Since I dove into crypto Twitter, I feel like I have been sucked into a deep echo chamber. There are more than a few "We are early"/"WGMI" chants and a whole lot of "Why NFTs are the future: A long 🧵". It is rare to hear about anything else.
NFTs actually have a horrible reputation. Some people don't quite get what they are, others think NFTs are stupid or even a scam and then there is the group that thinks NFTs are destroying the planet and should be stopped right away. In my opinion, some of this criticism is valid but most of it stems from a lack of understanding.
I want to preface the post by mentioning that this is my opinion. Everyone is entitled to their own. I believe the points I have made below are rational and I've done my best to not be biased. Here goes.
NFTs 101
NFT stands for non-fungible token. The word 'fungible' loosely means 'replaceable'. A dollar bill is fungible. If you lend someone a dollar bill and a week later, they give a dollar back to you, it doesn't matter if it is the same bill you gave them. Each dollar bill has the same value and can be used interchangeably. A piece of land is non-fungible. Every piece is unique and you can't just replace it without altering its value. A piece of land is unique and there cannot be another one exactly like it.
Mona Lisa is a unique painting. Even though it has been reproduced countless times by other artists, there is only one original. The concepts of uniqueness and scarcity are well understood and quite intuitive in the physical world. NFTs bring these notions to the digital world. More importantly, NFTs provide a decentralized approach to digital ownership.
The concept of digital ownership isn't a new idea. We've been "buying" domain names for decades! We even "buy" movies on streaming platforms. These are entirely digital objects but the ownership record is maintained by centralized institutions. Well, we don't really buy domains, we just rent them for a certain period. Similarly, when you "buy" a movie, you are essentially buying access to watch the movie on that platform. There are restrictions the central institution can impose and we are confined to use these assets that we supposedly own, as per their guidelines. With NFTs, we have a way to verify digital ownership in a decentralized manner which provides us a lot more freedom and real ownership over a digital asset. The possibilities are endless and NFTs have the potential to become an integral part of our lives.
So, why the hate? I've noticed a variety of arguments from people who abhor this entire concept. Let's dive into each of them one by one:
Arguments against NFTs
This is one of the most common responses to any tweet that reports a high-value NFT sale. I think these people are missing the entire point. Sure, you can right-click and save that jpeg but all you are getting is that jpeg. The real value is in the recorded transaction on the blockchain. The owner of the NFT has access to the utility provided by the token, any future airdrops, entry to physical world events, etc. We are still in the experimental phase of NFTs and new projects push the boundaries further by the day. There is so much more to come.
As far as the validity of this argument goes, it is hard to find any. I do agree that the prices of most of the NFT collections are ridiculously inflated and there is a limited semblance of real value creation to justify it. How do you defend a million-dollar value for an access pass that gives you some engagement on Twitter and provides access to some events? Well, it is no different than the art market.
Art is intrinsically worthless and yet we have paintings being sold for millions. This is because there is a subset of the population that believes it holds that value. With NFTs, you have the added benefit of providing additional utilities and a thriving community to back it up. With that said, this only applies to 1% of all the NFT collections today. NFTs have quickly gone mainstream in 2021 and when there's a gold rush, everyone wants to jump in. There are countless knock-off projects that do not have a vision and in the end, would most likely look like pyramid schemes.
It is a fair point. We already have a world with a lack of resources so why should we artificially produce scarcity in a digital world where duplication is practically free? Well, the answer lies in what NFTs are being used for today. Also, just to preface my argument, when I talk about NFTs, I mean legitimate projects that are actually delivering value and not rug pull cash grabs.
The scarcity allows the formation of a tight-knit community and provides direct access to the artist. The artificial scarcity also allows the artist to directly fund their art and make it better for the fans to enjoy it. Digital artists have been at the bottom end of the chain for way too long and when a technology allows them to capitalize on their talent, it should be applauded.
My argument falls a little short when talking about giants like Adidas, Nintendo, etc. entering the NFT space and restricting access to fans as they get priced out by the whales because of the artificial scarcity. There certainly needs to be a balance between what should be made into NFTs. We are still in the experimental phases and I hope that eventually the solution that benefits the artists and the fans would come out on top because of the inherent decentralization.
There is a lot of truth to this argument. NFTs are rife with scams and part of the reason is that it is an unregulated space with the potential to generate substantial economic value. On any given day, I receive at least ten scam DMs posing as the legitimate project. There are also rug pull projects where the anonymous founders run away with the money after the mint. To add to that, scammers are getting smarter by the day and a separate post would be needed to detail all the different scams currently going on.
The thing is, scammers have been a part of every tech advancement. The internet gave birth to email scams (I still receive a lot of them) and phishing. NFTs are no exception. This is certainly an issue but it is also an opportunity. The focus should be towards spreading awareness about these scams and building tools that protect the users rather than shunning the technology because of a few bad actors. It is also worth mentioning that a majority of the NFT volume is spent on legitimate projects. It again comes down to the lack of understanding behind why someone would pay an obscene amount of money for a jpeg and to them, the only valid explanation is that the person buying these NFTs is either getting scammed or is doing something illegal.
Hype-based pricing is certainly a real problem in the NFT space. A lot of projects have nothing of substance to back their price and rely solely on a few "influencers" touting it everywhere. People throw their money at it because of FOMO and end up losing all of it when the hype dies down. While this isn't great, people themselves need to do their research and only invest in projects they truly believe in. I've detailed some of my thoughts on a sensible approach to NFT investing here.
There is certainly merit to this argument but clarification is required on what exactly is burning the energy. When the topic of energy usage comes up in the context of crypto, it is referring to Ethereum's proof of work system. Essentially, in that model, miners run computations to come up with a specific number in order to create a block. These computations cost energy. NFT transactions are part of that block and even if the block is empty, those computations would still need to run. In a way, it can be thought of as a car that is going to keep on running and burning fuel no matter what so might as well play some music.
That is a cop-out however because NFTs do impact the energy footprint indirectly. With increasing NFT trade volume, the congestion on the chain increases which in turn increases the cost of gas and further incentivizes mining. This is certainly a real issue but there are viable alternative solutions like the proof of stake system used by the Solana blockchain. Ethereum is also in the process of migrating to a proof of stake system.
I agree that the carbon footprint from NFTs is very real. I can also see how jpegs of apes being sold for millions of dollars at the cost of the environment can rub some people the wrong way but we also need to understand that running an economy comes at a cost. NFTs are a game-changing technology and are here to stay in one form or another. We are still in the experimental stages and crypto art is just the very first use case. Once we confirm the reliability and scalability of these systems, you can expect to see NFTs in a variety of different places -- public records, land ownership documents, ticketing, voting, gaming, identity verification are just a few things on that list.
In my humble opinion, shunning a technology with the potential to revolutionize a plethora of industries based on misguided information isn't the best path forward. We certainly have problems with the current use case but that is just part of the evolution of a technology. The heavy energy use is objectionable but that warrants a solution, not abandonment. I sincerely hope that the focus shifts to making crypto and NFTs greener, safer, and more accessible in the future rather than just outright hatred.