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Credit to Author: Eric Ravenscraft| Date: Sat, 12 Mar 2022 13:00:00 +0000<\/strong><\/p>\n Eric Ravenscraft<\/a><\/span><\/span><\/p>\n To revist this article, visit My Profile, then View saved stories<\/a>.<\/p>\n To revist this article, visit My Profile, then View saved stories<\/a>.<\/p>\n It\u2019s been impossible<\/span> to avoid hearing about NFTs in recent months. Hype for the tokens\u2014pitched as proof of ownership of a digital item\u2014has reached a fever pitch, while billions of dollars<\/a> have poured into the market for them. To some, these non-fungible tokens are the hottest new collectible hobby, to others a powerful investment tool, and still more, they\u2019re the future of the internet.<\/p>\n The reality is, as always, more complex. In their current state, NFTs aren\u2019t actually capable of doing much of what they\u2019re often claimed to do. The extremely technical nature of how NFTs, blockchains, and cryptocurrencies work means that it\u2019s easy to simplify the explanation of the tech to the point of being misleading.<\/p>\n Explaining the problems with NFTs<\/a> is complicated, but we\u2019re going to try to break down the issues as succinctly as we can. We have to tackle this with the understanding that no explanation, no matter how in-depth, can ever be totally comprehensive. With that in mind, there are some misconceptions about NFTs that are worth clearing up.<\/p>\n The most persistent misleading claim about NFTs is also the one that\u2019s closest<\/em> to being true. Enthusiasts frequently claim that since NFTs are fundamentally unique and live on a trustless blockchain<\/a>, this constitutes proof that you \u201cown\u201d a digital asset. There\u2019s only one token like this one, and you have it in your crypto wallet, so the thing it signifies must be yours.<\/p>\n This framing is misleading for a number of reasons. For starters, NFTs can only convey ownership (or rather, possession, but we\u2019ll come back to that) of the token itself. As software engineer Molly White<\/a> explained to WIRED, \u201cWith NFTs, the thing you've bought does not tend to give you ownership of the underlying item (image, game asset, etc.) in any way you would normally transfer physical or digital art.\u201d<\/p>\n Instead, NFTs typically contain links to an asset hosted elsewhere. The NFT doesn\u2019t convey ownership of the copyright, storage, or usage rights to the asset itself. As White explained, when someone buys an NFT, \u201cThey've paid to have their wallet address etched into a database alongside a pointer to something. I wouldn't say they really \u2018own\u2019 anything at all.\u201d<\/p>\n Additionally, as mentioned above, the Ethereum blockchain (currently the most common blockchain for minting NFTs) doesn\u2019t have a mechanism for distinguishing between possessing<\/em> a token and owning<\/em> it. If someone steals your bicycle, it\u2019s generally understood that the bike is still yours<\/em>. With an NFT, the \u201cowner\u201d is whoever has the token in their wallet. So, if someone\u2019s ape NFT gets stolen via a phishing scam<\/a>, the blockchain treats the thief as the new owner.<\/p>\n Centralized marketplaces like OpenSea<\/a> have occasionally stepped in to freeze sales of stolen assets<\/a> (on their own platform, anyway), but this puts the power to determine \u201creal\u201d ownership not in the NFT itself but in the hands of the marketplaces that trade them.<\/p>\n An NFT is also only unique in the context of the blockchain it was created on. NFT marketplace Rarible, for example, offers the choice of three different blockchains<\/a> when minting a token, but what happens when two different people mint the same digital item on different blockchains? An artist could decide to mint their art on multiple blockchains and thus have an \u201coriginal\u201d on each, but deciding which of these blockchains is the \u201cauthoritative\u201d or \u201creal\u201d one is still a social and platform problem.<\/p>\n As an example, Twitter recently started supporting NFT profile pictures<\/a>, which are displayed in a unique hexagonal frame, but it currently accepts tokens only from the Ethereum blockchain<\/a>. Having an NFT on the Flow or Tezos blockchains\u2014both of which Rarible supports, and which are often cheaper to mint on right now\u2014won\u2019t get you that hexagon. Twitter could change this in the future, and other platforms could choose to support the other blockchains, or possibly even create their own<\/a>, but once again this puts the power in the hands of centralized platforms to decide which chains are the \u201creal\u201d one.