home . feature ...

An introduction to NFTs and their pros and cons

Thursday, June 02, 2022

A toy Fiat 500
My NFT: a postcard of a toy Fiat 500 I own.

NFTs are one of those topics that polarise opinion. You're either a staunch defender of this amazing investment opportunity, or deriding it as a Ponzi Scheme preying on the unwary.

There's a bit of truth in both points of view. Although I've had a couple of pieces of art available as NFTs, they've sat there doing nothing. I've not wanted to promote them for fear of being sucked into the negative side of the debate. So after weeks of digging through analysis, horror stories and hype, I've reached a conclusion:

They're OK for some people, not for others, and you need to join in with eyes wide open.

What I'm hoping this post does is offer a balanced view of the hows, whys and why-nots of non-fungible tokens.

Let's start with the basics.

What are non-fungible tokens?

NFTs are based on a technology called Blockchain. In simple terms this is a long list of every transaction that's happened in a specific implementation. These lists can't be changed, and the entries on them are verified as accurate.

Let's say I have an original Fiat 500 toy car I want to sell as an NFT.

I take a photo of the toy, print it on a single postcard, put it in my shop window and offer it for sale. This is the NFT, and creating it is called "minting".

A toy Fiat 500
My NFT: a postcard of a toy Fiat 500 I own.

You like the photo, so you buy the postcard for $10. You don't receive the physical toy car - I still have that. Instead, I write your name in big letters on a sign above the postcard in my shop window. Now anyone who walks by will see you own the postcard.

Photo of a model Fiat 500 with a stick that says Your NFT placed on one side of the image
Your NFT. All I've done is put a sticker on it - it's still in my shop window.

Someone walks by, also likes Fiat 500s, and decides they'd like their name above the postcard. So they pay you some money, and I change the sign. Now they can tell all their friends they own the postcard in my shop window.

While all this is going on, I own the toy Fiat 500. If I want, I could create new postcards. However, the more I create, the less valuable they become. I could earn a small commission every time the sign above the postcard changes, so it's in my interest not to flood the market.

All of this trading happens on the blockchain. It's a permanent ledger that records what was sold to whom, by whom, and so on. Also, real money never changes hands. Instead, it's bought and sold in "cryptocurrency", a different type of blockchain.

It's the fact this trading takes place in a digital world with no direct connection to our physical one that seems to underpin the tension and conflict in NFTs.

Fungible? Non-Fungible?

NFTs are a type of blockchain, basically a massive database of every asset and transaction that's taken place within its domain. In a cryptocurrency like bitcoin, each token (the bitcoin) has the same value. This is called a "fungible token" because you can buy the same amount of stuff with your 1 bitcoin as I can with mine.

In NFTs, the tokens (the artwork) have different values. Your 1 artwork could be worth more or less than the 1 artwork I have. The artwork token is called a "non-fungible token".

Why do people buy NFTs?

There is a lot of hype around NFTs being bought for cents and sold for dollars. Dig deeper and you'll find the reasons people buy and sell are as nuanced as any other market.

Investment / Speculation

From the noise, making money - and hopefully lots of it - might seem like the top reason for buying into it. I'm not convinced, particularly now the market has widened to include NFTs offered by celebrities and brands. However, there are people making careful purchasing decisions, and others who just buy something and hope they can sell it for a profit. The former I describe as investors, the latter as speculators. The speculators appear to make the most noise.

Supporting an artist

NFTs don't have to be traded, they can be kept. There are those who buy from specific artists to support them, or because they are fans. Think of it as a type of patronage.

This is becoming more common for celebrity and brand based NFTs.

Collecting

I think it's an inherent part of human nature to collect things. For some, NFTs are another "thing" to collect. It might be the work of a specific artist, or it could be AI generated images of primates. Either way, it's the digital version of collecting stamps.

Bragging rights

No doubt some people buy NFTs so they can tell the world they own it. They could buy the most expensive artwork in history, or the right to use a specific artwork in a particular way. Either way, it feeds their ego, and that's perfectly fine.

Crime

It's impossible to ignore the potential for crime in NFTs. There are scams circulating that see people part with large sums for worthless fakes, or who are caught in the middle of money laundering operations. Legal frameworks haven't caught up with the potential for crime, or how to deal with its victims and perpetrators.

Speaking of the law

Although there's very little in the way of regulatory frameworks to protect artists and buyers, markets have been quick to address issues like copyright theft that protect creators. Usually, this involves delisting a cloned NFT and blocking sales. That said, buyers have little recourse if they buy into a scam.

finding the perpetrator to prosecute.

