WTF are NFTs? Is it a scam?

On the 11th March 2021, an artist known as Beeple sold this digital artwork for $69 million (nice) as an NFT:


The buyer paid Ξ42,329 ether, which was worth $69M USD at the time. (Ether is the cryptocurrency of a blockchain platform called ethereum.)


What the hell did the buyer receive in exchange for this ridiculous amount of money, you wonder. A freaken jpeg?


Yes, he did. He received a high resolution file of the digital artwork itself. But he also received the means to launder his $69M illegally-acquired drug money… uh, just kidding. He actually received the ownership of the artwork itself, as recorded in a blockchain-based smart contract which contains metadata about the artwork. In most cases, the artwork isn’t even stored in the smart contract itself; instead the metadata provides a link to the artwork hosted on an external decentralised file system. If you’re confused, you won’t be by the end of this post.


This is what it looks like. Here is the metadata tied to the NFT for grumpy cat sold for $83k USD:

(Source because I apparently CBF getting my own screenshot)

And here is the nyan cat meme selling for Ξ300 (worth ~$600,000 USD at the time of sale, now worth nearly $1M):


And just to rouse some sort of indignation in you, or awe, here is an NFT of a red square listed for ~$900k:

Note: no one has purchased it so far. My sanity restored upon learning that.


Okay... you’re probably thinking... wtf?


How is this different from selling any other digital artwork and attaching a simple txt file about the artwork?


Why are NFTs selling for such insane prices?


Are people paying for the artwork’s intrinsic value or is it all speculative (i.e. people only buy the NFT because they believe in its resale value)?


Is this all a scammy mcscamscam?


I’ll try to answer all these questions.


If you already understand the basics of NFTs & blockchain, please skip ahead to the opinion parts of this post:

Why NFTs Are Not Scams

Why NFTs are Great for All Art, Not Just Digital

But Why NFTs Kind of Suck at the Same Time

How NFTs Could Revolutionise the Ownership of Non-Art Assets

What is an NFT?


NFT stands for Non-Fungible Token.


To understand what that is, let’s break this down into first principles:

  1. What is fungibility?

  2. What’s a “token”, exactly?

It’s important to understand these because I want to argue that the potential for NFTs expand far, far beyond the art world.


WHAT IS FUNGIBILITY?


To understand the idea of non-fungibility, you have to understand fungibility first. Let's take a look at money.

Here are the 5 main characteristics of money:

  1. Portable. Should be easy to carry around.

  2. Divisible. Can be easily divisible into equal units.

  3. Durable. Should be hard to destroy.

  4. Scarce. Should be rare enough that it remains valuable.

  5. Fungible. Its units can be interchangeable with each other.


The $5 bill in your jacket pocket is fungible. It can be interchanged with any other $5 bill. A $10 bill can be exchanged for any other $10 bill. Same with a $50 bill, $100 bill, etc.


Something is fungible when it can be exchanged with a unit of the same value.


Diamonds, on the other hand, are non-fungible because each diamond is unique and cannot be randomly exchanged with another diamond.


So, a simple way to see it:

fungible assets = interchangeable assets.

non-fungible assets = unique assets.


So then we can also infer:

  • Bitcoin is a fungible coin.

  • Ether is a fungible coin.

  • Litecoin is a fungible coin.

  • ADA is a fungible coin.

  • Etc, etc.

  • Cryptocurrencies are fungible coins.

Ok, so those are fungible coins. What about fungible tokens?


Wait, aren’t they the same thing?


Hmm, nope.

WHAT’S A TOKEN, EXACTLY?

In crypto, coins and tokens are not the same thing.


To explain why, I need to talk a little bit about blockchain. I promise I’ll be quick, and it’ll be simple and interesting anyway.


Blockchain is the technology behind cryptocurrency.

A blockchain is just a digital database of information.

When someone makes a transaction, a new “block” is created which is linked to previous blocks in a chronological "chain”.

Each cryptocurrency coin runs its own blockchain.

A coin is the native cryptocurrency of a particular blockchain.

A token is an asset built on top of another blockchain, that can behave like a currency.