<\/p>\n Moreover, there\u2019s very little to prevent someone from making multiple NFTs of an image on the same<\/em> blockchain. Twitter user @NFTTheft<\/a> has documented<\/a> numerous<\/a> cases<\/a> of users on the OpenSea marketplace stealing artists\u2019 work, creating duplicate NFTs, and selling them right next to the original (or selling NFTs of artworks that the original artist never intended to make into an NFT).<\/p>\n Since the blockchain doesn\u2019t verify that a person minting an NFT has the rights to the asset they\u2019re minting, it\u2019s up to platforms to solve that problem (or not, as it were). \u201cVerifying ownership of an asset at the point at which it is minted into an NFT is more of a social problem than a technical one,\u201d White explained. \u201cIt's hard to do through code alone.\u201d<\/p>\n According to OpenSea\u2019s analysis of its own marketplace, over 80 percent of the NFTs<\/a> listed on the marketplace were plagiarized art, fake collections, or spam. The company attempted to limit this problem by imposing a cap on how many free listings users could create, but reversed the decision after pushback from users<\/a>. Meanwhile, DeviantArt has tried to help protect its artists with automated tools to scan for theft, which sent over 80,000 alerts of infringement to artists in five months<\/a>, but this tool obviously only works for DeviantArt users.<\/p>\n OpenSea has also started verifying accounts and collections<\/a> to try to combat this problem, but verification is solely up to OpenSea\u2019s discretion. The result is that any given NFT is no more authoritative proof of ownership of the digital item it\u2019s referencing than, say, a Twitter handle is. Every Twitter username may be unique, and if you claim yours first, then it might suggest<\/em> that you\u2019re the real person behind that username. But the 45th president of the United States still had \u201creal\u201d in his username because a parody account claimed @DonaldTrump first<\/a>. Similar to OpenSea, Twitter\u2019s manual verification process is the only authoritative way to know which account belongs to the real person. It\u2019s hardly a foolproof system.<\/p>\n To make matters more complicated, marketplaces are only one method of interacting with the blockchain, but anyone can do it<\/a>. So even if every major NFT marketplace put tools in place to block stolen artwork from being minted, and verified all its creators\u2014a very big and complicated task already\u2014there\u2019s no way to prevent someone from minting stolen art<\/a> on a blockchain like Ethereum with relative ease<\/a>.<\/p>\n In the best cases, NFTs can only ever be proof of ownership of themselves. Third-party systems still need to verify the external data\u2014artwork, digital items, etc.\u2014that NFTs refer to.<\/p>\n One of the more outlandish claims made of NFTs is that they\u2019ll help enable the true metaverse<\/a> by allowing users to bring digital items with them from one game or platform to another. And while this is technically<\/em> possible for very simple data like images (which are already pretty easy to move from one app to another), when it comes to complex things like video game items, it\u2019s almost impossible.<\/p>\n Game developer Rami Ismail<\/a> outlined some of these challenges in a long Twitter thread<\/a>, using the example of a simple six-sided die. Even a very simple 3D model involves complex data, including the shape and textures of the model itself, physics and animation info, and deceptively simple information like which way is up. Some game engines use Y as the vertical axis, while others use Z, which means importing a game from one engine to another could result in a model that\u2019s turned on its side<\/a>.<\/p>\n A human game developer or animator can modify the 3D model asset to make it work properly in a different game or engine, but it requires time and effort (and labor) to do. Having an NFT of an item from one game doesn\u2019t mean that another game automatically supports that model.<\/p>\n There\u2019s also the problem of intellectual property. Say, for example, you own Thunderfury, Blessed Blade of the Windseeker<\/a> in World of Warcraft<\/em>. The model, textures, and all related assets for that item are Blizzard\u2019s IP. Hypothetically, Blizzard could give players an NFT for the item, but without the company\u2019s permission, no other game could import it into their game. And even if Blizzard did give permission to another developer, they would have to work directly with that company to provide the assets and make sure everything works correctly.<\/p>\n These kinds of crossovers are already common<\/a> in games like Fortnite<\/em>, which has partnered with franchises including Marvel, Star Wars, and God of War<\/em> to bring characters across games. Developers have also given out promotional items to players who own certain games or even who have certain achievements<\/a> for years. But none of these partnerships require NFTs to accomplish, be marketable, or succeed.