Introduction: At Expensivity, Bernard Fickser explains that a non-fungible token (NFT) is a unique token in cryptography that represents, say, real estate or art rather than money. Because the tokens have unique identities (non-fungible), they can be bought or sold while reducing the risk of fraud.
So how do they work?: The series is called How Non-Fungible Tokens Work: NFTs Explained, Debunked, and Legitimized (July 30, 2021). In Part 4, he looks at the question of what benefits NFTs, in their current state, really confer on you (or don’t):
4 What Just Happened?
The creation and purchase of an NFT as described in the last section raises a lot of interesting — and troubling — questions. It’s easy enough to go with the flow and simply load a crypto wallet with the Ether needed to create or buy an NFT, and then do what you need to get the NFT you want. But NFTs are supposed to impart some sort of ownership, whether it be full possession in a real-world sense or even a partial claim that nonetheless has real traction.
In fact, ownership of NFTs is much more tenuous than such conventional understandings of ownership suggest. I therefore want next to reflect on what the creation and purchase of NFTs as outlined in the last section reveals if we probe beneath the surface. On the surface, a site like Rarible looks like eBay (though not nearly as extensive or sophisticated). But in fact, something very different is going on.
4.1 No Limit on Proliferation, No Guarantee of Scarcity
If I put up a real physical item for sale at eBay, I can only put up as many items as I actually possess. For instance, if I’ve got three items of the same widget, then I can sell no more than three of them. But with the NFT that I created (i.e., the montage of photos from the Iowa Democratic Primary), I can retokenize it at will and ad nauseam. I can go to Rarible and simply re-upload the png of that montage, pay the service fees, and have it reappear as an NFT. I can keep doing this at Rarible as many times as I like. And so I can put up for sale as an NFT the same png as many times as I want to repeat this exercise.
I can also redo this NFT not as a “single” but as a “multiple” NFT where I specify the number of copies buyers can purchase of it. The analogy here is with a limited edition of baseball cards, where buyers can only buy so many copies until they’re gone. But just as with baseball cards, where you can always do a second print run, you can always do a second print run with such “multiple” NFTs. In fact, it’s even easier with NFTs because it’s all digital. And because Rarible imposes no limits on what its users can upload as NFTs (short of pornography or hateful content that violates clear guidelines), I could hit “multiple” in retokenizing my NFT multiple times. I could also mix and match “single” and “multiple” any way I like.
And, of course, I don’t have to stay with Rarible. Having saturated Rarible with my NFT of the Iowa Democratic Primary, I could go to any other NFT marketplace that requires no prior approval of its users, and do the same exercise there, uploading the png of the Iowa Democratic Primary there as an NFT. Granted, word of my unbridled proliferation of the same NFT might get around and ruin any chance of turning a profit with it. But that’s not the point.
The point is that such unbridled proliferation, with its assault on scarcity, has no technological solution (though it may have a sociological solution—see subsection 4.4). Note that I don’t have to be so wooden-headed in approaching the proliferation of my NFT as in simply replicating the NFT with no plan or purpose. Suppose my NFT, with just one copy in existence, sold for a good price. There’s nothing to prevent me as its author from then retokenizing it in an effort to get a better return but thereby ruining the market for it. From a technological or feasibility standpoint, the only constraint on my retokenizing an NFT is the service costs.
4.2 Where Is My NFT?
In his book Cybernetics, the mathematician Norbert Wiener remarked that “information is information, not matter or energy.” True enough, but information that makes a difference in the real world is not disembodied information; it is digitized data that resides on real physical hardware run by software written by human programmers.
So where is my NFT? The usual answer is: On the Ethereum blockchain. But although all Ethereum-based NFTs (which includes just about every NFT at this time) have some toehold in the Ethereum blockchain, to say that they’re on the Ethereum blockchain is almost never the complete answer, and can be highly misleading. Some NFTs do reside entirely on the Ethereum blockchain, such as CryptoKitties, for which ongoing expenditures of Ether are needed “to fuel transactions, which include purchasing and breeding CryptoKitties.”
But the fact is that the Ethereum blockchain, even though it can function as an all-purpose computer (i.e., Turing machine) and thus act as a database, it is not adapted for large-scale storage. “Gas,” the intermediation fees to do anything on the Ethereum blockchain, can mount quickly, and there are also limits to how much gas can be spent in a transaction block.
