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WTF is an NFT?
🕑 Added 2021-03-19 01:57:49 +0000 UTCNFTs are all over the news lately.
Recently, I was having drinks with a friend, who knows zip about crypto, and out of the blue, she started asking me about “non-fungible tokens.”
The next day, a musician friend posted an amateurish drawing of a guitar on Facebook, proudly announcing, “This will soon be available as an NFT.”
If initial coin offerings were the crypto grift of 2017 and decentralized finance (aka “DeFi”) was the grift of 2020, then “nifties” are the grift of 2021, and they do just what crypto grifters need them to do: lure more dumb money into crypto.
How do they do this? By convincing artists that by “tokenizing” their digital art, they can prove ownership and make oodles of money for their work. They just need to buy crypto first, and then sway their friends into believing that crypto and NFTs are the wave of the future. Also, by convincing investors that NFTs are the hottest new thing.
If you are trying to get up to speed on this nonsense, you’ll find answers to your most basic questions below.
What’s an NFT?
NFT stands for non-fungible token. Fungible means interchangeable. It’s the idea that one asset can be swapped out for another and nothing is lost.
Bitcoin and ether, the two most popular cryptocurrencies, are examples of fungible tokens. One bitcoin works like every other bitcoin; likewise with ether.
A non-fungible token is different because only one ever exists. Each NFT contains unique data, so NFTs are not interchangeable with each other. They are not divisible either, whereas fungible tokens are.
This is a wonderful play on bitcoiners’ idea of scarcity. There will only ever be 21 million bitcoin—and there will only be one NFT! Scarcity clearly means something is valuable. Grab it while you can.
Most of the ICO tokens in the 2017 crypto bubble ran on Ethereum and were based on the ERC-20 token standard, so exchanges and wallets would know how to integrate them. NFTs on Ethereum also have their own standard: ERC-721.
Other blockchains, like Tron, Binance Chain, EOS, and Polkadot, support NFTs but Ethereum is by far the most popular and widely used.
Because NFTs are unique, they are hyped as “collectibles,” rare one-of-a-kinds that will only go up in value over time.
What are you actually buying?
An NFT is only a pointer to something else on the web. It could be an image, a music or video file, or even a tweet. The object itself does not live on the blockchain.
In fact, the server holding the object could go away or it could change what is displayed at that location—and then your NFT would point to nothing or something totally different, like a rug.
Really, an NFT is simply proof that an object exists.
It doesn’t convey copyright, or for that matter, any legal rights at all. If anything, it is akin to a “certificate of authenticity,” which says this is where this thing is located. Unless you have a contract that specifically spells out you own the rights to this object, you literally just bought the pointer.
In addition to a slew of hitherto unknown auction houses where NFTs are sold, big-name auction houses are getting in on the game. Sotheby’s recently announced it will be selling its first-ever NFT on behalf of digital artist Pak in April.
And last week, Christie’s auctioned an NFT of Beeple’s “Everyday: The First 5000 days” for $69.3 million in ETH. Christie’s even made the unusual decision of accepting its premium in magic beans.
In its conditions of sale, Christie’s carefully points out that NFTs carry no rights:
“You acknowledge that ownership of an NFT carries no rights, express or implied, other than property rights for the lot (specifically, digital artwork tokenized by the NFT). You understand and accept that NFTs are issued by third parties, and not by Christie’s itself.”
Even if you own an NFT, that doesn’t mean you can restrict other people from seeing the object it points to.
Jack Dorsey, Twitter’s billionaire CEO, is selling an NFT to his first tweet. The bidding is now up to $2.5 million. But you don’t need an NFT to see the tweet. (It’s worth mentioning that Dorsey is a big fan of crypto. His company Square invested $50 million into bitcoin last year, so it’s no wonder that he is shilling NFTs.)
When you buy an NFT, what you are buying is the private key to a crypto-token. The value is mainly speculative. You will only get for it what someone else is willing to pay—if you can find a buyer, and there is no guarantee that you will, when the time comes to cash out.
The problem is that people’s perceptions of what they are buying when it comes to NFTs don’t always mesh with the legal realities. And marketplaces involved in these sales are not always transparent about what they are selling. In fact, the more questions you ask about the real underlying value of an NFT, the vaguer the responses become.
How to create an NFT
If you are an artist who wants to create an NFT to auction, first you want to download a digital wallet that supports the ERC-721 token standard, such as MetaMask, Trust Wallet, or Coinbase Wallet, and put a little ETH in it to pay for “gas.” Plan on spending $50 to $100 worth of ETH to cover the costs of creating your token.
