NFTs have been the topic of conversation on every playground and at every coffee machine for the past year. At least I assume so, because even on the World Wide Web you hardly talk about anything else. But what are these NFTs, what do they have to do with cryptocurrencies and blockchain, and why are people willing to give up their annual salary or even a kidney for it?
Are NFTs out of 2021 again?
If Google Trends is to be trusted, NFTs are more popular than ever. Which doesn’t matter though, because the principle of NFTs only appeared about a year ago and they haven’t really hit the mainstream yet.
But what exactly are NFTs?
The acronym NFT stands for Non finept TOkay, i.e. ‘non-exchangeable’ or ‘non-replaceable unit of value’. The word “unit of value” can be a bit confusing here because NFTs are actually first and foremost evidence. Proof of possession of something. And this Some are digital “objects”.
Objects in quotes, because the special thing about NFTs is the ability to clearly assign any digital “objects” to an owner for the first time. But to the details a little later.
All NFTs are compliant not interchangeable (eng. ‘not replaceable’). Unlike cryptocurrencies like BitCoin which are quite fungible ie. interchangeable. Therefore, a BitCoin is worth as much as any other BitCoin, whereas NFTs do not have a fixed value, or the value of each NFT derives from the amount that any person is willing to pay.
And what exactly can you do with it now?
The core idea behind NFTs is to use the blockchain technology (if you want to learn more about blockchain and cryptocurrencies, you should here look) to clearly prove possession of digital “objects”, similar to possession of cryptocurrencies. To do this, the blockchain determines whose hands the object previously passed. This can be traced back to the creator, clearly identifying the original without a chance of counterfeiting or fraud.
What is the technology used for?
Here we encounter the first metaphorical stone on the road to a truly promising technology, because the market for NFTs currently looks anything but revolutionary. The majority of use is in the digital art trade. Because the clear allocation to a single owner is what makes trading NFTs so attractive. Similar to the trade in physical art, it is the uniqueness that creates desire and thus irrationally high prices. With the difference that in the case of NFTs you are not buying an oil painting on canvas, but pixels on a screen.
Who makes sure I don’t just take a picture of an NFT and use it for myself?
No one, because it’s your right. Owning an NFT does not come with copyright or anything like that. You can download as many images as you want from your favorite NFTs and use them as wallpaper or anything else. What you must not do is sell these copies, because they do not belong to you. Additionally, as we have already established, the original is uniquely assignable due to the blockchain and differs from each copy in this regard.
But NFTs don’t have to be just pictures. There are no limits to the imagination. One of the first known sales of an NFT is the first ever Twitter post, which was auctioned off by Twitter CEO Jack Dorsey for nearly $3 million. However, this also means that Jack Dorsey has lost all rights and ownership of this explicit post.
Another example is the NBA, which captures iconic moments in the American basketball league in the form of small video clips with their trading card game Topshot. Fans who want to collect these moments, or simply see the monetary value in them, are willing to pay up to $200,000 for a single clip.
In general, it can be said that the NFT market is anything but safe and predictable. The appalling sums currently being paid for digital art cannot be explained from a rational point of view. The reason for the prices is often not the art itself, but rather an investment in technology. Many buyers of NFTs, inspired by the explosive rise of the Internet, which has fundamentally changed our lives today, see the endless potential of technology and want to be first.
Is all that glitters really gold?
Not at all, because where there is a lot of money to be made, there are often many scammers looking for the big money. And fraud is easier than you think in a new, unregulated market like NFTs. In a video, YouTuber and NFT enthusiast Brett Malinowski describes one of the simplest and most common forms of NFT cheating. The so called carpet cover or roughly translated as ‘pulling the rug out from under your feet’. For those of you who find the video too boring, here’s the short version:
1. First, you buy a relatively expensive NFT and use it as a profile picture on the social media accounts that you created specifically for it. So people think you know about NFTs because you obviously own a very expensive one.
2. You advertise a big NFT project which is THE NEXT BIG THING to generate interest and make people believe that they can only profit from the investment.
3. What you end up selling is as inspired as possible by what is currently in the NFT trend. If you are not talented enough to create it, hire an amateur artist and promise them a small portion of the profits.
4. You make big promises about the future of your project and long-term support from your side. This is usually a prerequisite for the relevance and longevity of an NFT.
5. On the so-called launch day, So the day your project is open to the public and available for purchase, you hope that your marketing efforts have been enough and your project will turn a big profit.
6. You now delete all your traces on social media so that you cannot be held responsible for the consequences.
But cheating isn’t the only battle NFTs have to contend with. Because even more irrational than the prices of some NFTs is the energy required to keep the store running. As we have already clarified, the technology behind NFTs is strongly connected to blockchain. To be precise, it is based on the Ethereum blockchain. Ethereum is a cryptocurrency, like BitCoin, and also the currency used for NFT trading. To keep the Ethereum blockchain and the systems connected to it running, small computing operations are performed by computers in huge data centers, every day, all day long. This costs an incredible amount of energy, because even if the crypto market takes a break (which it never does), these systems continue to run. On the Ethereum site itself, the organization compares the energy consumption per transaction between Ethereum and BitCoin. This should show that Ethereum does not even have a tenth of the energy consumption of BitCoin. At the latest a few lines later it turns out that this is not the place to be covered with glory. Here it becomes clear that almost 200,000 Visa transactions could have been completed for the price of one Ethereum transaction. To be fair, the data dates back to May of last year, and Ethereum is already working on a more environmentally friendly solution.
In my eyes, NFTs are undoubtedly a milestone in technology and have the potential to fundamentally change our lives. What other possible applications are hidden in it is beyond my imagination and of course many others’ as well. Nevertheless, I imagine that soon we will be able to prove ownership of a house or a car using NFTs, and in the digital world we will find more than enough applications in the metaverses that Meta (formerly Facebook) and now Microsoft is working on.
But it is also clear that the technology is currently in its infancy and that there is still a lot of work to be done.
Cover photo: Andrey Metelev
Featured Image: Taylor Vick