One calculation suggests that it would require 66 blocks, given an average block time of 13 seconds, and thus 14 minutes to upload one megabyte onto the Ethereum blockchain. My NFT of the Iowa Democratic Primary was about 2 megabytes, and thus would have required almost half an hour to upload, along with large gas fees. Accordingly, one comprehensive guide to NFTs remarks, “most projects store their metadata off-chain simply due to the current storage limitations of the Ethereum blockchain.” (Metadata here would include my png montage of the Iowa Democratic Primary.)
As a consequence, all the actual content of an NFT—in other words, what makes it collectible, artworthy, or of any interest—will typically reside off the Ethereum blockchain. But where? In the case of the NFT I created at Rarible, it will reside (big surprise) at Rarible, with what’s on the Ethereum blockchain simply registering the NFT and pointing to Rarible for the png that’s at the heart of this NFT.
So my NFT, to exist at all, must reside in two places, namely, the Ethereum blockchain AND the Rarible website. If either fails, I lose my NFT.
4.3 How Secure Is My NFT?
Not very. Most NFTs, as just noted, have to reside in two places at once and face the danger that if either place of residence fails, the whole NFT fails. If the entire NFT could be uploaded onto the Ethereum blockchain, despite its storage limitations, that would be better. But even leaving aside that NFT metadata may reside off the Ethereum blockchain, the long-term prospects for the health of the Ethereum blockchain, considered in and of itself, don’t inspire confidence.
4.3.1 Why Trust Ethereum?
Ethereum’s history of hard forks, including the one that caused the split into Ethereum (ETH) and Ethereum Classic (ETC), is troubling, suggesting that a cadre of miners, and especially Ethereum’s founder Vatalik Buterin, far from democratizing and decentralizing the Ethereum blockchain can, when push comes to shove, do anything they like with it. Additionally, there’s the worry that miners will lose motivation and no longer service the blockchain. That seems unlikely for now, given current enthusiasm for Ethereum, but if you’re thinking of NFTs as a long-term store of value, the prospect that the peer-to-peer distributed network that runs Ethereum may at some point run out of steam (or should I say gas?) needs to be taken seriously.
Perhaps the biggest concern for me personally with tying NFTs to the Ethereum blockchain, or indeed any blockchain running a cryptocurrency, is that it presumes that blockchain technology is the final point of evolution in cryptocurrencies, and that Bitcoin and Ethereum will never face displacement by newer and better technologies. To hear some enthusiasts of blockchain describe it, blockchain is the greatest invention since the wheel. But a blockchain is simply a ledger that resists tampering. Ledgers have been around for centuries, and securing them against tampering has likewise been a point of concern and redress for centuries. In any case, securing them by blockchains, though useful, does not constitute an infinite value-add, as it’s often portrayed.
So what happens if a better technology comes along for doing cryptocurrencies? I have some ideas, and I’ll offer some possible directions at the end of this article in attempting to put NFTs on a firmer foundation. But even if my proposals hold no water and if the prospects for a replacement technology remain for now completely murky, the concern that we’ve not reached the final technology for cryptocurrencies should give us pause. In the history of technology, paradigm shifts are common. Many tech companies that were behemoths a generation or two back have gone the way of dinosaurs.
One last point about blockchain technology: the ability of create novel blockchain-based cryptocurrencies at will and ad nauseam ought also to give us pause. Bitcoin and Ethereum for now have a prime-mover advantage. But what can be digitized can be redigitized. As of April 2021, there were 10,000 blockchain-based cryptocurrencies. Even if individual cryptocurrencies can build scarcity into themselves by limiting the total supply of coins (such as Bitcoin’s 21 million upper limit), the proliferation of cryptocurrencies by simply building new blockchains knows no such limitation or scarcity. If you haven’t done so, scroll down the cryptocurrencies listed at CoinMarketCap to appreciate how readily blockchain-based cryptocurrencies have proliferated.
4.3.2 Why Trust NFT Marketplaces?
Perhaps you have good reasons to think that my worries about Ethereum are unfounded. In that case, you should still be concerned about the NFT marketplaces that help “host” your NFT. (The word “host” here should set off alarm bells. We don’t think of a bank, for instance, as “hosting” our money. But NFT marketplaces, as we’ll see momentarily, host NFTs with no obligation or liability.) So, even if your NFT remains unproblematic insofar as it resides on the Ethereum blockchain, because your NFT is a dual resident that also resides at an NFT marketplace, you want some assurance that it is secure there as well. Unfortunately, no such assurance is forthcoming. Quite the contrary.
As emblematic of the security concerns you face at NFT markeplaces, I’ll focus on Rarible, which is where I created and bought the NFTs described in the last section. Although we’ve grown accustomed to automatically approving the terms and conditions required to use an online service, in fact you need to carefully read the “Rarible Terms and Conditions” if you are serious about preserving your interests there in creating and purchasing NFTs. In fact, once you’ve read these terms and condition, there’s no way you can be serious about preserving your interests there in creating or purchasing NFTs.
