Three Major Misunderstandings About NFTs

Author: Eric Ravenscraft, Wired

Original Title: NFTs Don't Work the Way You Might Think They Do

Compiled by: Biscuit, Chain Catcher

In recent months, NFT news has been everywhere. As proof of ownership of digital items, the hype around NFT tokens has reached a fever pitch, with billions of dollars flooding into the market. For some, these NFTs are the hottest new collectibles; for others, they are a powerful investment tool; and many believe they represent the future of the internet.

Currently, NFTs do not have the capability to accomplish what they are purported to do. The theoretical technology behind NFTs, cryptocurrencies, and other blockchain applications is too avant-garde and can easily be misconstrued into misinformation. Explaining the issues surrounding NFTs is complex, but we will break them down as succinctly as possible to clarify some common misconceptions.

NFTs Are Not Certificates of Ownership

The most misleading claim about NFTs is that they are unique, blockchain-based certificates that prove an individual "owns" a digital asset. Such certificates are unique, and if you have one in your crypto wallet, you supposedly have full ownership of it.

This claim is misleading. For beginners, NFTs can only represent ownership of themselves, more precisely, a claim of ownership. As software engineer Molly White explained to WIRED, "Using an NFT does not grant you ownership of the project (image, game asset, etc.) in any physical or digital transfer sense."

Instead, NFTs typically point to digital assets hosted elsewhere. NFTs do not transfer ownership rights such as copyright, storage, or usage rights to the asset itself. As White explains, when someone purchases an NFT, "they are paying to link their wallet address to a pointer to some database on a blockchain. I wouldn’t say they really 'own' anything."

Moreover, Ethereum (currently the most popular blockchain for minting NFTs) does not have a mechanism to distinguish whether someone owns an NFT. If someone steals your bicycle, it is generally assumed that the ownership of that bicycle still belongs to you. For NFTs, the "owner" is simply the person who has the NFT in their wallet. Therefore, if someone's BAYC is stolen through phishing, the blockchain will recognize the thief as the new owner.

Centralized markets like OpenSea occasionally freeze the sale of stolen assets (referring to their own platform), which indicates that "real" ownership does not lie with the NFT itself but rather with the market that trades them.

NFTs are merely unique within the blockchain they were created on. For example, the NFT marketplace Rarible offers three different blockchain options when minting tokens, but what happens when two different people mint the same NFT on different blockchains?

Artists can choose to mint their art NFTs on multiple blockchains, creating an "original" on each, but deciding which of those blockchains is "authoritative" or "real" remains a social and platform issue.

For instance, Twitter recently began supporting NFT profile pictures, which are displayed in a unique hexagonal frame, but currently only accepts NFTs from Ethereum. Owning an NFT on the Flow or Tezos blockchains will not allow you to display that hexagon. Twitter may change this in the future, but it again places power in the hands of a centralized platform to decide which chains are "real."

Additionally, nothing prevents anyone from creating multiple NFT images on the same blockchain. Twitter user @NFTTheft has documented numerous cases of players on OpenSea stealing artists' works, creating duplicate NFTs mixed in with original works (or selling NFTs of artworks that the original artist never intended to sell).

Since the blockchain does not verify whether the person minting the NFT has the rights to do so, it falls to the platforms to address this issue. "When an asset is minted as an NFT, verifying ownership of the asset is more of a social issue than a technical one," White explains. "It’s hard to do just through code."

According to OpenSea's analysis of its own marketplace, over 80% of NFTs on the market are plagiarized artworks or fake collectibles. The company attempted to address this by setting a limit on the number of free listings a user can create, but faced strong backlash from users and had to abandon the plan.

Meanwhile, DeviantArt protects artists' rights through an automated scanning tool for theft, sending over 80,000 infringement alerts to artists within five months, but this tool only applies to DeviantArt users.

OpenSea has also tried to verify accounts and payments to address this issue, but the criteria are entirely dependent on OpenSea. For example, every username on Twitter could be unique, and if you registered a username first, it may indicate that you are the real person behind that username.

However, the username of the 45th President of the United States still contains "real" because a parody account previously registered @DonaldTrump. Similar to OpenSea, Twitter can only distinguish which accounts belong to real people through manual verification.

Complicating matters, the marketplace is only part of the interaction between NFTs and the blockchain, but anyone can participate. Therefore, even if every mainstream NFT marketplace installed tools to prevent the minting of stolen artworks and verify all their creators, there would still be no way to stop someone from minting fake artworks on these public blockchains like Ethereum.

At best, NFTs can only prove ownership of themselves. Third-party systems are still needed to verify the external data that NFTs point to, such as artworks, digital projects, etc.

NFTs Do Not Transfer Data Between Game Applications

A more bizarre explanation of NFTs is that they will allow user data to migrate from one game/platform to another, achieving a true metaverse. While technically feasible, transferring data from one application to another is already quite easy, but when it comes to complex data like video games, it is nearly impossible.

Game developer Rami Ismail outlined some of the difficulties on Twitter using a simple six-sided die as an example. Even a very simple 3D model contains complex data, including the shape and texture of the model itself, as well as physical and animation information.

For example, to represent upward direction, some game engines use Y as the vertical axis, while others use Z, meaning that migrating a game from one engine to another could result in the model flipping.

Developers can modify 3D model assets to work correctly across different game engines, but this requires time and effort. Owning an NFT of a game does not mean that another game will automatically support it.

There are also intellectual property issues. For instance, if you own the "Thunderfury, Blessed Blade of the Windseeker" from World of Warcraft, the model, texture, and all related IP are Blizzard's. Assuming Blizzard provides an NFT of that item to players, no other game can import it without the company's permission. Even if Blizzard does grant permission to other developers, they must establish a direct partnership with the company.

