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What the Heck Is an NFT?

Recently, in NFT-land; lots of cringe. For the excessively-online and political, Kyle Rittenhouse toyed with the idea of launching his own series of NFTs:

If you have too much faith in the human race, how about a surgeon trying to make bank by turning a terror-victims X-rays into crypto payouts:

Among the ‘normies’, you had… whatever this was:

https://twitter.com/WinkyChrist/status/1485832875270279170?s=20&t=6GhFeOXgmHQ89_XQliHXeA

In all these situations, two things are made clear:

  1. We live in a weird, cringe-dense era, that is only getting weirder and probably more cringe-worthy.
  2. Very few people know what NFTs actually are, including those making and buying them.

I can do little about the weirdness and cringe, but it’s worth taking a stab at clarifying what NFTs are.

As with most things associated with crypto, any explanation unfurls into a seemingly endless follow-on of questions and complications, and most current implementations are overpriced, pointless, or scams.

But it’s also true that NFTs are among the most exciting implementations of blockchain technology, which is a fundamentally novel, important computing breakthrough, and will likely play a significant part in the future of the internet.

So; your questions:

What, in basic terms, is an NFT?

Let’s say you’re going to see a performance by the best Australian indie rock band, King Gizzard and the Lizard Wizard. You go on TicketMaster, choose a seat, insert your credit card details, and are emailed or mailed a ticket; which you present on paper or your phone when you arrive at the venue. But how do they know that this is your ticket? How do they know this isn’t a fake? A long series of numbers and characters, that corresponds to a database entry with the details of the ticketholder, and typically scannable through a barcode, or QR code.

On a basic level, this is what NFTs are; an identifying code on a database that confirms ownership of the related asset. What makes it different though is that an NFT isn’t on the seller’s database, or the marketplace’s, but an unfalsifiable, immutable, permanent public database, run across thousands of computers; a blockchain. If you own the NFT – your digital ‘wallet’ contains it – then you have sole access to that discreet, individual, uncopiable data-base entry.

For some, that seems irrelevant; but this is a fundamental shift in the allocation of ownership. No longer is the ‘ledger’ of ownership controlled by authorities – corporate or otherwise – but is publicly viewable, and verifiable. In the case of your King Gizzard and the Lizard Wizard ticket; it’s not controlled by the ticket company, it can be accessed and viewed by anyone, but only you can edit or sell it.

How do you buy an NFT?

There are many platforms, but the most notable are OpenSea, Rarible, and SuperRare, and they work by either charging directly from your debit/credit card and converting your cash to the cryptocurrency of choice, or by connecting to your crypto ‘wallet’; a piece of software that connects to the blockchain, recognising the wallet-holder’s ownership of a currency or NFT. Once you buy it, you can display it in a digital gallery like Spacial or Mynt, sell it as a speculative asset (which has been the dominant motivation behind most crypto and NFT purchases), or (if it’s an image, and you pay for Twitter Blue) can be made into your Twitter profile picture.

Are you buying an image?

No; you’re buying ownership of an image. Let me explain:

Adding to the blockchain is not free; instead, it has a processing cost to burning an entry to this ledger, and having it verified. These are called ‘gas fees’, and for a simple text entry – like a code or link – this can cost $100+ on the most popular blockchain, Ethereum. As such, it’s far too costly and impractical to add images themselves to the blockchain; to mint even a single gigabyte to the Ethereum blockchain would cost roughly $260 million.

NFTs mint a link to the blockchain, which points to a place online where that image is stored; on a different, separate server. It’s kind of like sending someone a link to a Google Drive file; but it has, within it, that verification and scarcity.

This has an almost endless list of problems, and is why using NFTs to buy and sell art, music, or other files is – at least for the moment – really, really bad; both for the art, and as an investment. The scarcity and security of the link does not carry whatsoever for the underlying file. Minting it as an NFT provides no protection against censorship, and no security for the owner, for you can simply change where that link points to. This is a gateway to all manner of horrors, from banal ‘rug-pulls’ – where the artist replaces the image with something else, sometimes literally a rug – to truly nefarious stuff, where the precious art you ‘own’ is replaced with doxing information, revenge porn, abusive content of children, or any other flavour of poison. There is no mechanism that prevents this.

Upgrades or replacements to the existing blockchains that include hashcodes for the connected content or that are far more efficient would solve this, but as it stands, no, you are not buying an image, you’re buying a receipt.

Why are NFTs so expensive?

The other night, sitting in a restaurant, I noticed a fellow diner was wearing a Richard Mille RM 55 “Bobby Watson”. You don’t buy, and wear, that very large, very bold, very white watch because you love horology. You do it to signal “I spent over half a million dollars on an accessory”. While eating, he picked up his phone to check the time.

This isn’t because he’s foolish; the watch isn’t there to tell the time; besides, checking your phone is more convenient. We all spend so much of our lives online – flicking through social media feeds, refreshing emails, and looking for the closest watch-owning Daddy on Grindr – so always have a phone close-to, or in, hand.

Take two core premises there – that people will spend lots of money to signal they have/had it, and that we spend most of our public lives online – and it’s not surprising that the first technology to express scarcity digitally would become a tool for signalling in the digital age.