The crucial thing you’ll find in reading these terms and conditions is that Rarible is a platform, much like Facebook or YouTube. You can put stuff up on these platforms, but the platform assumes no liability (repeat, NO LIABILITY, NADA!) for what can happen to your stuff once there. What’s more, at its discretion the platform can entirely remove your stuff. Here’s one relevant passage:
Later, the Rarible terms and conditions document makes the same point even more starkly:
Rarible May Deny Access to or Use of the Offerings. Rarible Company reserves the right to terminate a User’s access to or use of any or all of the Offerings at any time, without or without notice, for violation of these Terms or for any other reason, or based on the discretion of Rarible Company. Rarible Company reserves the right at all times to disclose any information as it deems necessary to satisfy any applicable law, regulation, legal process or governmental request, or to edit, refuse to post or to remove any information or materials, in whole or in part, in Rarible’s Company sole discretion. Collectibles or other materials uploaded to the Offerings may be subject to limitations on usage, reproduction and/or dissemination; Users are responsible for adhering to such limitations if you acquire a Collectible. Users must always use caution when giving out any personally identifiable information through any of the Offerings. Rarible Company does not control or endorse the content, messages or information found in any Offerings and Rarible Company specifically disclaims any liability with regard to the Offerings and any actions resulting from any User’s participation in any Offerings.
These are essentially the terms and conditions of a Facebook or YouTube. Only with Facebook or YouTube, you’re not plunking down any cash. You’re simply uploading material to your account, and there’s the danger that this material may get removed or that your account may get terminated. Ditto with Rarible. Only at Rarible, you are creating and buying NFTs for serious money. Check out, for instance, Beeple Round 2 Open Edition at Rarible (as of June 2021), with offerings valued in the six figures (in US dollars given the current ETH spot price).
Now it’s true that Rarible could not stay in business long if it willy-nilly started taking down or taking over its customers’ NFTs. But it can legally do with NFTs what banks would be held criminally liable for if banks attempted the same thing with their customers’ money. You may be able to profitably wheel and deal in NFTs at Rarible for a while. But for how long? Rarible gives all appearance of a game of musical chairs in which everything proceeds happily until the music stops. Or, to change the metaphor, it’s like Russian roulette. You may enjoy the excitement for a time. And perhaps getting caught up in the excitement is all that matters to you.
A final point to consider about the instability of NFT marketplaces is link rot. Even if an NFT marketplace guaranteed that your NFTs would remain on its site forever, the fact is that such marketplaces are businesses, and businesses can fail. Even with the best of intentions, an NFT marketplace may simply not be able to make good on its intention to keep your NFTs alive. The Wikipedia definition of link rot is pertinent:
Link rot is the phenomenon of hyperlinks tending over time to cease to point to their originally targeted file, web page, or server due to that resource being relocated to a new address or becoming permanently unavailable.
The problem of link rot is real. The average lifespan of a web page as of March 2021 is 2 years and 7 months. Hence the emergence of such organizations as the InterPlantetary File System (IPFS). Addressing the short average lifespan of web pages, and its efforts to prevent them from being “gone forever,” IPFS states on its about page: “It’s not good enough for the primary medium of our era to be this fragile. IPFS keeps every version of your files and makes it simple to set up resilient networks for mirroring data.”
IPFS has therefore identified a legitimate concern and is attempting to redress it. Rarible is not only aware of this concern but has even contracted with IPFS to store its collectibles. So Rarible is on it, yes? Unfortunately, there’s still a problem. Here’s what Rarible writes about IPFS in its terms and conditions document:
The Collectible Metadata for Collectibles created through the Rarible Applications are typically stored on IPFS through an IPFS node operated by Rarible Company. The Collectible Metadata for Collectibles created outside the Rarible Applications may be stored in other ways, depending on how such Collectibles were created.
So far so good. But later in the terms and conditions document is not so good:
Collectibles created on Rarible have their Collectible Descriptors stored on the IPFS system through an IPFS node operated by Rarible Company, but Rarible Company cannot guarantee continued operation of such IPFS node or the integrity and persistence of data on IPFS.
So good luck ensuring the permanence of your NFTs.
4.4 Does Creating/Buying NFTs Make Business Sense?
For NFT users with a large social media following and a short time-horizon, I can see NFTs making business sense: get in and cash out; pump and dump. But for an NFT Joe Schmoe like me, NFTs make little business sense. We’ve already seen that the service fees needed to do anything, whether in creating NFTs or in buying them, entail a cost of about $20 given the current spot price of Ethereum. That just seems out of hand given the absence of such service costs at conventional vendors like eBay or Amazon.
