NFTs are a scam! NFTs are used for money laundering! NFTs are… what? Listen up. The viability of NFTs doesn’t depend on how a few people use them: This story shows how there are use cases for NFTs and why art is NOT one of them.
The simplified purpose of a Non-Fungible Token (NFT) is to simulate the uniqueness of real-world assets using cryptographic technology. NFTs are implemented online using unique virtual tokens stored on a blockchain. But what does this mean?
Fungibility is the ability for an object to be exchangeable and indistinguishable. For example, physical fiat cash (“money”) is fungible because you can exchange any bill for another bill: A $100 bill is exchangeable by another $100 bill or even five $20 bills. So a non-fungible token is a token that cannot be exchanged (for the same value).
An example of a non-fungible object in the physical world is a house: You can’t exchange a house for any other house on the market because each house has a different value. That value is based on the economic value of owning the house.
If digital cryptocurrency is like physical currency, virtual NFTs are like receipts for physical objects. These virtual technologies require cryptographic calculations and are often stored on the blockchain for decentralization. For more technical information, read “How Does Cryptocurrency Work?”
So what are the use cases for NFTs?
What Do I Own?
When you purchase a phone, what determines who owns the phone? You may claim the phone is yours because “you remember buying it”. A legal department may state that a receipt verifies your ownership of the phone. A thief may steal the phone, then claim that their physical ownership of the phone means they own it.
The problem with NFTs starts here: Ownership is ambiguously defined. In other words, people have different ideas of what “ownership” means. So whether you find value in NFTs depends on your model of ownership.
Does physical ownership of an object mean you “own” it? If so, NFTs are worthless: A “NFT” itself is like a distributed receipt, which shows that you conducted a transaction for “ownership” of an object. So if you only care about access to the physical object, the receipt is useless.
This ownership model has a few implications: The most important is that access to an object means it’s yours. You can’t “lose” the object because “losing it” would imply that you still own “it” when you don’t. So if someone “takes” — not “steals” — your object, that is a valid transfer of ownership.
Does legal ownership of an object mean you “own” it? If so, NFTs may be of value: The NFT must be usable as evidence for ownership of an object, and this jurisdiction depends on the legal system you adhere to. In other words, does your government recognize NFTs as a claim to ownership of an object?
This ownership model also has a few implications: The most important is that proof of ownership to an object means it’s yours. When you can’t find the object, the object is “lost” because you can prove you “own” it. The object can also be “stolen” or “misused” because you didn’t permit the thief to use it.
Do you believe the world revolves around you? If so, NFTs are worthless. When the world revolves around you, then you determine who owns what. Why waste time with NFTs (claims of ownership) when you own everything? Just use the objects you want to use whenever you want.
The Art of Ownership
The ownership of art is controversial. Some people say that artists always own their art. Others say that artists may sell the rights to their art to other people. The most extreme deem art worthless and use the claim to justify “piracy” of the “worthless” art.
When it comes to NFT art, most people focus on the art (content) the NFT references rather than the claim of ownership the NFT provides. This phenomenon is present in memes such as “Screenshotting NFTs” which center around a single question: What determines the ownership of a digital artwork?
Copyright is a form of protection grounded in the U.S Constitution and granted by law for original works of authorship. In other words, people who do not adhere to copyright law in the United States can expect the full force of the nation’s military to make them compliant. So in the United States, the owner of NFT art is determined by U.S law.
NFTs as Content
The difference between physical art and digital art is that digital art requires a Computer Processing Unit (CPU) to be visualized. In other words, physical art — such as a painting — is located on a physical medium — such as paper — which contains “art” human senses understand. Whereas digital art — such as a .png file — is represented as a configuration of micro transistors (like a light switch) that a computer must interpret before a human can sense “art”.
All this to say that both “physical art” and “digital art” are physical objects. So there is no difference between the “ownership of a physical artwork” (such as the “Mona Lisa”) and the “ownership of a digital image” (such as a “Bored Ape” ): Both works can and have been copied, but it’s easier to copy a digital image.
