CHAPTER 1: A short intro about NFTs
(Or why NFTs aren’t just a bubble)
NFT was picked as the word of the year by the Collins dictionary in 2021. Present every day in the headlines, NFTs drew the world’s attention because of the millionaire values traded by copies of digital art, and of course, also brought tons of criticism from those who consider that all the hype is just for a very well-crafted scam.
Love it or hate it, NFTs have a whole lot of issues that need to be addressed. However, what has been seen the most are people defending NFTs for questionable reasons, or condemning them out of sheer ignorance.
Let’s start with the basics: NFTs are any type of crypto asset that has a unique value, that is, it cannot be exchanged for another equal asset (there can’t be such a thing). Hence its name: it is a non-fungible token. Any currency can be exchanged for another one at a corresponding value. But NFTs can only be exchanged for currencies that also match their value. Think about it this way: We know that an NFT can be sold for cash, and it can be bought with that same given value. However, if this same NFT could simply be exchanged for another NFT, then neither of the two involved in the trade could be considered NFTs.
That’s the heart of the matter. Just like that.
But after all, what are we calling crypto assets here?
Any asset that is part of a blockchain has a cryptographic record known as a hash. A hash is a function by which nodes need to process the data of a transaction to validate it in the blockchain ledger. This might sound complex, and it really isn’t quite simple. But it is enough to understand that a blockchain operates with a consensus mechanism, to guarantee the legitimacy of transactions without an intermediary (such as a bank or a brokerage) intruding on the process.
It is the functioning of this consensus mechanism (which varies from blockchain to blockchain, and currently the most common is Proof-of-stake) that gives circulating assets on the network their cryptographic quality. But the exacerbated value of some NFTs is not simply because of encryption. Encryption is just a basic feature.
NFTs are unique, and they work as an originality and property certificate towards an object.
But why do NFTs get so much criticism? Many look at million-dollar sales as sources of criminal activity such as money laundering, or simply as a bubble that could pop at any time. Let’s address these issues.
It is indeed true that cryptocurrencies are involved in criminal schemes or irregular financial activities. But these same schemes and activities are present on a much larger scale in virtually all economic activities in a capitalist society. Welcome to the system. NFTs are just icing on the cake. Traditional finance, to which decentralized finance presents itself as an alternative, still drives the bulk of financial crime, terrorist financing and corruption generated by the lobbying of large corporations.
But despite that, wouldn’t the ridiculously high values indicate a huge bubble in this new market?
This argument itself involves a certain ignorance regarding both the art market and certain economic precepts. You may have seen the so-called “NFT bubble” being compared to the Dutch tulip market bubble of the 17th century or even the great crash of 1929.
It turns out that these crises were generated by the logic of a production chain: when we are talking about producing something, this object will have an intrinsic value, which considers its production costs, labor, distribution, and so on. Objects in the production chain have a use, they serve something. They are inserted, therefore, in a typical logic of supply and demand.
NFTs are essentially art objects. Which is to say they are useless. If art were for anything, it would be something other than art. Although this discussion can take on very philosophical or conceptual airs, art would be deeply threatened if it had to fulfill any specific function other than simply being art.
NFTs are art. They just are. They have no intrinsic value, they don’t follow oil prices, they don’t even follow the value of cryptocurrencies. Between late 2021 and early 2022, we saw great volatility in cryptocurrencies, some dropping more than 40%, while the NFTs market remained hyped.
So, for those waiting for the bubble to burst, don’t hold your breath. NFTs do not follow a logic of supply and demand, but the logic of the art market: when we look at a contemporary art painting that your 5-year-old nephew could perfectly have painted, and we see that its value is astronomical, we are left with a question in our head: where did this value come from? Why could this abstract picture be worth millions?
The logic of the art market is not about cost or demand. What matters is: who painted this picture? What collections did he go through? Which galleries have exhibited it? Which specialized house evaluated it? These questions define whether or not there is prestige in the artistic object in question.
It’s not that different when it comes to NFTs. Every new celebrity who buys a Bored Ape will increase the value of the collection as a whole. Again, welcome to the system. This is our cultural logic, and in order to criticize the NFTs, it is important first to understand that there are much deeper issues in the way our society relates to art: through the market.
An NFT marketplace is not a stock exchange. The drop in oil prices or the rise in iron ore will not impact the price of NFTs, at least not in the same way that it impacts traditional markets. Let’s keep this in mind: NFTs are art. You may not like these arts, in the same way that many examples of contemporary art are aesthetically questionable. But this has more to do with our understanding of contemporary (and digital) art than a problem specific to NFTs.
Finally, NFTs being unique are also rare. As much as they do not follow the same logic of supply and demand, it is clear that rarity is a factor of price increase. But for now, we’ve talked a lot about all of this. There are legitimate problems that deserve attention and criticism, and we will have space to talk about these problems in more detail. In fact, despite everything we talk about in this text, there is one very serious flaw in NFT marketplaces: most of NFTs projects are not really decentralized!
Weird, isn’t it?
Check out Chapter 2 for a better understanding.
— — — — — — — — — — — — — — — — — — — — — — —
Follow our social media:
Twitter: @YungPixels
Instagram: @yungpixels.nft
Website: coming soon
Discord: coming soon