<\/p>\n Even if NFTs could be used to build a hypothetical external inventory system\u2014and assuming this is something developers or publishers would want in the first place\u2014this is a tiny part of the work necessary to bring items, characters, or outfits from one game world to another. The bulk of the work still depends on specific humans choosing to work with other specific humans, and no level of automation of future development is positioned to avoid that.<\/p>\n Another benefit proponents of NFTs assert is that they can help artists make money by selling NFTs of their own artwork, but demand for that NFT artwork may be illusory. For example, the jaw-dropping $69 million NFT sale from artist Beeple<\/a> grabbed headlines in March 2021. However, a few months before this sale, a project called Metapurse had purchased 20 other unrelated Beeple artworks, bundled them together, and in January 2021 sold 10 million fractionalized ownership tokens of the collection<\/a>, called B20 tokens. Ostensibly, the idea was to let people who couldn\u2019t afford to buy expensive artworks buy portions of the collection and join the speculation game.<\/p>\n The buyer for the $69 million Beeple in March\u2014angel investor Vignesh Sundaresan, also known as Metakovan<\/a>\u2014also owned 59 percent of the B20 tokens. B20 tokens were initially sold to the public on January 23 at 36 cents per token before hitting a high of $23.62\u2014a 6,461 percent increase\u2014just a couple of days before the two-week-long $69 million Beeple auction reached its end<\/a>. By the end of May, B20 was back down to trading for under a dollar. As of this writing, the token is trading for 40 cents.<\/p>\n Beeple himself also owned 2 percent of the B20 tokens. This means both the seller and<\/em> buyer of the most noteworthy NFT sale at the time had the same vested interest in driving up demand for the artist\u2019s work<\/a>, with the buyer standing to make more from the arrangement than the seller\u2014the artist himself.<\/p>\n More broadly, one analysis from the Alan Turing Institute<\/a>, which focused largely on data from OpenSea, found that 75 percent of NFTs that sell at all go for less than $15, while the majority never sell in the first place. Only 1 percent traded above $1,500. \u201cIt\u2019s very clear that very few people can really go over $1,500 in selling,\u201d says Mauro Martino, head of IBM\u2019s Visual AI Lab and one of the researchers on the analysis. \u201cIt's not a magic place where everybody becomes rich. It\u2019s really much the same reality in any other type of business.\u201d<\/p>\n The issue of wash trading\u2014where one person sells an item to their own sock puppet accounts to give the impression of high demand\u2014also makes it difficult to say how many of the high-value NFTs sold are legitimate. One analytics firm, CryptoSlam, found more than $8 billion<\/a> worth of wash trading on NFT marketplace LooksRare, which at the time had amassed only around $9.5 billion worth of trades in total<\/a>.<\/p>\n \u201cOur paper went viral on Twitter, etc., because many people connected the concentration that we observed\u2014that 90 percent of transactions are made by 10 percent of the wallets\u2014as a signature of wash trading,\u201d says Andrea Baronchelli, an associate professor at City University of London who also worked on the analysis for the Alan Turing Institute. \u201cCan we say this is true? Not for sure,\u201d Baronchelli continues. \u201cA market with a lot of wash trading wouldn't look necessarily different from this. So what we see is compatible with a lot of wash trading; we cannot prove anything.\u201d<\/p>\n The low yield for smaller sellers can also end up costing<\/em> artists money<\/a> once accounting for gas fees (money paid to the miners and validators that make up the Ethereum blockchain) and fees paid to marketplaces that list the NFTs. For buyers and sellers that have only traditional currency like US dollars to trade with\u2014which is to say, most people\u2014there\u2019s an extra step of converting money into cryptocurrency just to interact with the system. Currency exchanges, which facilitate those transactions, also take a cut. \u201cIt's not enough to cover the expense for the gas, for example,\u201d Martino says of the 75 percent of sales that don\u2019t exceed $15.<\/p>\n \u201cThe main people who are winning are the exchanges and the marketplaces,\u201d says Dan Olson, a video essayist and internet researcher who posted a feature-length deep dive into NFTs on YouTube called Line Goes Up<\/em><\/a>. \u201cThey're taking transaction fees, service fees, percent cut royalties. They're the people who are actually making money hand over fist.