After that, there are plenty of sites, including OpenSea, Mintbase, and Rarible, that will take your money and step you through the process of “minting” your NFT.
Connect your wallet to one of those sites. Write up a description of your artwork, upload your image, and voila, you’ve created your first NFT.
Unfortunately, many struggling artists find their NFTs simply languish on these auction sites, and they’ve sunk $100 into nothing when they could have gone out and bought groceries instead.
A short history of NFTs
Where did NFTs spring from? Although the technology for NFTs has been around almost as long as bitcoin, NFTs hit the mainstream in 2017 with CryptoKitties, a game that allowed people to buy and “breed” limited-edition virtual cats with crypto. CryptoKitties was the first NFT to use the ERC-721 standard.
Last summer, game developers got into NFTs in a big way. NFTs enabled gamers to win in-game items (e.g., a digital shield, a digital sword, or digital skins), transfer their assets from one game to another, and then sell their in-game NFTs in blockchain marketplaces—sometimes for impressive sums.
Soon after, NFTs found their way into the art world, hyped by celebrities who weren’t always up to speed on crypto. Lindsay Lohan minted her own token on Rarible, based on an image of her face.
Hours after she put her NFT up for sale, she tweeted, “Bitcoin is the future, happening now,” even though her NFT lived on Ethereum. Lohan sold the image for over $17,000. It was quickly resold for $57,000.
Here are some NFTs making the news in the last two months:
- Grimes sold $5.8 million of NFTs, after putting them up for auction on Nifty Gateway.
- Kings Of Leon generated $2 million on NFT sales of their new album. (The music download is not an NFT, but you get an NFT, for some reason.)
- Chris Torres auctioned off the NFT for an animated meme called “Nyan Cat” for $580,000. He’s now in the process of selling more memes.
- A video of NBA star LeBron James dunking a basketball sold for $200,000 as an NFT.
Keep in mind, most of these NFTs don’t sell for real money, they sell for ETH, and the trick is then converting your ETH into fiat, so you can spend it in the real world.
What are the risks?
NFTs open the door to fraud and general funny business. This is because 1) money is involved, usually in the form of crypto; and 2) regulators haven’t caught up with grift.
Crypto bros promote NFTs as the ultimate stamp of authenticity, yet for many artists, the NFT market has done the opposite: it’s opened the door for swindlers. Here’s what can happen:
You can create an NFT of someone else’s work. There are no protections in place to ensure that an NFT you are buying was created by the actual artist. Digital artists, ranging from 3D renderers to pixel painters, have all discovered their art on online marketplaces.
There are literally dozens of bots on Twitter that will allow you to create an NFT of a tweet simply by tagging it, and Twitter has thus far made no moves to block these accounts.
The problem got so bad that Corbin Rainolt, who designs detailed paleo art, had take down all of his dinosaurs and repost them with watermarks.
“I tried to block all NFT accounts but it seems I can’t block everyone of these accs,” he said on Twitter.
Illustrator Chris Moschler doesn’t get the buzz around NFTs.
“Art theft has never been this aggressive and rampant ever before,” he tweeted, after blocking dozens of Twitter accounts trying to mint NFTs based on his tweets. “I cannot understand how this is still being called a revolutionary movement in the art world.”
It is also possible to create an NFT of a piece of work on one auction site, and then create NFTs on the same piece of work on a plethora of other auction sites. What’s to stop you?
Some NFT marketplaces do better due diligence than others, but they take a cut of anything sold and can easily wash their hands of it afterward.
Your NFTs can also be stolen. Not your keys, not your crypto, as the saying goes, and when you leave your NFT on an auction site, they have control of the keys.
Recently, several Nifty Gateway customers reported a hacker breaking into their accounts and stealing their NFTs. Some of the victims also said their credit cards on file were used to purchase additional NFTs, which were then transferred to a hacker’s account. (Nifty said those users did not have 2FA turned on.)
Also, NFTs open up big-time opportunities for money laundering. Art is an attractive vehicle to launder money, to begin with. Transactions are often private, and valuations of art can vary widely for unexplained reasons. Art prices can also be extremely high, so there is no reason not to expect that NFTs will be used for the same purpose.
Right now, the NFT bubble is a big one. Crypto grifters promote NFTs because it’s a new avenue to bring fiat money into the world of crypto and to pump up their bags. The problem is, all bubbles eventually pop, and when this one does, retailers will be left holding the bag.
Feature image: Beeple’s artwork from “Everydays: The First 5000 days.” Courtesy, Christie’s.
