of the Mona Lisa or Golden Gate bridge or prevents anyone from buying it.
Why Are They So Hot?
Crypto Kitties, Beeple, various punks have sold for millions of dollars. That alone has made the crypto community get involved, and got the mainstream media interested.
PFP NFT Collectors
PFPs (Profile Pictures) are a kind of NFT that most people witness "in the wild", they are the apes and the punks.
There are genuine collectors, I am sure. I don't get it, but I do believe they are out there.
People set their avatar to be their latest NFT purchase as a kind of "look how much money I spent on this profile picture", I guess?
Right now they are like bling or "flare", but once we have a Metaverse things will get more serious as your avatar really will represent you, plus you might buy virtual real estate NFTs for your stuff to be stored in.
NFT for the Artists
For the artist, though, there are some benefits provided they were included in the scheme (most NFTs don't benefit the person or people who created the artwork, unfortunately)
Original sale - If the artist is the one who sells the art then they get the sale price minus any commissions and fees. Etherium Gas Fees can be higher than the sale price, so many NFTs are forgoing the original NFT standards and going with cheaper alternatives.
Ongoing commission - Many of the NFT platforms allow the original artist to get a cut of future sales, meaning the art can become a passive income into the future.
Fractional ownership - One NFT can have multiple owners, kind of like a timeshare on a beach property. This means the whole can be more easily afforded by the part-owners.
Licensing Terms - Just as with stock photography, ownership can infer certain rights. In most cases, if you buy an NFT of "Success Kid Meme" or "Millenium Falcon" all you are getting is a collectible (bragging rights?) but the artist could say to increase the value of the offering that as owner, you have exclusive rights to an asset in the same way that Michael Jackson bought a whole raft of the Beatles music.
Generative Art - Artists can use software and various sub-component pieces to generate thousands of unique variations of work. This is how you can see a punk with pink hair versus a punk with blue hair, or a kitten with a pipe versus one with a pirate patch. Within the algorithm the artist (or more likely developer) can set certain things to be more scarce, and therefore worth more money, so your Yacht Ape with a crown and a monocle has more value than the regular guy in a blue vest. For what it's worth, this is the route I am going, not because I think it will make me more money, but it is a way for me to lower the entry price for individual buyers.
NFT Gaming
While "play to earn" has been a thing for a while, as has buying digital assets, these things being based on crypto tokens took things to a whole new level.
The promise of you "owning" these assets is a little wonky, due to the fact there is no way to take your Splinterlands cards with you to your Magic the Gathering tournament, if Splinterlands goes offline then what you "own" vanishes.
Interestingly, none of the NFT-pumping game studies allow you to literally own their games, just buy assets that work with the game.
Why NOW?
Things have been traded for years on the internet, but using the blockchain as a ledger adds a level of confidence because the blockchain is immutable - editing it breaks it.
That means if we had created the token in a traditional database, whoever controlled the database could change the ownership.
Mostly, however, I believe they are hot right now because the community was looking for the next thing to cash in on.
Why the Skepticism?
As with anything that could potentially make people rich, bad actors have found ways to work the system in their unethical favor, from scams to phishing campaigns.
It's not just grifters, there are bugs in the system as with any software written by humans:
A "glitch" resulted in Turner's Bored Ape #2643 being bought even though he thought it was no longer for sale, and he ended up spending 10 ETH (about $38,000) to get it back
Many artists are having their work stolen and sold as NFTs with no credit, let alone financial compensation going to them. This has meant a lot of artists pulling their work down from the internet or adding watermarks, but of course with modern AI tools and the fact the internet never forgets, this is locking the proverbial door after the horse has been sold for meat.
Crypto pumpers will tell you that the space is decentralized but it really isn't when it comes to NFTs. There are a few dominant trading platforms, and the main of those is the OpenSea marketplace.
Sixteen NFTs from three collections were taken, including eight Bored Ape NFTs. In total, the loss totalled around 593 ETH (equivalent to about $2.2 million). After asking for help on Twitter, OpenSea froze the stolen assets, preventing them from being traded on their platform. Some commenters noted that the redress (asset freezing and flagging of suspicious accounts) was only possible because OpenSea is a centralized platform with a large amount of power in the NFT arena, which some see as antithetical to the supposed ideals of web3
You can easily lose access to your asset, for example by being tricked into exposing your credentials, or if the hosting platform deletes the end URL, the server goes down, or they go out of business.
Another form of loss is when the NFT is pumped and then the value drops to $0, a form of Rug Pull.
Twitter user ElectionDayMad1 posted how he was paid 18 ETH (about $63,000) to hype the Expansion Phunks project that later rug pulled. He also admitted "I’d say 99% of projects that I promote fail"
Another good example is where millions of dollars of apes were sold then the developer vanished taking all the money.
The developer vanished and took 798 Ether from sales, which is worth over $2.7 million. The website and Twitter page don't exist now and Evil Ape is nowhere to be found.
Or where the scam was a bait and switch ...
Doodled Dragons, touted that they would distribute all profits "straight to charities protecting animals on the brink of extinction". They announced on Twitter that they would be donating $30,000, "our first donation", to the World Wildlife Fund. Two hours later, they tweeted, "actually. fuck that. our charity will instead now be... my bank account. cya nerds." They deleted the Twitter account shortly after.
Plus, while you might own the receipt, as with any art people can enjoy a copy almost or just as much. Just check how many people have Monet prints if you want proof.
Are NFTs Killing the Planet?
No more than any other crypto technology, and you can lessen the impact by going to a less energy-intensive blockchain. As these things go, I think Hive is on the best side of the trend, and even ETH is working to limit the energy drain. It's a solvable problem is what I am saying.