The Unfortunate Truth about NFTs…
Due to this almost comically-obvious scam continuing to persist and, somehow, gaining mainstream traction, I felt compelled to explain the rise of NFTs in layman’s terms.
A man finds a rock on the ground. There is no apparent worth to it. In fact, it is so mundane in appearance, that it doesn’t even look particularly pleasant in its natural habitat. Despite this, he begins to cook up a plan to make bags of money with something that no one currently believes to have any worth. Not a single person would look at this rock and consider it of any importance, so he needs to find a way to drive up its value. “How can I sell rocks to people for profit?” he ponders to himself. “I also don’t particularly feel like collecting a bunch of unique rocks to sell to people. That sounds like work.”
He now has two problems to overcome in order to make money easily and with minimal effort:
1) Convincing people the rock has worth.
2) Reducing the work needed to produce the product he is selling.
The man then has a eureka moment. He will build his business on the gullibility of the masses. He first spray-paints the rock gold. Then, he approaches a rickety, decentralised digital transfer backend known for being a lovely grey area when it comes to legality, accountability, and other typical centralised protections. If it’s good enough for money laundering, black market activity, and human trafficking, it’s certainly good enough for his business scheme.
It has a nasty habit of killing the environment through exorbitant and wasteful energy usage, but he doesn’t care. He’ll link people to an article about some companies that plant a tree once a week to try and compensate for it. If they buy into his business idea, they’ll buy that, too.
Why did he decide to use this shady decentralised backend? It’s good at keeping receipts. It attempts to maintain a legitimate record, at the very least, even if the dealings behind those transactions are fraudulent. Wait, if he’s selling rocks, why does he need this overly complicated backend?
He’s clever, you see. He doesn’t intend to actually sell the rock. He intends to sell digital ownership of a picture of the rock. He still maintains all of the intellectual property rights to the rock, as well as the rock itself. But he needs willing victims, and no other beings are more willing than those already participating in crypto trading.
Now, he needs to convince people of the product’s worth. He convinces some peers to help him with a big show. He will put the picture of the golden rock up for sale for a ridiculous sum of money. Everyone who sees the listing will roll their eyes and think he’s mad. Then, either another account owned by the man, or an accomplice, suddenly buys the picture of the rock for the agreed sum. Digital ownership is transferred over to the buyer, the money is transferred to the man’s wallet. This appears like a perfectly legitimate transaction on the backend system.
However, it isn’t big enough yet. This will surely grab a bit of attention, but it isn’t mainstream news-worthy. The accomplice then lists the same digital rock token online for an even larger sum. A truly gobsmacking amount of money. Another accomplice, or alternative account, purchases this token. They now own the digital receipt of the spray-painted rock. Money is exchanged.
Now, this occurrence is catching the attention of the masses. A news station potentially circulates the story. Suddenly, the whole thing starts to appear legitimate. “That’s a lot of money!” exclaims one of the viewers. “How can I make money like that? How can I get involved?”
“It’s simple!” yells the original creator to his new following. “Digital ownership is the future! To kick off this revolution, I will be releasing a series of highly-valuable rock pictures. We’ll be a family of investors who pioneered this technology! We’ll be the Painted Rock Yacht Club!” A crowd of slightly confused but enthusiastic buyers cheer in harmony. At last, an answer to their financial concerns! They can be investors in something meaningful! “This technology and the surrounding business practises make complete sense, right?” asks a curious person in the crowd.
“Absolutely, you questioning cretin, here’s some reading!” yells the creator again, linking to the articles he bookmarked. It all seems legit. Money was definitely exchanged for the picture. It appears to have worth. The man rushes into his garage. He needs more pictures ASAP!
He takes the exact same rock, which he still owns, and spray paints it purple. He takes a picture, mints it as a digital token, and slaps it online for sale. He uses the same rock again, draws a moustache on it, and slaps it online. He repeats the process any number of times, ensuring that each one looks unique enough. He hasn’t yet thought about releasing the exact same design with a unique serial number stamped on it to save time, but someone will, eventually.
Next, either more accomplices, or gullible onlookers, begin to show interest and snatch up these jpegs for ludicrous sums of money. One man withdraws his life savings and purchases a particularly pricey one. He receives backlash from everyone around him.
“Don’t you see?!?!” he yells, “This is the future! This is art! I now own a token that says I am the owner of the digital representation of this particular configuration of a rock. It’s simple economics — I buy this token for $300,000, then I sell it a year from now for a million bucks! That’s how this works, right?”
At this point, people have spent so much money on these rock jpegs that they begin to froth at the mouth and do their utmost to convince others of the legitimacy of this business to justify their investment. They realise that if the market doesn’t grow, then their purchases are worthless, so they do whatever it takes to get others to join in so they can keep selling these jpegs to hungry newcomers.
Once the story gets out, other companies and individuals begin to release these digital tokens for large sums of money. More gullible buyers, or accomplices seeking to drive up value, show up to acquire them. Suddenly, this entire business built around conning people into buying a digital token of an item begins to gain legitimacy, built on the back of what is quickly becoming the worst pyramid scheme of the digital age.
