NFTs: The Future or a Scam?

Image Courtesy of CNN

By Dean Robbins

An NFT collection of digital art by artist Beeple sold at Christie’s for over $69 million. Many people had never heard of an NFT but the massive value sparked a spike in interest in the burgeoning market. Even a year later, though, the market remains a mystery to many. What is NFT and how exactly does it work? Why would you want to buy one? 

An NFT, which is an abbreviation for non-fungible token, is an item non-legally owned through the blockchain. A blockchain is essentially a virtual list of data that is stored in a decentralized network of computers. This network is made up of any device that uses the blockchain, whether it is those that mine cryptocurrency or those that own it. There are many blockchains, which means there are many different networks. A computer can store more than one blockchain. 

Some blockchains are used as ledgers for cryptocurrency, essentially a security that keeps track of transactions. Data cannot be removed from the blockchain. Theoretically, anything digital can be a non-fungible token but NFTs tend to be pieces of art or media. The digital file of the piece of art itself is not what is stored on the blockchain but that file corresponds to a piece of data that is stored there. 

Some of the most popular and successful NFTs are from the Bored Ape Yacht Club (one is depicted above). There are 10,000 unique NFTs in the collection, which are drawings of apes. Some of these NFTs are for sale with prices over $200,000. All of the Bored Ape Yacht Club NFTs are stored on the Ethereum blockchain, which is one of the most popular blockchains. Sales of them and other NFTs are publicly tracked on the website Open Sea. The Bored Ape Yacht Club is just one of the thousands of NFT collections. 

The value of an NFT, whether a Bored Ape Yacht Club one or not, is in their artificial scarcity. There are only 10,000 Bored Ape NFTs. Some NFTs collections contain a single NFT. For instance, several famous internet memes have been sold at NFTs, including the Overly Attached Girlfriend meme and the “Charlie Bit My Finger” video. The latter sold for over $750,000. 

But what does it actually mean to own the “Charlie Bit My Finger” NFT? Does it grant IP ownership? No. 

Imagine you buy a bottle of Sprite. You now exclusively own a unique bottle of Sprite. That bottle is one of a kind. However, buying that bottle of Sprite does not grant you rights over the Sprite brand. Then, imagine that the bottle of Sprite is digital and there is a set of data on the blockchain that corresponds to the digital Sprite bottle, which proves it is yours. That is an NFT. 

There are three major problems with them: artificial scarcity, blockchain instability, and environmental impact. NFTs are essentially creating an arbitrary market with the intention of making money. The items themselves are theoretically unlimited in their quantity. The only hard limit on the quantity of a certain JPEG is time and storage. Owning (in the loose sense of the word) an “original” JPEG is a merely honorary gesture. It is not like the NFT is the canvas the artist painted on – its exclusivity is its data set on the blockchain. 

NFTs exist, not for the sake of art, but to increase crypto usage and demand. What matters about a Bored Ape Yacht Club is not the aesthetic value of the ape but the Ethereum (ETH) used to purchase it. The value of an NFT is determined by the value of its currency. One ETH may be worth around $2,500 now but the only security in its value is the continual usage of it. NFTs keep the currency active and valuable. 

The problem is that there are many blockchains and cryptocurrencies and not all of them will survive. While NFTs can be value generators for a cryptocurrency, they are also tied to it. The uniqueness of the NFT is in its place on the blockchain. If you were to spend $500,000 on an NFT stored on the DogeCoin blockchain and DogeCoin collapses, your NFT is now worthless. Unlike other collectibles like physical art, there is at least an object to hold onto. 

An NFT, in its most common form, is an easily reproducible and impossible to secure JPEG with a dose of bragging rights. Some NFTs may not even have that. For instance, French video game publisher Ubisoft has an NFT program called Ubisoft Quartz. The NFTs are gun skins and costumes for the video game Ghost Recon: Breakpoint and are stored on the Tezos blockchain. As far as I can tell, the NFTs can only be earned through gameplay but there seems to be some way to sell or trade them. Either way, the gun skins and costumes can be used in the game. However, if Ghost Recon: Breakpoint were to be shut down, the NFT would then be useless–merely a data point on Tezos.

At the end of the day, does it really matter if people want to spend hundreds of thousands of dollars on blockchain data? It might. Cryptocurrency and most blockchains are an immense drain on the environment. According to PCMag, “a single Bitcoin transaction is estimated to burn 2,295.5 kilowatt hours of electricity, enough to power a typical US household for over 78 days”. In short, the cost of mining and using cryptocurrency is a pricey one for the environment. 

Some blockchains like the previously mentioned Tezos have taken measures to reduce their impact. The majority of the most popular cryptocurrencies, like Ethereum and Bitcoin, have not. To quote Dr. Ian Malcolm in Jurassic Park (1993), “your scientists were so preoccupied with whether they could, they didn’t stop to think if they should.” The only legitimate benefit of NFTs besides the possibility of making money is creating another avenue for selling digital art. 

Expanding the digital art market is admirable but the end goal of that side of NFTs is not exactly beneficial to many. It will likely mean that digital art will more easily become the domain of the rest of art collection. Christie’s and Sotheby’s, two of the biggest auction houses in the world, have already begun to sell NFTs. So yes, it might be a way for artists like those behind the Bored Ape Yacht Club to make millions of dollars. 
It also means the theoretical commodification of anything on the internet, which almost always means less accessibility. It is a loss for the environment and often for the buyer. Crypto mining costs around $30,000 and NFTs are a gamble. There are many collections and only a few hit big. In the end, NFTs are, like most other things, mainly beneficial to a small minority of people at the top.