Not every blockchain has the complex smart contract functionality that allows for other tokens to be built into it. For example, the Bitcoin blockchain does not. Only special blockchain platforms, like Ethereum, are capable of it. Other blockchains that allow for smart contracts include TRON, NEO, & Binance Smart Chain.

Maybe this will clear it up:



That’s why it’s important for you to understand the difference between coins and tokens - all coins are fungible, but not all tokens are fungible.

On the Ethereum blockchain, there are Fungible Tokens and Non-Fungible Tokens:


So, this is why NFTs are supposedly a big deal. By tokenising an artwork, you make it:

  • public

  • transparent

  • endurable

  • transferable

  • digitally-secured


WHY NFTs AREN'T SCAMS


This is why I don’t think it’s a scam. Well, most NFTs anyway.


When I paint a watercolour original, I have the choice to sell two things:

  1. The original artwork (only 1 available)

  2. Prints of the artwork (many can be produced)

Digital artists should be given a way to sell “original" pieces, the same way I as a watercolourist can sell my original physical artworks.


Digital artists have never had this opportunity before - to distinguish between the original artwork (what I call the “genesis work”) and subsequent reproductions.


And how could they? What’s the difference between genesis works and subsequent reproductions? They all have the exact same pixels?


u/cheese-pickle, prominent Redditor, weighs in on this:

Good point Mr Pickle.


But you have to remember that when you buy an NFT you are not just buying the artwork - you are buying ownership of the artwork. This ownership is a record on the ethereum blockchain that is publicly viewable for anyone. If you are curious to know what that looks like, here is a list of NFT transactions. Here is a specific NFT of a cryptokitty giving birth - don’t ask me what this means, I don’t want to know either.


If this sounds like a copout answer to Mr Pickle’s legit concerns, let me argue my case.


Compare a traditional artwork (the Mona Lisa) & an NFT (a beeple artwork).


The Mona Lisa is a painting by da Vinci valued at over $1B, although most would call it “invaluable”. An exact replica of the painting costs no more than $1K. The beeple NFT I talked about earlier sold for costs $69M, but a right-click save-as jpeg of the same artwork costs $0. So what makes the originals worth way, way more than replications?


The price of something and the value of something are separate things - though they are easy to conflate.


Value is the intrinsic worth of an asset.

Price is the extrinsic worth of an asset.


I will argue that the value of anything is derived from five things: utility, quality, scarcity, historicity, and equity. Only the lattermost 3 qualities relate to NFTs, so I’ll only talk about them. Actually, utility is also somewhat applicable, but I’ll talk about that later.


Scarcity

Scarcity is how rare an asset is. Scarcity amplifies the value of any asset.

  • The Mona Lisa is scarce because there is only one Mona Lisa in the entire world forever.

  • An NFT has scarcity programmed into it. Theoretically, there should be only 1 NFT of the artwork in existence, unless it is a series.

Historicity

Historicity is the historical quality of the asset.

  • The Mona Lisa is valuable because it was a product of its times, by an artist with his own unique life story, with unique brush stokes and environmental pressures.

  • An NFT is valuable because an artist decides to publicise their artwork as a minted NFT on their own terms, on the time/platform they decide on. Both have unique historical contexts

Equity

Equity is the ownership of an asset.

  • With the Mona Lisa, ownership of the artwork affords you control on how the artwork is displayed and maintained.

  • Only with NFTs can the ownership of digital assets be publicly available, cryptographically secured, and easily transferable.


But in the end, you can argue there is no such thing as objective value. Value is by definition subjective and relative to context. This itself is a whole other philosophical discussion - but here my argument stands that if the Mona Lisa is considered valuable by current social values, then so should most NFTs.


WHY NFTs CAN BE GREAT FOR ALL ARTISTS, NOT JUST DIGITAL ARTISTS


With NFTs, ownership is decentralised.

Think about that for a second. Because artworks can be tokenised on a decentralised database such as blockchain, you are essentially selling art peer-to-peer (P2P). This gets rid of parasitic third parties such as curators, critics, attendants. Fuck the age of galleries taking a 30% commission from selling other people’s art!


