So, Are NFTs A Scam?
No doubt you’ve seen it said. On Twitter. In the media, even in articles that are otherwise positive. Likely from family or friends, if you collect NFTs and made the mistake of mentioning them IRL.
“NFTs are a scam.” “A pyramid scheme.” “A Ponzi scheme.”
While there are some people that will simply never be convinced, if these views get the most oxygen in the room, they will unquestionably slow mainstream adoption.
If you’re interested in NFTs continuing to grow in acceptance and use, it’s a useful exercise to go through the arguments rather than ignore them entirely.
If we can answer the question with an affirmative “no,” then that makes a much stronger argument than a simple dismissal.
So let’s ask: are NFTs a scam?
Narrowing the Scope
Often, the most vocal opponents of NFTs just throw every argument against the wall. This method of “debate” is called a Gish gallop: making an excessive number of individually weak arguments to try to overwhelm an opponent.
It’s easy to throw out a bunch of scary-sounding words all at once to try to make your argument sound stronger than it really is.
Here, we’re going to focus specifically on the “scam” part.
In other words, the arguments about whether or not they’re bad for the environment are entirely separate from whether they’re a “scam”, which we’ll get to in a minute. Those arguments don’t actually strengthen each other, because one has nothing to do with the other: whether or not NFTs are bad for the environment has no bearing on whether or not they’re a scam, so let’s carve that out.
Incidentally, there are easy arguments against the environmental piece too: ETH will use a fraction of current energy needs when it moves to proof of stake.
There are a number of chains that host NFTs and use a fraction of ETH’s energy. The energy use of NFTs is tiny in the grand scheme of things. While you may agree or disagree with these propositions, they are irrelevant to the question of whether the business model of NFTs is or is not legitimate.
We’re also not going to talk about NFTs representing “theft” from artists. Yes, there are bad actors who create NFTs from art that they don’t own. In much the same way that traditional art is stolen for profit, it can happen in this space as well. Again, the fact that a problem exists in both the NFT and IRL art worlds does nothing to delegitimize NFTs as a model or a technology.
As for whether NFTs can be good for artists, it shouldn’t be in question.
Okay, but they’re a scam/pyramid scheme/MLM/Ponzi, right?
Let’s get to each piece of this argument one at a time:
scam
noun
a confidence game or other fraudulent scheme, especially for making a quick profit; swindle.
verb (used with object), scammed, scam·ming.
to cheat or defraud with a scam.
This argument is an easy one: even if there are scammers in the NFT community, there is simply no cheating involved in NFTs as an industry. Yes, there are individual actors that scam collectors by, say, stealing their seed phrases or engaging in other cheating behavior. There are anon project teams that rug their buyers. But that’s separate from NFTs as an investment or collectible. The fact that rug pulls happen does not mean that other NFTs are delegitimized; rather, it simply means that the industry is young and still maturing. After the dot com crash, it came to light that a number of technology companies had been engaging in fraud, but that did not mean that Amazon and Ebay weren’t legitimate.
pyramid scheme
per Wikipedia, a pyramid scheme is “a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products.” Does that sound like most NFT projects you know? I don’t think I’ve ever seen an NFT project promise payments or services in exchange for getting others to buy into the project. Often, when a project launches, it doesn’t have any roadmap or promise in place at all! While calling something a “pyramid scheme” might sound smart and sophisticated, there is zero connection between this business model and what NFTs do.
MLM
Similarly, multi-level marketing relies on “the revenue of the MLM company is derived from a non-salaried workforce selling the company’s products or services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system.” There are no earnings or commissions to NFT owners dependent on how many other collectors they bring into a project. There’s simply no analogue in the NFT space to this sort of business model.
Ponzi scheme
Now we’re getting somewhere. A Ponzi scheme is “a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.” This is likely what most critics mean when they describe NFTs: that it’s basically a speculative bubble reliant on new money continuously entering the space to prop up values.
Here’s the thing: at first glance, they’re right! When you buy an NFT, you are undoubtedly hoping that, sooner or later, someone else will want to pay more for it than it’s worth today. But how is that different from… any collectible that’s ever existed? Are sports cards a Ponzi scheme? How about stamps, or physical art? Presumably, anyone paying $45,000 for a Serena Williams card either a) simply wants to own it for ownership’s sake or b) hopes it will be worth more in the future, or some combination of both.
Would that not describe most NFT purchases?
In fact, NFT purchases are often more substantial than that.
When you buy a Bored Ape, you are not simply buying it hoping it goes up. You are also hoping that the team continues to find ways to make ownership more valuable, whether through appealing to celebrities, creating a mobile game, or otherwise expanding the universe.
These are distinct steps that the creators of the NFT, and its users, are taking to tangibly increase the brand value of the project. Certainly, there could come a time when value is no longer being added to owning a BAYC Ape, at which time it could turn into a speculative bubble or Ponzi scheme.
But at the moment, there’s nothing to distinguish it from any other collectible market in that regard.
Ignoring the Technology
Underlying all of the arguments against NFTs is the idea that there is nothing more to NFTs as a technology than profile picture (PFP) projects. Dismissing the capabilities of NFTs because of their current use would be like dismissing the internet in 1995 because all it was used for was porn. Yes, this is an early use case, but the technology is far more powerful.
In the future, smart contracts will likely dominate a range of industries, from real estate to live event ticketing. You may think paying six figures for the privilege of owning a cartoon monkey is crazy, but the market determines fair prices, and that does nothing to take away from the potential of this technology.
There’s no doubt that many arguments against NFTs are lazy, and based on little to no research. But they will continue to present themselves, in much the same way that some people continue to insist that Bitcoin is a scam after eight years.
You’re free to ignore these people, but if you’re going to engage, it’s important to be clear about what we’re talking about, and the many ways in which NFTs are very much not a scam, or a pyramid scheme, or even a Ponzi scheme.
The future is inevitable, whether they like it or not.
