NFTs Explained – It’s not what you think
Over the last few months you’ve probably heard the term “NFT” a whole lot, from video games trying to add them to their games (and quickly removing them again), to celebrities using crude auto-generated apes as their social media profile pictures, and even “the great NFT heist” every news outlet rushed to report on. With literally a billion tech-bro dollars invested in NFTs, they must be the future right? Well to know that, you’ll need to know what an NFT is, and more importantly what it isn’t.
Of all the NFT news you are likely to have seen, this kind of “Bored Ape” image has garnered a whole load of headlines and attention. Celebrities like Eminem have been paying hundreds of thousands of dollars – $450,000 in Eminem’s case – for this somewhat crude, auto-generated ape image. Here’s the thing though, this image, this ‘artwork’, isn’t an NFT. NFT stands for “non fungible token”, and this image isn’t that. In essence, what he paid nearly half a million dollars for is this, the token ID. That’s the unique, the “non fungible” part of this, and this is basically your receipt to say you own… something.
Let’s take a step back and look at what is ‘fungible’ and not. Fungible means that something is replaceable by another thing of equal value, it’s not truly unique, it’s interchangeable. So the food in your fridge or the change in your pocket could be considered ‘fungible’ as if someone swapped them out for functionally identical but physically different items you wouldn’t mind. Ok someone randomly replacing all the food in your fridge would be pretty weird, but still. ‘Fungibility’ can change from person to person, as a piece of decorative jewellery for example may be more fungible to someone who rarely wears it, compared to someone’s family heirloom ring for example as the latter could not be replaced with something of equal value.
So, by definition an ‘non-fungible’ item is fully unique and cannot be replaced, there can only be one. The Mona Lisa, and most ‘priceless’ pieces of art would be considered ‘non-fungible’. So what is a ‘non-fungible token’? Well, that is a token, a piece of data, that gets stored on the Ethereum blockchain.
Wait wait wait, ethereum? Blockchain? What’s that all about? Ethereum is a crypto-currency, a digital currency that is one of the biggest and most popular, although the original cryptocurrency, Bitcoin, is still the most mainstream. Blockchain is pretty much what it says, it’s a long chain of blocks of data, where those blocks contain logs of transactions. Much like your bank does when you transfer money between your accounts or to other people, but on the blockchain those transactions are all public (and anonymous, at least for now). The benefit of them being public is that the chain becomes “immutable”, as in fixed, unchanging, a permanent record. Everyone has a copy of that chain so no one can go back and change a transaction without everyone else knowing and ignoring their version of the chain.
So, back to the NFT. What is it actually saving, what does an NFT actually look like? Well since everyone who wants to transact on the blockchain needs a copy of the whole chain before they can try and add to it, you can’t store all that much data in each transaction – you can’t store the actual image file or whatever as that’s much too big. Instead, you save the usual transaction details like the token ID, the sender and receiver’s addresses, the value and any fees paid, and a small block of data. For these “Bored Ape” images, that’s a little different to most, but for a more ‘conventional’ NFT like this Nyan Cat gif, it’s just a web link.
Well, I say web link, but it’s not just a link to Google Drive or Dropbox, it’s not a ‘conventional’ link at all. It uses “IPFS”, which genuinely stands for “InterPlanetary File System” (sigh). Much like torrenting, IPFS is a peer-to-peer file hosting and transfer protocol, where in theory there isn’t a centralised server hosting the one and only copy of the artwork, instead anyone can access and seed the content so even if the initial producer’s system goes offline, the file should be dispersed among countless other systems.
That has its downsides – much like torrenting if no one has a copy of the file active on the network, that link is dead. Sure it can be brought back online, but the token is effectively worthless without the artwork it links to so if it goes down permanently you have effectively lost your ‘investment’ in an instant. And that isn’t some hypothetical, major artist’s IPFS links have gone dark for millions of dollars worth of value disappearing for hours or days.
It’s also not always as simple as a link to the file itself – sometimes, like in the case of the Nyan Cat gif, it’s actually a link to a file which itself has another link to the video. While IPFS is also an “immutable” system, as in once a file is put on the network it cannot be updated or even deleted, in theory this could be a vector for scammers using redirects (especially to conventional web links) to swap out the artwork after purchasing. That’s called a rug pull, and it seems to be worryingly common. In fact, an artist purposefully rug pulled their entire collection after sale to prove a point – a statement piece if you will. While IPFS should help with that, there is no guarantee that the file you think you are purchasing will stay intact or even online.
There is also another important distinction I should make clear – when purchasing an NFT, you are not purchasing the artwork. You are purchasing the token ID, which may or may not grant you some level of rights over the connected works. In the case of the “Bored Ape Yacht Club”, their ‘off-chain’ (ie conventional) terms of sale agreement states that “you own the underlying Bored Ape, the Art, completely”, however then go on to grant you both personal and commercial use licenses meaning they still own the copyrights to the image and again that is an agreement that is made outside the actual transaction. That could be a PayPal payment they publish the transaction IDs for and would function identically.