How does the market survive? By convincing someone else to buy a digital token, passing on the incredibly-expensive curse of owning a meaningless jpeg on a decentralised database that is contributing to environmental catastrophe.
Those who started the scheme make their money and pull out, leaving the remaining suckers to keep scamming newcomers or one another to keep the market alive. Every week, there’s a news article where one person made a million dollars on a sale, which drives more starry-eyed unfortunates into the crypto mill.
The reality of the situation? A lot of people are going to be left with ludicrously expensive digital tokens that won’t be worth much once people figure out the scheme. They might have spent their life savings, or they might have gone into debt to acquire it, thinking they would one day make a profit. Most people who get involved in these schemes won’t make their money back.
That is how this business thrives, built off of misinformation and a gullible consumer base with a fear of missing out. They can also easily be scammed, and there will be no recourse because there’s no real governing authority of the technical backend.
That’s exactly what a Ponzi scheme is. Investors will make an absolute killing off of a gullible consumer base, and they don’t even have to deal with legal repercussions due to the wild west nature of the blockchain. Any company taking part in this, especially the media who post “success stories” to try and promote this drivel, are contributing to a worldwide grift. Misinformation and the desperation to make a quick buck can get the better of anyone. I just hope future prospective buyers will think twice before investing and know exactly what they are contributing to.
In case it hasn’t become clear, NFTs are intrinsically worthless. Before you buy one, remember that they are just digital tokens of pictures of spray painted rocks. You don’t own the rock. You don’t even own the picture. It isn’t even particularly unique and it is easily reproducible. You just own a silly token on the blockchain.
If you compare it with traditional capitalism, at least when you purchase something in the free market, you actually get something of value. It may be the most gimmicky of gadgets, a momentary delight, or just something that takes up space. But at least you enjoy it for a moment or two, and it often has some kind of use. Even the meaningless rock described above has more uses than its digital token. There is no situation where an NFT is useful, even as a concept.
Most, if not all, of the use cases for NFTs, revolving around digital ownership, can be accomplished using traditional centralised databases. And it would be safer and more efficient as a result. “But the government and corporations!! It should be controlled by the people!” shouts someone in the corner. A lot of people don’t particularly like their local government and distrust platform holders, but you’ll appreciate having proper support channels when someone finds a sneaky workaround to steal your crypto savings and you discover the blockchain isn’t as secure as you once thought.
You’ll need to pay taxes on your digital goods anyway, according to recent legislation, but the government won’t protect your digital interests in return. It’s kind of a lose-lose situation for having any money on the blockchain, realistically. “But DAOs!” yells someone else. A DAO, or decentralised autonomous organisation, is supposed to offer an objective set of rules for governing the blockchain without needing to trust a third party.
Naturally, it has a plethora of security and other concerns (including how tricky, or impossible, it is to hotfix a tiny bug or security flaw), but most notably has issues with the need for an informed but unbiased entity when it comes to disputes over theft, IP abuse, and so on.
One might think there is a way to construct an autonomous ruleset in the form of a DAO to make such decisions on its own, but it’s difficult to make a case for computers to handle case-by-case legal disputes when they can’t even correctly identify a picture of a person of colour as a human 100% of the time. But let’s not diverge into the topic of algorithm bias and prejudiced programming, even though that is a fascinating and dreadful topic in its own right.
As an example, imagine an artist has distributed their art online for their fans to view and potentially purchase printouts of. Someone else takes this image, mints it without the actual artist’s consent or knowledge, and places it on the blockchain for sale as an NFT. Because the artist wasn’t the first to mint the NFT, they aren’t the original author according to the blockchain, due to this being the first reference it has seen. What can the artist do? Contact whichever third-party marketplace the NFT was hosted on and try to get them to take it down. Does this work?
According to the vast majority of artists who have been the victims of NFT art theft, the issue is very rarely resolved. The blockchain’s bookkeeping can’t help them unless they mint an NFT first, which many artists don’t want to do due to the environmental impact and dubious nature of NFTs. Artists are trapped in a battle of morality, so the answer isn’t as simple as minting their work as NFTs before showcasing it online.
This actively discourages ethical artists from sharing their work, which harms the larger creative community immeasurably. However, even if they were to fall in line and mint NFTs, it doesn’t solve the wider issue of IP theft. Someone else can still plagiarise or use another artist’s work in a manner that is just unique enough to get past automated detection.
As a result of the rampant IP theft issues, including someone illegally producing artwork of someone else’s IP and minting it as their own NFT, this introduces the need to trust a third party at some point to make a human decision over whose story to believe. This, quite clearly, causes the entire purpose of the blockchain to break down.
If it doesn’t solve all of the problems it is supposed to, while simultaneously being less efficient and far more wasteful than centralised solutions, then what exactly is it good for? Scams. There are people at the top who want to take your money. It’s all one gigantic case of sunk cost fallacy. Too much money has been spent by investors and they want a return on that investment.
So, if the blockchain breaks down into needing to trust human-operated entities or, worse, a problematic DAO, best of luck on your journey to reclaim your digital goods. Such entities will certainly be there to take a cut of transactions and pretend like they’re running the show, and nothing more. The blockchain is an uncontrollable and ungovernable beehive of scams and theft at this point, but you’ll find that out soon enough.