When NFTs function as digital receipts, their value depends on the claim to the ownership they bring. Just as the Louvre in Paris claims ownership of the real “Mona Lisa”, an NFT owner may claim ownership of an authentic “Bored Ape”. This ownership’s economic value depends on the value of the underlying artwork.
There is no change to the assertion above when NFTs function as content instead of “references to content”. What do I mean? An NFT that functions as a receipt is a hash — such as
20c9ad97…— of a URL (which contains content) like my email newsletter at https://switchupcb.com/newsletter: The hash is stored on the blockchain.
An NFT that functions as content represents a hash of data — the content — stored on the blockchain. This practice is expensive, so people don’t do it. Even if they did, the question of ownership still applies. So the fact that “NFTs aren’t content” is irrelevant.
NFTs as Receipts
A receipt is a written acknowledgment that something of value has been transferred from one party to another: Receipts document payments and business transactions. People also use them to prove that purchases were made for services and goods.
Are digital receipts valuable? This question determines whether there is a use case for NFTs in bookkeeping. However, a technology shouldn’t be used just because a use case exists for it: Is using NFTs for the functionality of a receipt justified? It depends on your ideology.
NFTs as Metadata
Art has a metadata problem. Whenever you download a song, there is a high chance that the metadata — information about the song — will be missing. So what is the solution to this problem?
The Technical Issue
You might attempt to solve this problem by including relevant metadata — such as a song’s title, artists, songwriters, etc — in the audio file itself. Unfortunately, operating systems — such as Windows, MacOS, and Linux — handle file metadata differently. So there is no guarantee that the file metadata you added will be recognized on another person’s machine.
Want to test this solution out?
- Add metadata tags to a file from a Windows, MacOS, or Linux computer.
- Upload that file to a Virtual Server or Cloud (i.e Google Drive).
- Download the file on a different Operating System from step one.
- Edit the metadata tags of the file on a different Operating System from step three.
- Reupload the file to a Virtual Server or Cloud.
- Download the file on the original Operating System from step one.
- Check the file’s metadata tags.
You will find that — for most files — the metadata you added in step one is not present in step three. In addition, the final file might not even contain the metadata you added in step one. There isn’t a profitable incentive to fix this issue, so don’t expect it to be fixed by a company either.
The Social Issue
Even when you solve the technical issue of transferring file metadata, you still must verify that the metadata is correct. How can you determine whether a statement is correct? That’s a problem that mirrors the issue with ownership.
This issue is where the difference between an immutable decentralized blockchain and a centralized database becomes significant. In a centralized database, data can be modified by the entity that owns the database. In an “immutable” decentralized blockchain, the entire network must agree on modifications to data.
Using an immutable decentralized blockchain may prevent history from being rewritten, but the network must still agree on truthful events. So the problem with using any technology to determine truth is that the definition of truth is ambiguous. What I believe to be true and what you believe to be true can be different.
The Blockchain Oracle Problem refers to the inability to verify data collected by third parties in a closed system. In other words, “How do you confirm that the data a computer collects is true?” If the Blockchain Oracle Problem can’t be solved, blockchains can’t be used for functionalities requiring truth.
An NFT that relies on a blockchain to determine and distribute metadata claims of ownership over files must solve the Blockchain Oracle Problem. Otherwise, everyone in the world must use the blockchain’s definition of truth as the sole definition of truth. So the usefulness of NFTs depends on what you believe to be true.
Just think about it for a second…
Which Side Are You On?
Do you believe that people should work for free? Opt for the physical ownership model and advertise NFTs as worthless. Only pay people for their work if they require you to pay upfront. Feel free to download and upload any content you access on the internet.
Do you believe that people should be paid for their work? Opt for the legal ownership model and be sure you own the rights to the work you use. Support the creation of other people's work.