Why NFT makes no sense: Unraveling the Hype and Exposing the Pitfalls

What is NFT？

NFT stands for ‘non-fungible token’. Fungible essentially means interchangeable – for example, bitcoins are fungible since you can exchange one bitcoin for another bitcoin, and you still have something which has the same value. An NFT is non-fungible because it‘s unique and can’t be directly replaced by another NFT. NFTs can be anything digital – photos, videos, audio files, and so on. They have generated a lot of excitement because of their potential to use technology to sell and collect digital art.

Essentially, NFTs are digital assets – this is where the 'token' part of non-fungible tokens comes into play. When you buy an NFT attached to a digital asset, you're not taking ownership of the asset itself. You can‘t reproduce it or use it commercially. Instead, you’re taking ownership of a record of purchase in the blockchain, which you can keep or sell on to someone else.

How do NFTs work？

NFTs are layered on top of a blockchain – a ledger of transactions stored over multiple computer systems – and point to a web link, such as an image file. Usually, NFTs are held on the Ethereum blockchain, though other blockchains support them as well.

NFTs are created from digital objects that represent both tangible and intangible items. These include:

Art

Gifs and memes

Videos

Collectibles

Virtual avatars

Music

This list isnt exhaustive. NFTs can be almost anything: Jack Dorsey, the founder of Twitter, famously sold his first Tweet as an NFT for over $2.9million.

NFTs are the digital equivalent of collector's items. Instead of getting artwork to display, the purchaser receives a digital file. This gives them exclusive ownership rights because NFTs can only have one owner at a time. The unique data associated with each NFT allows ownership to be verified. It is also possible for owners or creators to store specific information inside of them – for example, articles can include their signature within an NFTs metadata.

To collect NFTs, you need a digital wallet that can store both cryptocurrency and NFTs. You also need cryptocurrency to make your NFT purchases. There are NFT marketplaces where you can browse NFTs – some of the best-known include OpenSea, Rarible, and Foundation. Many argue that NFTs are a way to support digital artists, while others argue that there's a resource cost involved in any blockchain transaction. If you are interested in NFTs, it's essential to be aware of the risks involved, including NFT scams and fraud.

NFTs don‘t work. The concepts behind them make little sense practically and philosophically, they have no legal backing, they don’t live up to the marketed hype, and their costs are prohibitive, both economically and ecologically.

And the only reason people put up with them over the past year is that they had nothing better to do. Its no surprise that the amount of attention paid to NFTs exploded during the pandemic, and not when the technology was introduced to the wider public in 2017: bored people had nowhere else to put their money while they were sheltering at home.

As the economy reopens, we are seeing the price of most NFTs being cut in half, if not more. Coincidence？ I think not.

10 Reasons Why NFTs Are Stupid

1.Fake scarcity

A few months ago, I made a little graph for one of my articles. And because its mine, I turned it into an NFT. That means that I verifiably own its deed. The blockchain says so.

There‘s a snag, though: there’s absolutely nothing I can do about you seeing the picture for free, or copying and sharing it. Try as I might explain that the picture has become scarce because its ownership is now unique as defined by a token, it does not give it much more value. Furthermore, nothing is stopping you from creating your own NFT of the very same picture by copy-pasting it. Why, then, would you buy it, or any other？

You could argue that buying such an asset COULD have some worth because you‘d be able to copyright it, sell it, alter it, and make sure you receive a fee whenever its likeness is used. But there’s a snag…

2.No copyrights for you

An NFT is not a piece of content itself, it is merely a code defining ownership, which often simply points to a URL. An NFT purchaser might assume that he purchased the underlying content that is associated with the NFT; however, in reality, the original creator is still the copyright owner and retains the exclusive right to copy, distribute, modify, publicly perform, and publicly display said content.

Additionally, NFTs are not backed up by any new or special digital laws at this time. Id have few legal recourses, beyond the already existing copyright laws, should someone take my graph and use it.

We may thus ask ourselves… how is this technology in any way “innovative” for content creators？

3.Commodification of Culture

Right now, and as explained above, NFTs do not corrupt one of the internet's core principles: free(ish) access to digital assets. Not yet, at least.

Their existence is however a step in that direction, and we should condemn it wholeheartedly. Sure, for now, anyone can still view content purchased as an NFT. But this may be only temporary if the commonly agreed rules were to change. It may have already begun: the video “Charlie Bit My Finger”, a staple of early internet culture, is being sold as an NFT, and will then be deleted from YouTube. The person who buys it might put it back there for everyone to enjoy…

If we do not take a stand for our common digital culture, its just a matter of time before swathes of the internet become private collections inaccessible to all but a few privileged friends and donors.