True, one might argue that credit cards impose a hidden service cost, so conventional vendors are always handing us those costs without making it obvious. But then again, there is also the service cost of simply loading one’s wallet with cryptocurrency. And then there’s just buying the cryptocurrency at an exchange (before transferring it to your wallet): there’s always a cost in exchanging one currency into another, and that includes changing fiat currencies into cryptocurrencies.
I also saw the price of Ethereum drop about 8 percent from the time I bought it to the time I created and purchased the NFTs described in the last section (in line with cryptocurrency volatility, it’s gone way down and way up since). Maybe I would feel more positive had the price of Ether gone up from the time I bought it to the time that I completed this exercise, but at every point in the 5-point process for creating NFTs described in section 3, I had the sense of being bled.
And then there are the commission costs. Conventional vendors like eBay and Amazon charge commission costs. But commission costs also exist at NFT marketplaces, on top of the service costs simply to upload a new NFT (create one) or move one to your items (buy one). For instance, Rarible’s Must Read Guide for People New to NFTs states that for each transaction “Rarible takes a commission at the very end; it’s 2.5% on each end, so 5% of final sale price.” Ouch.
Laying aside all these costs, what happens once you upload and create an NFT, putting it under “my items”? What about buying an NFT and putting it under “my items”? Good luck with any potential buyer finding it. Take my montage of the Iowa Democratic Primary. Its exact title at Rarible is “Iowa Democratic Primary, December 2007.” Suppose I punch in “Iowa Democratic Primary” and hit Enter, using Rarible’s search feature. A panel of NFTs at Rarible appears, and you’d think that my NFT should get pride of place, situated in the upper left as the first thing that users making that search should see.
But my montage is nowhere to be found on this search output panel. The very first NFT that appears is titled “Crypto Drinks” and shows an iPad displaying a bottle of beer. There’s an NFT titled “Crying Assange.” There are a bunch of NFT with representations of Bitcoin. Everything I see in response to my search is irrelevant to it. There’s absolutely nothing in the search panel that even hints at my NFT.
The only way that I’ve been able to get to my NFT at Rarible is by punching in the title “Iowa Democratic Primary, December 2007” or some portion of this phrase into the search bar and then, instead of hitting Enter, I need to be attentive enough to see that the search bar has dropped down and is suggesting my NFT. I then have to click on that drop down link to get to my NFT.
Perhaps it’s just that search in these NFT marketplaces is primitive right now and that down the line it will get better and be able to compete with the mature search capabilities of an eBay or YouTube. But I’m not holding my breath. I suspect the inadequacy of search at Rarible is baked into the system to promote NFTs that are likely to sell and thus lead to more commissions for Rarible. Rarible’s homepage highlights the NFTs they want to highlight: “top sellers,” “live auctions,” “hot bids,” “hot collections,” etc. Leaving aside the merits of my NFT (minimal as they are), my NFT never had a chance. In fact, it’s only chance is that someone will read this article and want to buy it.
=====ADDENDUM JULY 26, 2021=====
The searchability of my NFTs at Rarible has improved since I wrote about it last month (see immediately above). But the searchability there is still not great. Presently, searching on my name and on the name of my NFT does show the right items on a search results page, but still not at the top, where it should be. One still gets the sense that my NFTs are being buried among the NFTs that Rarible is trying to promote.
But, someone may retort, people are making good money creating and selling NFTs. Just because Joe Schmoes like you, who create NFTs in an uninspiring exercise, can’t make any money with them doesn’t mean there isn’t a business model here that can’t thrive. Such optimism about NFTs is misguided. Certainly, the other concerns raised earlier in this section should dampen such optimism. But let’s examine this optimism more closely and see why it is unjustified.
The premier NFT marketplace for now is SuperRare. This is the place to be if you’re an artist who wants to put your NFTs up for sale and get the best prices for them. So, what does it take to be an artist at SuperRare? To answer this question, SuperRare’s Help Center is particularly helpful and revealing. Unlike Rarible, where anybody can create and trade NFTs, SuperRare is by invitation only. Artists in SuperRare’s stable need to fill out an application form and then be approved. What is SuperRare looking for in the artists it accepts into its stable? The answer is found on the SuperRare page titled “Tips for Getting Accepted as an Artist on SuperRare.” The tips include the following (these are all direct quotes):
- Be able to prove your identity as original artist. [SuperRare wants] to make sure we are protecting our collectors by ensuring all artworks tokenized on the platform were actually created by the artist that tokenized it.