Much like the Richard Mille – or owning a notable piece of physical art –  Punk 7121 doesn’t need to do anything for you except signal that you’re rich (and tasteless). And that it does!

It’s worth noting a few additional points though:

  1. The valuation of some projects has clearly been inflated as a way to money launder, move currency from authoritarian regimes, avoid taxation, or just pump the value so as to make a lot of money before those buying realize nobody running the project cared about anything beside robbing them.
  2. Most NFT projects have as little financial value as they do artistic; and the market reflects this. Don’t be fooled by the pricetag; see what someone actually paid for it.
  3. NFT prices don’t just vary based on perceived value, but also on blockchain’s gas fees. As mentioned, most NFTs are minted to the Ethereum blockchain (the first blockchain to natively facilitate smart-contracts; which are essentially legal contracts but written into code, and are necessary for all NFTs), but more are being built on other chains, from mainstream alternatives like Solana and Polygon, to lighter ones like DeSo.

Are NFTs good for artists?

It depends on the artist.

The high prices have been a benefit for some great digital artists whose work had been criminally underserved by the internet economy. I’ve loved the work of many digital artists online but other than buying an occasional print, I – and the majority of their fans – have done nothing to support them. NFTs are a way to change that; because you aren’t buying the art, but attaching a financial asset component to it. As this tweet notes, whatever critique you can have for NFTs, nobody was acting in a way to actually give artists money:

https://twitter.com/katxlev/status/1488869476707807233?s=20&t=IFfdx4AiTazuICyHHLlcRw

As a financial instrument, the connection of an image to a payment also makes it excellent for signalling support for a cause. Say our editor-in-chief Isaac was to mint some of his more sizzling tweets as NFTs; not only are you buying them as a piece of internet history, but to support his ongoing work. Sam Harris has intended to do the same for ‘effective altruism’, precisely because the cost of making an NFT is minimal, but by attaching some great art as a free reward to charitable commitment, it gives social credit to a good deed, and may improve the financial incentives of doing it, if those NFTs became desirable in time.

The flip side of this though is that what makes an NFT successful is not the quality of its art; and there’s a lot of theft.

For the former, consider the most successful NFT projects; Bored Apes Yacht Club, CryptoPunks, and Lazy Lions. As explained in this great video by Solar Sands, each piece consists of a computationally randomised set of elements, with some common and some exceptionally rare. This means they are inherently derivative, lack the signs of an artistic touch – because they fundamentally lack any – and are generally fucking hideous.

For the latter point, many digital artists who don’t like NFTs have had their work stolen and minted by those hoping to exploit their hard work; and even notable NFT creators have their work stolen and re-minted. Perhaps the most ironic example of this was where ‘DeeKay’s’ ‘LetsWalk’ project – cute animated profiles that steal a lot of very very valuable IP without credit – was reminted/stolen, to the original maker’s chagrin. Stolen IP is rampant through the NFT world, and the cracks are already showing; hype-wear reseller StockX was sued last week by Nike for their ‘NFT’ sneakers.

But what about the environmental impact of NFTs?

Worries about the energy consumption, and thus environmental harm, of blockchains fail to recognise that the server infrastructure that supports the internet consumes a huge amount of energy and resources as it is, and that the efficiency improvements that gas fee reduction requires is one and the same with improving its total energy usage. This means that, however energy-inefficient NFTs are now, no technology has more incentives to become environmentally friendly than the blockchain, and all great innovations start being ostensibly useless. The final point to mention is that energy consumption is a good thing – it is the road to progress. The worry is how it’s produced, but never have we seen as rapid and encouraging progress in making that renewable as we do now; notably in solar panels and nuclear reactors.

Should you invest in NFTs?

No.

Do not do this.

More specifically; if you have enough expendable income that you can afford for a certain percentage of it to burn, then yes, but otherwise, I would not.

Just save two- to four-months of expenses in a savings account and then dollar-cost average into a passive index fund.  

Why are NFTs useful?

As you can probably gather, I’m not enthused about most existing NFTs. They don’t protect art, are rife with scams, and are basically just the most technologically advanced, novel way to tell someone ‘Look, I’m rich’. But, this is genuinely unique, interesting technology, and despite this inevitable, distasteful beginning, I’m bullish about the future of NFTs.

As laid out in a very good Harvard Business Review article, NFTs allow artists to monetize their work effectively on the internet, as wasn’t possible before without selling ads or personal data; they can allow greater security for documents, tickets, and records, without depending on central bureaucracies; and this is just the beginning. If virtual worlds become mainstream, then they could allow for the purchasing of digital items to cross between them; for buying music from artists without it being tied to a single streaming service or platform; and paying directly for single articles, books, and podcasts online, for very small amounts, avoiding the costs of payment processors, and perhaps leading to a healthier media ecosystem, without having to bankrupt oneself on Substack subscriptions.

And if none of those individual things excite you, that’s totally fine! Remember, these are very early days of a technology that is genuinely novel and important. At the moment, there’s a lot of scamming, a lot of bullshit, and a lot of cringe. But, give it time, let smart, creative people take it in directions we can’t even imagine right now, and there could be something genuinely great in NFTs on the horizon.

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