The hunt for the biggest idiot

Optimists see in them a new democratic value chain for artists in need. At the moment, however, all indications are that the NFTs are a fatal design flaw that cannot work.

By Marko Kovic

Damien Hirst’s work “The Currency” includes 10,000 images. If you buy an NFT for one of these dotted disposables, you can swap it for the original – probably a better idea than betting on the value of the NFT. Photo: Mundissima, Alamy, © 2022 ProLitteris, Zurich

In March, the popular online game “Axie Infinity”, in which over ten million players breed cute creatures and sell them to other players, was spectacularly hacked: the unknown perpetrators were able to plunder over 600 million US dollars.

The theft made headlines not only because of the large loot. “Axie Infinity” is a flagship of the brave new cryptocurrency world: The creatures that players breed are so-called NFTs, “Non-Fungible Tokens”, stored on a blockchain database paid for with cryptocurrencies.

A good idea

NFTs are non-replaceable data units. They were invented in 2014 to help artists find an income from their digital work. For example, if a photographer publishes a digital photo, it can be copied and shared indefinitely; if she does not actively sue for her copyright, the photographer loses. But when she makes an NFT of her image, she has created something unique and non-copyable: a digital certificate that documents the ownership of the image. Promised: The image can still be copied indefinitely, but the NFT of the image can only be purchased and owned by one person.

Blockchain, cryptocurrencies, NFTs: These are the key ingredients of the “Web3” vision. According to its proponents, Web3 should become the next generation of the Internet with decentralization, data protection and digital property rights in the foreground. Away from centralized data and surveillance oligopolies like Facebook or Google, away from commercial banks or government institutions and towards a digital playground where we all meet as equals and live our digital freedom. So far the good idea.

Blockchain technology, a decentralized database that can be seen by everyone, and cryptocurrencies like bitcoin or ether as application examples for this technology have tended to lead a niche existence for the last ten years or so. The spectacular price fluctuations on bitcoin were repeatedly the subject of media reports, but the blockchain world was primarily a subculture of tech insiders and die-hard “crypto bros”. With the hype surrounding NFTs, that changed abruptly.

Digital Gucci sneakers

The big hype about NFTs erupted in 2021, when Mike Winkelmann, known by his stage name Beeple, was able to sell the NFT of a digital collage for over $ 69 million. Since then, various platforms for buying and selling NFTs have emerged, and countless individuals and companies are buying and selling NFTs. Whether it’s almost identical prey cards from bored monkeys, digital Gucci sneakers, or doodles from a motivational speaker who became a millionaire by teaching others to become millionaires, everyone wants a piece of the NFT cake. According to estimates, the global NFT market will pass the $ 40 billion mark by 2021.

In this fast-growing NFT ecosystem, the “Axie Infinity” hack is only top of the scale of criminal activity. From ‘rug pulls’, where anonymous providers of NFTs fail with buyer money, to’ airdrop ‘scams, where allegedly free NFTs are distributed to give hackers control over digital Acquiring wallets: Just as diverse as the countless NFTs’ are produced day in and day out are as creative as NFT scams.

In the early stages of a largely unregulated digital gold rush, lies and deception can be inevitable. NFT optimists are also convinced that things will soon calm down. Once calm returns to the NFT market, it is hoped that what NFTs could theoretically achieve – a decentralized value chain that economically liberates and strengthens us as individuals – will slowly become a reality. But there is a big catch: Although NFTs function as they should, they remain a technical and, above all, philosophical misconception.

Even the technical basis for NFTs is anything but forward-looking. Transactions on blockchain databases are slow and expensive – the more data stored, the more complex the processing. This is why many NFTs do not directly contain the digital works they refer to, but only link to them. This leads to the problem of “broken link”: NFTs may be relatively permanent entries in blockchain databases, but what they point to is on some sites that may disappear tomorrow.

And even though technology is playing along, NFTs are basically not living up to their promise. In fact, what is written in an NFT is completely and categorically non-binding – an NFT is by no means a deed. For example, I could create an NFT that says I own Beeple’s collage, which he sold for $ 69 million. But that, of course, does not make me the owner of the digital painting – just as little as the buyer of Beeple’s “official” NFT owns it. This problem is unsolvable because it is deeply rooted in the logic of NFTs. This is precisely the decentralized nature of NFTs, ie. the fact that there are no generally accepted authorities to document and enforce ownership claims that make NFTs meaningless pseudo-deeds: each NFT is equally non-binding.

The almost perfect crime

The decentralized nature of NFTs creates another insoluble problem: There is no protection against fraud and abuse. If someone breaks into my apartment and steals a painting, there are regulated ways to limit the damage: I can contact the police, maybe I have taken out insurance on the painting in advance. Such mechanisms do not exist in the NFT world. In case of scams or technical issues – NFTs are computer code and computer code are prone to failure – there is no support hotline and no means of correction. Once the damage is done, it stays forever: Blockchain is a digital one-way street. This is the big misleading incentive that leads to a lot of crime in the NFT system: Anyone who manages to enrich themselves with cunning, fraud and digital attacks will almost certainly get away with it. Perfect crimes do not exist, but NFT scams come close.

So NFTs are not what they claim to be. And yet billions are pouring into the NFT market. In the end, despite all the problems, are NFTs at least a golden edge in the digital horizon that opens up a new and sustainable source of income for struggling artists?

no Anil Dash, one of the co-inventors of NFTs, complains that NFTs have not led to economic democratization and equality, but on the contrary have led to yet another speculative bubble for the privileged. The only reason individuals and professional investors spend tons of money on meaningless NFTs is the bet in the NFT bubble that there will be people willing to spend even more money on NFTs in the future. NFTs are thus a textbook example of the economic “Greater Fool” theory: NFTs are completely overrated as an investment object and have no use whatsoever – but in the future, hopefully, there will be a bigger fool who will sell NFT ‘is for evt. more money will buy.

The bubble grows and grows

NFTs not only do not work. They do the opposite of what they promise. NFTs did not herald an era of decentralized democratization and economic equality, but simply opened a new chapter in the history of financial capitalism. More and more money is being pumped into NFTs, but these investments do nothing in the real world – no factories, no cars, no houses being built. NFTs are a digital nothing that has mutated into an investment bubble. The bottom line is that the benefit of NFTs is even negative. To keep all the blockchain databases running, huge amounts of energy are required. NFTs may just be digital hot air, but to generate the hot air, many power-hungry computers work 24/7.

The dream of a better NFT-based internet and a more equal, economically inclusive society thanks to NFTs has little in common with the reality of NFTs. And yet the NFT fever continues unabated. The bubble grows and grows, and as long as new money keeps coming in, the illusion is still that he will always be found, the even bigger sucker that makes me rich.

And what happened to the online game “Axie Infinity”? A few days after the hack, investors poured $ 150 million into tech company Sky Mavis, the maker of the game. Analogous to the entire NFT ecosystem and in logic loosely based on the so-called Ponzi scheme: as long as money keeps flowing in, the collective illusion remains alive.

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