Is it still possible for third party intermediaries come in and take a cut? Absolutely. I haven’t looked into the NFT space too much but NFTs are being sold on platforms such as Rarible, Foundation that probably take some percentage.


Ok, now let's talk about why NFTs kinda suck, but not as much as contemporary art.


NFTs ARE NOT FOR ARTISTS. THEY ARE MOSTLY FOR ART CELEBRITIES.


NFTs are not that great for most artists.


NFTs are great for celebrities. NFTs are great for celebrities who happen to be artists.


Any celebrity can create a high-selling NFT.

Not all artists can create a high-selling NFT.


In the recent NFT boom we have seen celebrities monetise their reputation, with the price of an NFT directly proportionate with the celebrity status of the artist. Actually, they don’t even have to be artists. Jack Dorsey sold the first ever tweet as an NFT for Ξ1630. Chris Crocker sold his Leave Britney Alone video for Ξ18. Overly Attached Girlfriend? Ξ200. That’s ~$400k USD.


As Tyler Winklevoss says, “NFTs are monetised memes”.


There’s no real problem with that, but the benefits to everyday artists is overblown. It’s being mistakenly touted as an avenue for artists but it’s more a platform for viral content creators. That’s not a bad thing! Meme subjects should probably get some considerable compensation for having their face plastered all over the internet.


So, no, I don’t think NFTs for the most part are scams, but the value is kind of overblown at the same time. You want to know what I think are scams?

Most contemporary artworks are scams.

Selling a freaking banana duct taped to a wall for $120k USD is a scam.

Post modern philosophy being fused to art is a scam*.

The academisation of art is a scam**.


*I rant about this all in my post Why I Hate Most Contemporary Art. It's kind of a wanky piece that needs a desperate rewrite, but until then it's a badly written but honest opinion on why I think the modern art space is masturbatory and empty.


**If you are ever forced to create an artwork that needs to be justified by some bullshit dissertation about geo-political forces on the human condition or how capitalism is ruining everything, sorry your art degree sucks.


Ok, now I want to talk about the part of NFTs that no one is talking about, but is super exciting.


HOW NFTs COULD REVOLUTIONISE THE OWNERSHIP OF NON-ART ASSETS


With NFTs we have the potential to tokenise anything.


Remember, with NFTs you are not just buying an asset, you are buying the ownership of the asset. This is a special way of buying ownership because it is solidified as a public record on a blockchain. Why is this important? This record is virtually impossible to corrupt.


There are potential implications for this. At best, it could revolutionise the way we purchase major assets.

REAL ESTATE


One of the major possible asset is the tokenisation of real estate. At the core of buying a house, is a transaction between two parties - the buyer and the seller. However we hire middlemen to help us in this transaction, such as lawyers, real estate agents, banks, and brokers. What if we could remove the middlemen? What if we could replace all of that with a self-executing smart contract?


NFTs could digitise the entire process of buying a house. This can be done by tokenising and quantifying real estate records such as land titles and property registration.


While I haven’t seen any legit real estate transaction so far, here is a guy trying to sell his house as an NFT. Again, It is worth noting that as of today, 3rd May 2021, there are 0 bids on it.


OTHER


Here is another example of non-art NFTs - Couple exchanges NFT rings during Wedding Ceremony


NFTs could also have potential utility in identity management, collectibles, supply chain audits, in-game items.


As you can see by now, the big benefit of NFTs is that it is able to remove superfluous third party intermediaries by replacing them with immutable code and smart contracts. This is only possible with the distributed decentralised technology behind blockchain - I explain everything in my blog https://www.karililt.com/post/how-ethereum-solves-the-social-media-problem if you want to learn about it (scroll down to the heading "What is Blockchain?” I explain everything in depth, including wtf a smart contract is.) Only recently I have discovered non-blockchain distributed technologies such as holochain... which seems to have potential... but I do not know enough to say anything certain at this point.


Of course, we shall see how everything unfolds in the next few years. Technology grows exponentially, so barring an extreme Black Swan event, we shall expect to see crypto explode within the next 5 years, for better or worse :)))).

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