#84: Non-fungible token (NFT): digital, decentralized art market
Non-fungible tokens, NFTs for short, are financial instruments implemented on top of the blockchain. They can be bought and sold, just like cryptocurrencies. However, unlike bitcoins, each NFT is unique and traded individually. Whereas Bitcoins or ether are interchangeable, just like hundred-dollar bills. So what makes each NFT unique? Why would you purchase this particular NFT rather than the other one? Well, an NFT has an associated piece of data. That data is typically a hyperlink to a digital piece of art. What you actually purchase is… well… that link?
Indeed, you can purchase an NFT linking to Mona Lisa or an MP3 of “Bohemian Rhapsody”. However, you did just that: bought ownership of a hyperlink. There’s no inherent copyright or legal ownership associated. It’s worth as much as someone else is willing to pay for it.
To be honest, you can say the same thing about any collectable item, like an old comic book. But in the case of NFT, you don’t own anything physical. You don’t even own anything virtual. You can basically prove, using blockchain technology, that you are the person owning that particular link. There is no mechanism preventing anyone from simply copying the digital asset your NFT points to. Moreover, you can create NFT pointing to that same asset on a different blockchain. It’s even funnier when you realize that most NFTs, like Bored Apes and CryptoPunks, are… generated. There was no artist involved, you are buying auto-generated pixel art.
So in essence, you are buying a status symbol. You can prove that you own a given hyperlink. At least as far as the ledger is concerned. And you can sell it for profit. Well, technically, because everything lives on a smart blockchain like Ethereum, possibilities are endless. For example, you can build a smart contract that pays loyalty to an artist every time her art is resold. Or, you can build fair online ticketing systems, where each live event ticket is a separate NFT. This could theoretically deal with the problem of ticket flipping. Also, virtual items in computer games could exist as NFTs. In practice, none of these use cases became widespread.
There’s one more disturbing fact about NFTs. You don’t own a physical art. You don’t own a virtual piece of art. Well, the sole idea of ownership is doubtful. But it gets better. Most NFTs are just hyperlinks. Often to public, centralized Internet. This means that a link you own may change. It may become unavailable or change its contents to something less meaningful. You have no control over that. You simply own a URL.
The NFT market quickly exploded and imploded shortly thereafter. Countless NFTs rug pulled, which is a technical term for hyping a particular NFT, inflating its price, cashing out and running away. Oh, and don’t get me started on energy consumption. So, while I can see some use cases for decentralized ownership database and ledger… The current implementation seems flawed for many reasons. What was suppose to help independent artists, became yet another greedy speculative asset.
That’s it, thanks for listening, bye!