Pitfalls and downsides

Nothing is certain in life, and some of the valid complaints about NFTs get over-hyped. Most of what I've seen complained about could be applied equally to physical products and usually come down to theft, forgery and scams.

Right-Click & download

This is often cited as the biggest drawback of NFTs. Anyone can go to the public blockchain record and download the image or media associated with it. If you can do that, what's the point of buying it?

Artists are countering with content that's ONLY available to the owner. This can include videos, text, more images, even games. As it isn't available to the wider public, it reinforces the sense of exclusivity "just looking at it" on the blockchain lacks.

Theft

If you can right-click and save on an NFT's image, what's stopping you from minting your own version? Or an NFT of any image? Price it right, and the buyer might think they're getting a bit of a bargain (not too low to arouse suspicion, not so high it draws attention).

It's not only popular NFTs that are stolen. Photographs and videos from across the internet are finding their way into markets without the creator's knowledge. When they are found and flagged, most reputable markets will block their sale. That leaves you with an asset that has no value, and which you can't sell on.

Graphic showing the same image of a Fiat 500 presented 5 different ways
Different ways your NFT could be stolen: from simple copy/paste to image edits to trick robots looking for fakes and forgeries

Forgery

There are ways to generate NFTs that look like the original, but aren't. This isn't about stealing one and creating a new record, it's manipulating the blockchain to think another copy exists.

The most common appears to be "sleepminting", where a forger fakes a sale and generates a new NFT to sell on. Just like with an art forgery, it looks legitimate until you take a deeper look into the blockchain. That's when you discover your priceless Mona Lisa is a forgery and as valuable as dirt. You won't be able to sell it, and if you do, you risk accusations of fraud and copyright theft.

Ownership

In general, you do not own the underlying asset. Remember our toy Fiat 500? I always own it. If I want to, I can take another photo and sell that too.

This can be a psychological barrier. Some people like to "own" the thing they buy or consume. They want to be the only person who has the toy Fiat 500. If you have this view, NFTs are unlikely to be for you.

That said, much of the media in our lives isn't owned by us. Although you have a physical CD in your hand, you can't do what you want with it. The label owns the music on it, and you can't play it at a public event without buying another licence. The same applies to the music on your phone, or the movies you bought from Apple.

Link Rot

Let's go back to the postcard. When you buy it, I let you come and see the real toy Fiat 500 every week as an exclusive benefit of ownership. That's great and you enjoy regular visits to admire the toy car.

But then I die, or move, or get rid of the real toy car. All you have is the postcard, not the physical Fiat 500 to come and look at. The same thing can happen with NFTs. If it has a link to a website for bonus content and that site shuts down, you've lost some of the value. You will have whatever you downloaded, but when you sell it on, there will be bits missing.

Currency Speculation

One issue often lost in the discussions is you are often investing twice. The first investment is in the NFT itself, with all the pros and cons that brings. The second is in the cryptocurrency used to buy it. The latter is a form of currency speculation, a bit like buying US dollars when your country uses the Euro. But whereas you can look at the state of the US economy and make judgement calls on whether you think the exchange rate will rise or fall, what drives cryptocurrency exchange rates are more opaque. There are no economic fundamentals to review, and a tweet from a billionaire or the silence of a founder can trigger or worsen currency fluctuations.

Graphic showing the price of Ethereum from 21/5/27 to 22/5/27 against the US Dollar, showing a general decline in value
The value of 1 Ethereum - a cryptocurrency often used with NFTs - from May '21 to '22

Alternative ways to support artists

If you're interested in collecting or investing in art, but NFTs aren't your thing, there are plenty of established alternatives. If you'd prefer to own something physical or that can't be taken away from you, consider buying directly from the artist. Many will be happy to sell you a signed print, or point you toward their online store.

Some artists offer their work through online market places like Redbubble and DeviantArt. Others use subscription based patronage, where you can pay a small amount each month for exclusive new artwork and content. Patreon is commonly used, and OnlyFans, although it has its origins in adult entertainment, is used by non-adult content artists. YouTube has also entered the fray.

Art markets are highly developed, and range from small local galleries to the major auction houses. Just be mindful it is rare to turn a quick profit, and it requires a lot of time and energy to research the right purchases.

The long and the short

If you're going to buy into NFTs, do it with your eyes open.

If NFTs aren't for you, don't sweat it. They're not for everyone, and if you are risk averse or prefer to own something, you're probably better off looking elsewhere.

Bottom line

Just always remember: buyer beware applies.

My name is Ross Hori

I'm a freelance writer, designer and photographer. By day I create articles, features and reports. At night I take photos and write fiction.

My socials...

click for LinkedInclick for Tumblr