Hopefully you have realised that the blockchain/web3 is slowly turning into a mirror version of the same chain of inequality present in the real world that spawned it in the first place, but is somehow even more problematic and less fair. There are always rulers and peasants, and it may be even more difficult to rise up in the digital pyramid than the one present in the real world.
The issues described in this article only scratch the surface of all that hinders the crypto space from becoming what it intends to be. Some of the ideas are interesting, to varying degrees, but blockchain tech fundamentally cannot fully support them. Ask any software engineer worth their salt why this is the case and they’ll roll their eyes and list the many reasons around interoperability, scalability, sustainability, and so on, likely for the hundredth time that week.
The technical infrastructure and logistics need to be rethought and rebuilt from the ground up, hopefully using far less environmentally harmful solutions, rather than tacking on flimsy fixes to new problems that continue to appear. It feels a lot like all of the learnings from web1 have been tossed out the window, only for the same mistakes to be repeated in a far more damaging and less exciting way.
Worst of all, if web3 succeeds, the eventual outcome will be a far less appealing future than if it were to fade away and allow more logical and ethical evolution to take place. That is, if the ideas surrounding web3 are even worth pursuing in the first place.
Once again, it’s important to emphasize that nothing the blockchain has done thus far is particularly profound. It can all be solved using more efficient centralised solutions. When it comes to digital ownership bookkeeping and transfers, companies and global brands could have done something like this decades ago using conventional tech (some actually did along the way, to little success), but they chose not to because they will lose money if consumers start trading digital goods amongst themselves rather than purchasing new ones.
That is the whole point of selling digital goods. Digital goods are infinitely reproducible. They are cost-effective. They do not burn through real-world resources and time like when manufacturing physical items. The biggest cost comes from the initial production of the digital goods, which is why you want to sell as many of them as possible to hopefully break even and then earn a passive income stream for years to come.
NFTs do not solve this inherent problem. It doesn’t make sense to sell one NFT after its creation. It makes sense to sell many thousands of NFTs, much like it does to sell many thousands of copies of digital goods.
If NFTs catch on, companies will just be selling the same digital goods with the exact same terms under the NFT banner because that’s how they maintain an income stream, but in a format that is, again, less efficient and terrifyingly environmentally destructive. Maybe they’ll spray-paint the same NFT in different colours, or stamp a different serial number on them, to pretend like they have any ounce of scarcity.
If someone actually releases an NFT that is truly unique, it can still be copied endlessly unless it is tucked away in a vault for no one to see except the owner. And what exactly is the point of that?
Realistically, they have no more value than a traditional digital item, unless you fall for the recruitment posters and marketing campaigns. Similar to the one where they claim that NFTs can be transferred outside of the bounds of where you purchased it and magically import it into another metaverse experience. Companies have absolutely no incentive to support NFTs outside of their brand. Most companies can barely support the transfer of digital goods within different versions of their own software.
But let’s not get started on a discussion about the problems with the metaverse, which could very likely fill an entire book, similar to the novels that universally condemn the metaverse but are somehow being used to hype up the metaverse. At this point, I’m convinced a celebrity could eat their own feces on YouTube and claim it has health benefits and we’ll have a few million people sick in hospital within a week.
Why is everyone going mad about NFTs, then? Because investors have heard about them, and they think they can make money off of them. They are dumping investment capital into it, so companies are experimenting with the tech.
This, unfortunately, makes the whole scheme seem more legitimate. All because some guy painted a rock and scammed people into buying digital pictures of it in exchange for bags of crypto coins. In the end, it’s about keeping the scam alive and making a quick buck off of the masses, until the fad dies off and people get hurt.
If you really want to support artists and creators, go through their legitimate channels. Commission artwork from them (you can potentially even own the IP rights to whatever the picture depicts if you come to an agreement, often for less than what even middling NFTs cost :O), purchase their printouts, buy their wallpaper collections, albums, and other digital goods. At least then you’re actually supporting artists without participating in the shitshow that is the modern blockchain craze.
As a game developer, I would particularly like to call out publishers and studios jumping on the NFT bandwagon. You should be ashamed. Despite all of the insurmountable issues described by some of the most brilliant developers on the planet (encompassing technical, ethical, legal, and logical concerns), you continue to drive the industry towards an inevitable iceberg.
Microtransactions and gacha mechanics are one thing, but attempting to turn your player base, including children, into a literal workforce that will need to grind endlessly, scam one another, and cheat to earn back their investment, is completely unacceptable behaviour. You are simply making a mockery of an industry that so many people hold dear.
As game developers, we hold influence over an immense amount of people. The gaming industry is massive. As such, we have a responsibility to remain ethical and use that platform for good. You are losing sight of that, in some sick attempt to drive up your stock prices. It is perfectly alright to make money from the experiences you create, but this new direction is an abominable parody of dystopian fantasy.
Great work, games industry. You’ve built an empire over the course of decades to spread joy to the masses, and now you want to pivot into slavery instead. Very classy.