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The case against NFTs

I’d just written my two pieces last week about non fungible tokens (NFTs) …

… when I spotted a fellow blogger and colleague who I respect, Sebastien Meunier, had written about them too. In Sebastien’s case, he writes that they’re a storm in a teacup and not worth the bits and bytes that created them. Here’s why …

Debunking NFT myths

NFTs, cryptographic tokens which are unique and not mutually interchangeable, are being hyped right now on social media and in traditional media. I have read many dumb takes promoting crypto since 2009, but the NFT ones are the dumbest. And no, this is not because NFTs “consume a rain forest each time you mint one”. This argument is twice irrelevant as public blockchains consume the exactly right amount of energy for the security and economic benefits they provide, and NFTs would still be overhyped even if they needed zero energy to produce.

Let me state that it’s perfectly OK for creators to sell their work on their website, or on a third party platform. It’s also OK for fans to spend their money the way they want. My only issue with NFTs is that they are based on a lie. If NFT promoters weren’t lying about their product, I wouldn’t care.

NFTs aren’t really scarce

Not only the digital creation that NFTs represent can be copied at will (an exact copy bit for bit), but NFTs themselves are not scarce:

  • You only have the word of the creator and issuer that only 100 tokens will be produced. Nothing prevents them from minting some more in the future.
  • NFTs are bound to one smart contract on one platform. Similar contracts could be deployed on the same or other systems.
  • Public blockchains are regularly forked, meaning that the tokens will inevitably be duplicated.

NFTs aren’t linked with the content they aim to represent

An NFT is actually a serial number generated by a software. The same software records that “this token ID” belongs to “this address”. But there is no way to verify that the token ID is actually linked with the digital creation (JPG, MP4…): the token ID doesn’t embed a hash of the digital creation, nor does the digital creation embed a digital signature that could be verified. You only have the word of the issuer that they are linked. At best, NFTs are some kinds of “blank digital certificates” where the blank can only be filled and attested by the third party issuer. If NFTs were digitally signed by the creator, at least they would be the digital equivalent of autographs*. As an illustration, see how this artist was able to change his creations entirely with no impact on the corresponding tokens.

*Update: at least one platform aims to provide autographed digital content (tweets), even though it’s not clear what the digital signature is exactly and how to verify it independently before buying the NFT. It seems that the “signature” is the assurance that to sell a tweet you must use your twitter credentials to connect to the cent/valuables website, meaning that the owner of the twitter account actually launched the selling process. It looks weak to me, as I expected an actual digital signature to be embedded in the token that could be verified using a public key. If this weak link is confirmed, the cent/valuables token would be closer to an “unwashed worn sweatshirt” meaning that they is some kind of personal “link” between the creator and the token (but it’s not a digital signature).

NFTs don’t protect intellectual property

I am not a lawyer, so I let you check this thread by Nelson Rosario. That piece by Andrés Guadamuz makes great sense as well, except the embedded tweet at the end of the article.

NFTs aren’t transparent

I looked at the below original creation by Grimes, that I downloaded with a right-click and “save as”:

It was sold on this website, where you can find the token ID, and the alleged history of transactions. The website says it was bought for $7,500, then re-sold one time. I challenge you to find the corresponding transactions in the Ethereum blockchain. They should represent an amount of 4 to 5 ETH depending on the price at that time. This is the corresponding token to start your quest. Good luck!

NFTs aren’t decentralized, they’d work the same with an SQL database on a website

Theoretically, individuals could mint tokens themselves, and use “sufficiently” decentralized auction and discovery services through trusted open source clients. This is not the current situation however in the case of Nifty and other platforms:

  • The minting process (“primary market”) is entirely managed by a third party. That third party acts as an agent, taking a cut in the process. That third party could be faking it, make mistakes, or be hacked. This denies the benefits of using a public blockchain in the first place.
  • The reselling process (“secondary market”) is also managed by the same third party. In effect, you can’t do peer-to-peer trading of unique objects. You need a centralized platform where the discovery process takes place between buyers and sellers. They have to register on the third party website to make buying and selling offers and communicate together.
  • The public blockchain is merely used as a recording system. Those serial numbers, transactions and users could be recorded more efficiently in an SQL database. You can be sure that the websites of the NFT issuers store their data in an SQL format anyway, so why duplicating the data and the effort?

Finally, NFT platforms have forms that allow people to report a piece of content and have it taken down. If an NFT sale can be taken down, how is it different from a sale on a regular website?

Bottom line

At best NFTs could represent digital autographs or digital unwashed worn sweatshirts. Currently, most of them are simply “blank digital claims” that have no legal value and no link with the actual creation but the word of the third party issuer. The use of public blockchains doesn’t bring anything more than a regular database coupled with a PKI, accessible through APIs. If the content is not cryptographically signed by the creator, then it should be sold on the creators’ websites. They can organize auctions, set up a secondary market, and offer actual exclusiveness. Typically, a photographer shows low quality pictures or watermarked pictures on his website, and provides the clean high resolution pictures only when the buyer paid for them.

NFTs aren’t trustless. It comes down to the fact that nothing that isn’t native to a public blockchain can be managed in a trustless manner. As soon as you re-introduce agents (creator, issuer, market place) and external assets somewhere in the process, then you fall back to traditional trust mechanisms. Again, it’s perfectly OK for creators to sell their creations on a third party website, and it’s people’s right to buy artefacts for emotional reasons. Just don’t be fooled by the “revolution” narrative spread by unscrupulous NFT promoters that are in it for the money. It’s OK to use trusted third parties – no need to lie.

 

About Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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