404 NFT's

NFT's are the newest hype in the cryptosphere. The idea seems brilliant; we all know that blockchains are immutable ledgers, and that what's on the blockchain stays on the blockchain. What better way then to store pieces of digital art that are rare and exclusively owned by the buyers, than to store and sell them on such a blockchain?

In the past few months however there have been numerous reports of NFT owners who claim that their valuable piece of digital art has disappeared. Disappeared from their wallets and even gone from the platform they bought it on, like OpenSea. One of the most remarkable stories is the one from Tom Kuennen, who spent $500 to buy an Elon Musk-themed "Moon Ticket" from OpenSea. Only one week after the purchase however, the art had disappeared from his wallet, and instead he was confronted with a 404-error. You know, the one that says "Page Not Found." Here's an article about this case: People's Expensive NFTs Keep Vanishing. This Is Why

So here we stumble across a widespread misunderstanding about NFT's: the art is NOT stored on-chain. Or at least most times it isn't. You see, blockchains aren't any good for storing a lot of data; they're simple chained immutable ledgers containing all the past transactions, with each consequent ledger pointing to the previous, stored and verified in a decentralized network of nodes. That's why it's such a good method currencies, and why we can all 100 percent trust that our transactions are recorded truthfully; there's not a single point of failure and verification is done by agreement between many independent nodes.

This also means that decentralized blockchains, which is the basis for any true cryptocurrency, has some weaknesses, the first of which is speed. We've made great progress in that department though, even though it is still true that the faster blockchains are generally also the least decentralized. Just think about Proof Of Stake coins, where only large holders of a coin can become a validator, whereas with proof of work any Joe Schmoe with a couple of powerful graphics cards can help with the validation. Both of them, Stake and Work algorithms, provide pools, staking pools for the former and mining pools for the latter, where small participants can bundle their forces.

The second disadvantage of blockchains is storage space. Taking Bitcoin as an example, the bitcoin blockchain was 359.47 gigabytes on 7 October 2021. And that's with no extra data stored on the blockchain, just the transactions. If you want to start mining Bitcoin, your machine will only start mining after the entire blockchain has been downloaded, as it is needed locally to be able to participate in the verification process. You can see how storing digital graphical or audio data on-chain could become a problem very fast.

These problems are by no means insurmountable though. There are already decentralized storage solutions (like the InterPlanetary File System) and they will only get better. But for now, when you buy an NFT, you probably don't own the artwork itself; all it is, is a digital ownership certificate that, when it's decoded through your private key, points to a URL elsewhere on the internet where the artwork is hosted. And in many cases this artwork or collectible is free to see or download by anyone, like the NBA Top Shot collectibles, which are nothing more than short video-clips of NBA players scoring nice shots, but can also be admired on YouTube. So when you read an article saying that "NFT's Are Disappearing," like the one I've linked in the first paragraph, they're actually not exactly right. The NFT's don't vanish; they are stored on an immutable blockchain after all. But the artwork the NFT points to can vanish, as it is not stored on the blockchain.

I predicted that most of the NFT hype will cool down in my post 2022 Crypto Forecast, and this is one of the reasons. There are many legit use-cases for NFT's, don't get me wrong, but the digital art and collectible space, without any other underlying use-case is just a hype. So make sure you don't become one of the customers who's confronted with a 404-error in your NFT wallet...

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