4.Digitalising real life

Beyond the appropriation of internet culture, NFTs can also represent real-world assets, such as houses, cars, or… moments in time. In an extreme interpretation of what NFTs can be, the NBAs new venture, Top Shot, is selling Moments from games in the form of GIFs.

There is nothing wrong with merging the digital and the physical to a point, but we cant go down a slippery slope where the continued digitalization and tokenization of our lives allow us to monetize more and more aspects of it, including MOMENTS IN TIME. That way lies madness.

The technology is very versatile, and there are very few things you wouldn‘t be able to sell as an NFT (again, it’s just digitally claiming the rights to something and selling that claim). And thats exactly what could become worrying in the long term.

5.No real use cases for technology

We‘ve already gone this far into the rabbit hole, so let’s be honest with ourselves: we‘re not talking about the Next Big Thing here. It’s been a decade since the first blockchain was invented, and not a single app that you, your friends, or your co-workers use regularly relies on that technology. By contrast, when the web was the same age that bitcoin is today, it had half a billion users around the world.

What does that make NFTs？ Beyond smart contracting use cases which are yet to materialize, they‘re only good as flimsy “stores of value”, within which bored millionaires can dump their crypto-gains. It’s not like they can use them anywhere else.

And, as described earlier, that value only exists as long as everyone is dancing to music. For anyone paying attention, though, its clear the song has already reached its last verse.

6.Long-term ownership is impossible

For a store of value to have any worth in the future, which is its sole purpose, the method of storage used needs to work long enough for the asset to appreciate.

This isnt an issue for wines, cars, houses paintings… But how old is the average NFT platform？ 6 months？ 2 years？ How long will they be in business before their founders take a job at Goldman Sachs？ And what happens to NFTs when their business does fold, as is the way of so many such start-ups？

For those paying attention, most of the start-ups and platforms used to sell NFTs today are no more innovative than any random website selling posters. The house of cards is shaking, and when it comes tumbling down, there will be nothing left of that “store of value”, other than a fun 404 error page.

7.NFTs have too many technical issues

Even if the companies themselves manage to survive for more than a decade, their systems often still depend on the old-fashioned pre-blockchain internet, wherein a token might suddenly vanish if someone forgets to renew a domain name.

The technology is so badly put together that Most NFTs dont permanently live on a blockchain. That would require too much energy. The content and metadata that an NFT represents are stored separately from the NFT smart contract itself. And that content is not well protected.

Furthermore, digital files require power to access and maintain and are incredibly unstable over time as new operating systems, plugins, and standards render things unviewable - often within a year. Itd be a miracle if 50% of NFTs survive past 2025.

8.NFTs are expensive to make and buy

Despite big democratisation talks, creating an NFT isn‘t cheap. You have to “mint” it (put them on the blockchain), which costs a noticeable amount because of the “gas fee”, which is the amount you give the person whose computer is solving cryptographic puzzles. Solving these puzzles takes a lot of energy, which in turn can create astronomically high electricity bills. It’s only fair then, that this person be rewarded.

However the gas fee costs tend to be hidden during transactions. And theyre not small. I spent 50$ to make the NFT I created for research purposes. It sets its price for 1.99$, but purchasing will also set you back 100$ in gas fees. When all is said and done, I get 2$ cents for my asset, and the crypto-millionaires who run the network get 150$. So much for decentralization.

Speaking of…

9.NFTs are not decentralised

Most of the marketing surrounding NFTs is based on the claim that such technologies do away with third parties, allowing sellers to interact directly with each other.

But guess who handled the sale of the largest-ever NFT auction a few months ago, and took a $6M cut in the process？ Christies, a 300-year-old company owned by French multi-billionaire Francois-Henri Pinault, also owns the Kering luxury group (Gucci, Balenciaga, YSL…).

Furthermore, the key concepts behind blockchains (Proof of work and/or Proof of stake) largely benefit the people who have the most power over said blockchain.

Add to all this the fact that 70% of the crypto supply necessary to purchase NFTs is mined in China, and we dont get a decentralized picture, do we？

10.Impending climate disaster

As explained earlier, to receive financial rewards, miners who create blocks within a blockchain have to solve complex puzzles, which require a lot of processing power, and thus a lot of electricity (often from burning coal in countries like China). And they have to do it faster than their peers.

This energy-intensive network competition is called the “proof of work”. Proof of work, in essence, is a way to confirm that computational effort has been expended by “the prover” (the system doing a task). Its just how blockchains work. The more a computer “works” (the more energy is expended the more coal is burnt), the more competitive it is.

This computational arms race essentially rewards the participants able to burn the most coal.