\u201d<\/p>\n In theory, marketplaces like OpenSea and Rarible offer \u201cfree\u201d NFT minting for artists, but this comes with some caveats. For starters, the NFT itself won\u2019t be created until someone buys it. The minting fee is also passed on to the buyer (which raises the buy-in price for any transaction), and since gas fees fluctuate over time<\/a>, even the cost of conducting the transaction can be hard to predict.<\/p>\n At the time of writing, the average<\/em> fee for an Ethereum transaction over a moving 30-day period<\/a> was hovering in the area of $14 to 15, but individual transactions can and do spike so starkly by the hour<\/a> that the same transaction can cost several times more just depending on the time of day or the day of week the transaction goes through.<\/p>\n This leaves most artists who choose to get involved in NFTs with a complicated choice: They can either front a large amount of cash to mint their work as NFTs, in the hopes that an audience will come along and buy enough to make the fees worth it, or they can pass those not-insignificant costs on to the buyer, pricing out portions of their potential customers\u2014and in the meantime they won\u2019t have a record of their NFTs on the blockchain at all.<\/p>\n The royalties function is another pain point. NFTs do not inherently come with royalties built in. Rather, royalties can<\/em> be added as a part of the \u201csmart contract<\/a>\u201d that governs the NFT. But these contracts are software like any other, and are just as susceptible to bugs, compatibility issues, and manipulation.<\/p>\n In general, NFTs don\u2019t know the difference between being sold between two people and being transferred from one wallet to another owned by the same person. Instead, marketplaces like OpenSea have to mediate a sale and inform the NFT that it\u2019s being sold. A marketplace can enforce royalties for NFTs minted and sold within its own platform, but trading via other platforms can cut out the royalty payments entirely<\/a>, whether by accident or by design. This makes it relatively easy to bypass royalties<\/a> altogether.<\/p>\n While there are proposed solutions to potentially standardize royalty payments<\/a> across marketplaces, ultimately they can be difficult if not impossible to enforce. When combined with the rampant fraud in the NFT space\u2014and the extra effort it takes artists to send takedowns and notices<\/a> to combat fraud of their work\u2014NFTs can create more headaches for artists than benefits.<\/p>\n Most of this article has focused on the issues with Ethereum, NFTs based on it, and the biggest marketplaces that use them. However, it\u2019s difficult to map the exact shape of how any specific NFT or crypto project can be misused or an outright scam, due to the highly specific details of how each project and blockchain works.<\/p>\n As an example, when the US Postal Service issued around 25,000 NFTs of its Day of the Dead\u2013inspired stamps<\/a>, it used a more obscure mobile app platform, not based on Ethereum, but rather using the Ethereum-compatible GoChain. The app simply sells \u201cgems\u201d for $1 apiece (which are designed to be a user-friendly interface for underlying OMI tokens<\/a>) that users can then use to buy NFTs within the app. Each of the Day of the Dead NFTs sold for 6 gems each.<\/p>\n The catch is that cashing out gems users earn from selling NFTs is \u201ccurrently in testing<\/a>,\u201d after over a year of being unavailable entirely. Users can buy the app\u2019s special currency to purchase NFTs, but after that they can be traded only with other users of the app for more gems. Despite users looking for ways to cash out their gems for at least a year<\/a>, the feature hasn\u2019t been added, though the platform has attracted brand deals including Marvel<\/a>, DC<\/a>, and Star Trek<\/a> in that time.<\/p>\n The overwhelmingly technical details in the NFT and crypto space mean that projects, and news coverage that explains them, are often motivated to simplify. To reduce the complexity down to terms and concepts that are easier to grasp, and often to describe wildly different projects as a monolith despite the fact that services like the one described above can operate very differently than, say, OpenSea, despite both \u201cselling NFTs.\u201d<\/p>\n This simplification can sometimes come at the expense of understanding the technology as it truly is. Which, right now, is riddled with fundamental security and privacy issues baked into the design of the most major systems, a confusing and misleading feature set, and lofty promises that range from moonshots to actively impossible.<\/p>\n