These types of collaborations are already common in games like Fortnite, which partners with Marvel, Star Wars, and God of War to bring characters into the game. Developers have also offered discounts to veteran gamers. But these partnerships can be accomplished without NFTs.

Even if NFTs could be used to build external inventory systems, this is only a small part of the functionality of bringing items, characters, or outfits into a game; future automation technologies could handle this task entirely, while most of the work still revolves around developing specific game IPs.

NFTs Are More Harmful Than Beneficial for Artists

NFT supporters claim that artists can make money by selling NFTs of their artworks. However, the demand for NFT artworks in the market may be artificial. For example, in March 2021, artist Beeple's NFT auction for $69 million made headlines, yet in the months leading up to the auction, a project called Metapurse purchased 20 pieces of art unrelated to Beeple and bundled them together.

They then sold a collection of 10 million decentralized ownership tokens called B20 tokens in January 2021. On the surface, the idea was to allow those who could not afford expensive artworks to buy fragments of the collection and participate in the speculation of the tokens.

Angel investor Vignesh Sundaresan is the buyer of Beeple's work and also owns 59% of the total B20 tokens. The B20 tokens were initially sold to the public at $0.36 on January 23, then reached a high of $23.62 just days before the Beeple auction, a rise of 6,461%.

By the end of May, the trading price of B20 had fallen below $1. At the time of writing, the trading price of the token is $0.40. Beeple himself also owns 2% of the B20 tokens. This means that during the NFT auction, both buyers and sellers had the same profit motives, and the buyer gained more from the auction than the artist.

According to data from OpenSea, 75% of NFTs sold for less than $15, and most have never been traded. Only 1% of the trading prices exceed $1,500. "Clearly, very few people are trading above $1,500," said Mauro Martino, head of IBM's Visual AI Lab. "This is not a magical place where everyone gets rich."

Fake transactions also make it difficult to discern how many high-priced NFTs are genuinely valuable. Analysis firm CryptoSlam found over $8 billion in wash trading on the NFT marketplace LooksRare, while the total trading volume of that marketplace was only around $9.5 billion at the time.

"We observed that 90% of the trading volume was conducted by 10% of the wallets, which is a hallmark of wash trading," said associate professor Andrea Baronchelli. "Can we say this is real? We cannot prove it."

Considering the gas fees (paid to miners and validators) and the market fees for NFTs, the low earnings for small sellers ultimately come at the expense of artists. Moreover, just to interact with the blockchain, converting traditional currencies like dollars into cryptocurrencies, the cash-in and cash-out merchants also take a cut. Martino noted that when 75% of NFT sales do not exceed $15, "just paying gas is not enough; players need to pay more fees to trade NFTs."

"The ones benefiting are the exchanges and markets," said video essayist and internet researcher Dan Olson, who published an in-depth NFT video titled Line Goes Up on YouTube. "They charge transaction fees, service fees, royalties; they are the ones really making money."

Markets like OpenSea and Rarible allow artists to mint NFTs for free, but there are a few caveats. First, NFTs are not minted until someone purchases them, and the minting fees ultimately get passed on to the buyer. Additionally, since gas fees fluctuate over time, the cost of transactions can be difficult to predict.

At the time of writing, the average gas fee on Ethereum over the past 30 days has been between $14 and $15, but during certain periods, it can spike, meaning that the transaction fees for the same transaction could vary depending on the gas fees at the time of the transaction.

This presents a complex choice for artists wanting to mint NFTs: either spend a lot of cash to mint their work as an NFT and hope that a few wealthy fans buy it all, or pass those costs onto the buyer and let potential customers on the blockchain speculate on the NFT works without understanding their significance.

Another pain point is the royalty feature. NFTs do not inherently have built-in royalties; instead, royalties can be added as part of the management of the NFT's "smart contract." However, like other contracts, these contracts are built from program code and are equally susceptible to compatibility issues and manipulation by others.

In general, it is impossible to determine whether an NFT transaction has occurred between two real users; it could be a transfer between different wallets belonging to the same person. Markets like OpenSea must facilitate transactions and publish notifications of items for sale. The market can charge usage fees for NFTs minted and sold on its platform, but trading through other platforms can reduce those fees, making it easy for buyers to bypass royalties.

While there are some solutions to standardize royalty payments across markets, they may ultimately be difficult to enforce. Combined with rampant fraud in the NFT space, this creates more trouble than benefit for artists.

Details Determine Success or Failure

Much of what this article discusses pertains to NFTs on Ethereum and the largest NFT marketplace, OpenSea. However, due to the varying operations of each project and blockchain, it is difficult to accurately define how the public is misled about the concept of NFTs.

For example, the United States Postal Service issued approximately 25,000 NFTs inspired by Día de los Muertos stamps, using the GoChain blockchain, which is compatible with Ethereum, rather than Ethereum itself. The project sold "gem" tokens at $1 each, which users could then use to purchase NFTs, with each Día de los Muertos NFT priced at 6 gems.

A year later, the project became completely unusable, and users trying to sell NFTs to redeem gems found that the feature was "currently under testing." Users could purchase other tokens to buy NFTs, but afterward could only trade with other users on the blockchain. The project promised a solution within a year, but that functionality has yet to be added, despite the platform attracting brands like Marvel, DC, and Star Trek at the time.

Most of the technical details in the NFT and crypto world are too advanced, and the media often simplifies the reporting of these projects. To reduce the complexity of technical descriptions, some media outlets use more easily understandable terms and concepts, frequently describing vastly different projects as one type. Just like the aforementioned NFT project, which operates very differently from OpenSea, both are reported as "NFT marketplaces."

This simplified reporting can mislead the authenticity of the technology. Currently, most public blockchain systems are riddled with security and privacy issues, and erroneous reporting on the technology makes the future seem elusive.