- Promote your art on social media! We’ve seen very clearly that the artists doing a good job of promoting themselves and their art on social media sites like Twitter/Instagram/Cent are the ones that attract the most collectors on SuperRare.
- Have an original, consistent style. [T]he artists that do the best on SuperRare are the ones that focus on being original and having a consistent look & feel.
- Scarcity Scarcity Scarcity. We take scarcity very seriously, and we’re strong believers that the artists spending more time on creating the best possible works of art do far better with collectors, rather than flooding the market… Are you tokenizing multiple artworks every day? Or are you spending more time creating and tokenizing better artworks less frequently? … We’re more inclined to accept artists with a lower total supply of existing artworks than artists that have already tokenized hundreds of works across multiple platforms.
The things that SuperRare is looking for and desiring in its artists make perfect sense. In fact, if NFTs as currently structured at NFT marketplaces are to have a future, then NFT artists will need to address and satisfy the concerns raised in these points.
The interesting thing to note about these points, however, is that they don’t admit technological solutions. Where is blockchain here? A big motivation for Satoshi inventing blockchain was to allow for anonymous transactions, but here we find SuperRare wanting to prove identity. To the second point listed, promoting art effectively on social media likewise feeds into this anti-anonymity. So too, the question of style and branding is personal, reflecting the artist’s work and not its technological implementation.
The last point about scarcity goes to what I’ve been saying right along in this article, which is that NFTs can be proliferated at will. The technology allows such proliferation. In fact, the only thing that can disallow it is integrity and trust, integrity on the part of the creator of the NFT (especially the commitment not to proliferate it) and trust on the part of the buyers (that the creator and marketplace will stand against proliferation and thus ensure scarcity).
If NFTs are to make any business sense, the question of proliferation and scarcity needs to be addressed in earnest, especially as these relate to value and ownership of NFTs. We turn to these topics next.
Here are all the parts of the series, 1 through 7:
Part 1: Cryptography: Are non-fungible tokens a scam? Or can they work? By Warren Buffett’s logic, if cryptocurrencies are rat poison squared, non-fungible tokens are rat poison to an infinite power. But is that all there is to be said about them? Blockchain technology allows for digital collectibles to be scarce even if they are replicable, thus creating value, like Jack Dorsey’s famous initial tweet.
Part 2: Can digital signatures protect NFTs in digital marketplaces? The concept of owning an NFT on a blockchain is specific to the blockchain with no legal force in society at large. While NFTs are new, the debasement of value by proliferating copies whose marginal value is close to zero has a long and ignominious history.
Part 3: How to create non-fungible tokens (NFTs), simplified. While still deeply skeptical of what ownership of an NFT really means at present, Fickser decided to experiment with creating, buying, and selling NFTs. Bernard Fickser offers a step-by-step explanation, offering an original montage of the Democratic primary in Iowa in 2007 for sale as an illustration.
Part 4: NFTs: You bought one. But do you really own it? Could you ever? Right now, the non-fungible tokens markets leave a lot to be desired as a business proposition, Bernard Fickser explains why. The current NFT regime features no limit on proliferation, no guarantee of scarcity, and terms that disclaim any accountability on the part of the NFT market.
Part 5: In the digital world, what does “scarcity” mean? For a digital artwork like Beetle’s Everydays, which sold for over $69 million, a number of methods are used to prevent copying, thus ensuring uniqueness. Three methods used to ensure uniqueness include partial availability (for fair use), digital marking, and algorithmic immutability (like blockchain).
Part 6: What makes NFTs valuable? What does it mean to own one? In the case of non-fungible tokens (NFTs) on the Ethereum blockchain, actual ownership with legal standing is never in fact transferred for the underlying digital file. Bernard Fickser points out that the NFT literature is filled with equivocations about the meaning of the word “own” as it relates to NFTs.
Part 7: How can non-fungible tokens (NFTs) be made to work better? Bernard Fickser offers twelve steps to handling NFTs in a way that dispenses with cryptocurrency-based blockchains and works in ordinary online marketplaces like eBay. In Fickser’s view, NFTs can work if they avoid self-serving cryptocurrency blockchains like Ethereum and enable real-world legal transfers of ownership.
Also: Jonathan Bartlett’s response: Blockchains have NFTs unnecessarily tied down.. New ideas propose severing the accidental relationship between NFTs and blockchains. For NFTs, the blockchain is actually reducing the value of the NFT, as it introduces additional dependencies and costs for maintaining NFTs.