This is the price of an NFT: a bit of cultural value on top of hundreds of acres of forest burnt to make electricity to create fancy puzzles enabling technology.

Types of NFT scams

Both cryptocurrency and NFTs are relatively unregulated spaces. This means there is potential for criminals to exploit loopholes and carry out scams. Thats why there has been news coverage of NFT Ponzi schemes, OpenSea scams, NFT art finance scams, and more. Some of the best-known NFT frauds include:

Impersonation

Third-party marketplaces like OpenSea exist to facilitate NFT transactions and provide security that underpins each sale. But criminals can set up imitation marketplaces with similar URLs to deceive users. An NFTs visible component is an image that can be easily copied plus some plaintext information, which means these websites can look very similar to legitimate marketplaces.

Rug pulls

A rug pull is a scam where the promoters of a scheme deliberately hype it up through social media to drive up the price. Once they have taken investors' money, they stop backing it, which leads to the value of the asset crashing, and investors incurring losses. A variation on this theme is when developers of an NFT remove the ability to sell the token – by adding code that prevents this – leaving the purchasers with an unsaleable asset.

Pump and dump schemes

A pump and dump scheme is when a group deliberately buys up NFTs to drive up demand artificially. Believing the NFTs to have value, unsuspecting buyers join the auction and start bidding. Once the bids increase, the perpetrators sell off the NFTs for a profit, leaving buyers with worthless assets.

Phishing scams

Before buying an NFT, you need to sign up for a crypto wallet. NFT phishing scams typically target customers with fake ads – for example, on Discord, Telegram, and other public forums – which ask for their private wallet keys and 12-word security phrases. Or scammers may impersonate MetaMask and send you fake alert emails saying your wallet will be suspended for security issues, prompting you to click a link in the email to verify your account. An NFT phishing scam is designed to obtain your personal information and drain your digital wallet.

Customer support scams

Similar to phishing scams, hackers pose as technical or customer support staff for blockchain marketplaces and contact unsuspecting targets on Telegram or Discord. Under the guise of attempting to resolve issues, the scammers send links to fake, but official-looking websites – intend to gain personal information and access to cryptocurrency wallets. Alternatively, they may ask you to share your screen to resolve the issue – in reality, they want to see and screenshot your cryptocurrency wallets credentials.

Bidding scams

Bidding scams occur when investors want to re-sell their purchased NFTs in a secondary market. Bidders might switch your preferred currency with lower-valued cryptocurrencies without telling you after you have listed your NFT sales. This can lead to potential losses for the seller if they don't double-check the currency before agreeing on the sale.

Counterfeit NFTs

Scammers can plagiarize an artists work and list the fake version on an NFT marketplace. Unsuspecting buyers can end up buying a counterfeit NFT that has no value.

NFT giveaway or NFT airdrop scams

Scammers can pose as genuine NFT trading platforms on social media to promote NFT giveaways. They usually offer a free NFT if you spread their message and sign up via their website. Once you have signed up, you're prompted to link your wallet credentials to receive your 'prize'. Once they have your credentials, they can access your account and steal from you.

Investor scams

Because of the anonymity associated with dealing in cryptocurrency, investor scams can be common with NFTs. Scammers exploit anonymity by creating projects that appear to be viable investments, then disappearing with funds they have collected from prospects without a trace.

Examples of NFT scams

2021: Evolved Apes

An example of an NFT rug pull took place in October 2021. A collection of 10,000 'Evolved Apes' went on the market. Buyers were supposed to receive a unique ape made of component elements that could be battled against other apes in a vaporware fighting game, where the prizes were cryptocurrency rewards. The initial NFT offering was to raise funding for the game. However, once the developer – known as ‘Evil Ape’ – had raised 798 Ether (equivalent to about $2.7 million at the time), he disappeared – leaving investors with nothing but a jpeg to show for their investment.

2021: Fractal

Fractal is a marketplace for game item NTFs. In 2021, scammers created and promoted a fraudulent NFT giveaway that resulted in users losing over $150,000 in cryptocurrency. Buyers were hoping to receive a limited edition NFT. Instead, they received an unpleasant surprise when they discovered that a link sent through the project‘s official Discord channel was a scam set up to steal cryptocurrency. Users who followed the link and connected their crypto wallets in the hope of receiving an NFT found instead that their crypto holdings had been transferred to the scammer’s account.

2022: Frosties

The Frosties NFT scam was an example of a rug pull scam, which led to the theft of at least $1.2 million. The creators of an NFT collection called Frosties absconded with investors' funds. They deactivated all communication channels with members – leaving a community, which numbered about 40,000 at its peak, and who had been promised various rewards – stunned.