But, for many works you don’t get that. Some expressly forbid commercial use, and some are more akin to you purchasing a song on iTunes – sure you own that copy, but that doesn’t mean you own the song, the rights to it or anything other than “legal” access to that copy. Of course, since the blockchain is public all the artworks links are all public knowledge, meaning I can access Eminem’s Bored Ape image (the original, no less) just the same as Shady himself. Same for the Nyan Cat gif.
If you take away just one thing from this video, I hope it’s this: when you buy an NFT, you aren’t buying the art. You are buying the token, the receipt to say you bought something. If the link to the artwork fails, you have no proof of what it is you own, and moreover because the sale agreement is ‘off-chain’, you can’t even guarantee the rights you are invariably licensing will be yours forever (if you even got any in the first place). Much like everything we see as valuable, that value essentially comes from what people are willing to pay for it. The Mona Lisa is theorised to be worth somewhere around $1 billion, but if everyone decided they didn’t care then that value is gone. Now with the Mona Lisa there are a whole boatload of reasons why it’s unlikely to become worthless overnight, with the history, the provenance, who the artist is and its general popularity, and in theory you have those things with NFTs. That’s what the token and blockchain are all about, proving exactly who owns them, how much they were sold for and who has owned them previously, but unlike a physical, one of a kind, 500 year old painting, where the non fungibility of the item itself garners it much of its value, digital, often procedurally generated works like the Board Ape collection don’t have much underwriting them beyond their current popularity. That’s the risk you are taking, at least as an “investor”.
There are also some pretty significant issues with the technology as a whole. The anonymity of the artists, sellers and buyers mean you get scams where an artist makes a ‘collection’ of works and pays their friends and family to purchase some of their pieces for ever increasing prices then finally convinces a legitimate buyer to part ways with thousands on the premise the value of the works will keep going up only for the schmuck to be left holding the bag with nothing when no one else wants the nondescript artworks.
There is also the problem of copyright law, or the fact most people seem to think that it doesn’t apply to them here. You don’t have to own the rights to the content you are minting, and what’s worse is once it’s on the IPFS network it can’t be removed. Apparently if you have your lawyer contact their legal department they will block nodes from rebroadcasting the file, but they can’t delete every copy on the network. That doesn’t mean the minter nor owners are free from legal troubles.
The final thing I’ll mention is actually much more serious, which is that you don’t have to actually purchase an NFT to become the owner of one. Anyone with your wallet address could transfer one to you without you doing anything. Sounds great, right? Well, if they happen to know your address, phone number or other difficult-to-change contact information, they can send you an NFT which includes that information and now that is tied, irreversibly, to your wallet, publicly stored on the blockchain for everyone to see. That’s called “doxxing” and it gets people swatted and killed.
Now, can these problems be solved? Well, possibly, but not with the current system. To solve the doxxing you’d likely need to make the tokens or chain at least partially mutable, editable, which defeats the purpose of the whole technology, and to fix the scamming you’d likely need to remove the anonymity which again is one of the key benefits of cryptocurrency. Even if this is the start of something we will all be using in 10 years, this feels more like an “open alpha” complete with all the early adopter bugs, many that don’t appear to be fixable within the current system. You ‘investing’ in NFTs now isn’t as much ‘getting in on the ground floor’ as much as it’s betting on laserdisc CDs hoping not only that the content’s value will grow, but also the underlying technology will take off and become mainstream.
To make it clear, I do hold some cryptocurrency, and I’ve been interested in it since early 2014 (I used to mine in a pool on my HD6870, cool kid I know). I see promise in the tech, but NFTs ain’t it. You aren’t buying the art, you aren’t even directly buying the rights or ownership – that has to be agreed outside of the transaction – and it’s for publicly available digital goods. You can go to a site like this and download the actual, original file for Eminem’s ape. If the file hosting was tied, cryptographically, to the artwork, maybe that could be useful, but then how is that any different to just buying undeniably better art on the countless other marketplaces on the internet? Oh right, bragging rights.
But why is there all this hype around these? From an investor perspective, if you missed out on the dotcom bubble, the rise of ‘big tech’, the original crypto boom, you’ve basically been primed to think that since this is being sold as “the future” it’s actually a massive opportunity you need to get in on this ASAP. With enough investor-bucks behind it, it starts to seem convincing to regular folks – and to influencers like celebrities – then it kinda snowballs. Seeing stories like “Eminem paid $450,000 for a picture of an ape” on every media outlet, implies they are inherently worth a whole lot, and the cycle continues.
I should also make it clear I am in no way bashing artists getting in on the goldrush, or people who are buying the art because they genuinely like it – think of this as more of a warning to people who are ‘investing’ in NFTs. This is quite possibly the most risky investment you can make right now as it sure looks like a bubble – but as long as you understand that, I sure as hell won’t stop you. Best of luck!
