Q: What is an NFT?
A: NFTs are a novel method for some people to make boatloads of money off of others, and in doing so create an entire new ecosystem that primarily uses misinformation to justify its own existence in order to perpetuate profiteering from those at the top.
As one would expect, many previous methods with this MO have existed, including within the cryptocurrency ecosystem, such as ICOs. However, most ICOs ended up being illegal as they not only involved selling unregistered securities to non-accredited investors, but also involved a lot of fraud and deception. NFTs solve this debacle by having a significantly lower legal risk, as they’re unlikely to be considered securities (since I wrote this, many people have come up with wonderful ideas on how to turn them into securities, so this can be considered false for many projects. Regardless of this, there’s enough other laws about fraud being broken that it is often irrelevant.)
Technically, an NFT is an entry (digital file) on a blockchain (large sequence of blocks made up of data and transactions) that is unique, and thus not fungible (interchangeable) with any other token or asset.
Q: How does an NFT put art on the blockchain?
A: It doesn’t. The reason for this is simple: the blockchain is too inefficient to store large amounts of data on; storing as much as a 4MB image on the Ethereum blockchain would currently cost around $72,000, as it needs to be stored on every copy of the blockchain in existence (The math for this is (10^9 / 10*18) * 1000^2*4 * 68 * 150 * 1800, where the constants are the following: wei per gwei, wei per eth, bytes in 4MB, gas per byte, gwei per gas, usd per eth).
Q: If an NFT is not on the blockchain, then where is it?
On a web server somewhere, just like everything else on the Internet. Specifically, the blockchain may have a link to media content, which in the best case would be an ipfs link (which is still sitting on one or multiple computers somewhere, and generally accessed only through centralized gateways), and in the worst case is an http(s) link. Neither of these are guaranteed to remain in existence forever, but at least ipfs (among some other decentralized solutions which are still relatively newer) can be partially decentralized, replicated more easily, and verified more easily. As the blockchain is public, all files are generally public as well. This not only means that the content pointed to by the NFT may not stay up, but also that it could be replaced with anything else, as recently pointed out by Moxie.
Q: What about other NFT information like traits or NFTs listed for sale on websites? That’s the blockchain, right?
Nope. Again, due to the blockchain being prohibitively expensive to store information on, even NFT traits (identifying characteristics/labels for the given token) are generally not stored on the blockchain, but are instead provided via a JSON api, just like the rest of the Internet uses.
Although NFTs are intended to be minted on the blockchain in order to exist, the cost of this started to get too high as fees increased, so now popular websites that users use to create NFTs have a ‘gasless’ minting method, where no blockchain transaction occurs until someone purchases the asset on the website, thus the blockchain is yet again bypassed and a centralized entity is used instead. If you analyze the technical makeup of many popular cryptocurrency projects, this is an extremely common theme; most cryptocurrency blockchains are very expensive, redundant, inefficient, and slow; so centralized systems are used in their place anywhere that users are not directly paying attention to.
In fact, it’s often much worse than this! As pointed out by Moxie, centralized companies like Opensea can remove NFTs from their platform at their own discretion, and ‘decentralized’ extensions such as metamask just query the Opensea API! Working with blockchains is very expensive and difficult and tedious (for a good reason – decentralization is hard and is often worth this effort!), so this is a very common pattern (we are certainly glad actors like Etherscan seem to be impartial, because almost all chain information comes from companies like this rather than from anyone reading the blockchain data themselves!)
Q: If transactions on the blockchain are so expensive, how are users using Ethereum to make cheap and instant transactions?
A: They aren’t, at least not right now. Currently the cost to transfer an Ethereum ERC20 token is $22 and the cost to trade a token with Uniswap is $65 (this seems to have only increased since writing this and constantly changes, so this section will often be out of date). A regular transaction can still be performed for around $6, although this can of course increase arbitrarily according to the market. This price may decrease at some point, but you also never know when the market will increase it drastically, potentially even making ether you own worthless (for example, if the fee to send eth is $6 and you only have $5 of eth in your address, you are out of luck). It is worth knowing there are other solutions (sometimes called L2 / ‘Layer 2’ systems) that are working to improve this on many major blockchains such as Polygon on Ethereum.
Q: How do I receive ownership and the rights to the art I purchase as an NFT?
A: You don’t. As far as ownership goes, there is nothing but a digital signature by an Ethereum address you have the private key to, which is placed on a contract that has a link inside of it of something you happen to like. Anyone can see the link and view the file. Additionally, there is nothing legally binding about this transaction, and there is no guarantee you will have the IP rights to whatever it is you spent your money on. Many popular NFT projects specifically have legal disclaimers telling you that not only do you not own the IP, but they (the creator) does, and you are unable to modify it without their permission.
Q: How can I ensure the original artist is the person selling the NFT?
A: You can’t. Anyone can create an NFT that has any link to any file in it, and there is nothing preventing this from being published on the blockchain by anyone.
As you would expect, there are many instances of users selling art that they did not create. In addition to art being stolen and sold by someone unrelated, resources such as machine learning models and art tools have been used to create valuable NFTs, with the original programmers not only left uncompensated, but un-credited entirely. But at least some random person got $10,000 for taking credit.
Q: Why has the popularity of NFTs been increasing so much?
A: Because people are making easy money with them. Similar to cryptocurrencies, every person that owns them has a vested interest in hyping them up to others in order to profit. The ecosystem as a whole uses many techniques in order to increase its own virality, including stories about how Everyone Is Getting Super Rich Super Quickly Doing Basically Nothing Except For You, significant hype both from excited individuals and from extensive paid shilling campaigns from those that are set to profit from them, and new technical jargon like “Decentralized Ethereum non-fundigle tokens with sidechain and parachain integration using ERC721+ERC1151”.
Q: How can I verify that an NFT purchase was legitimate?
A: You cannot. Although the transaction is on the blockchain and you can verify that it occurred, you do not know who the addresses involved in the transaction belong to. This enables one to create NFTs and then buy them from themselves using different addresses that they own in order to give the appearance that they are valuable and in high demand, effectively painting the tape with the hope that someone else (who, unfortunately, doesn’t understand this is occurring), will then will pay a large amount for something no one else actually wanted. For example, the recent NFT purchase for $69 million which garnered significant media coverage was even publicly known to have been someone that already had a prior business relationship with the seller. Regardless, it seemed to have made a good enough story to make it to just about every ‘news’ website – which was exactly the intention of this purchase
Q: Why do you hate cryptocurrencies or Ethereum so much? You must be a fiat supporter!
A: I don’t hate cryptocurrencies at all; I actually love the concept of many of them and think ideas like Bitcoin and Ethereum have been revolutionary. I own Bitcoin, Ethereum, and Polkadot, and enjoy using them. I do kind of support fiat, however, so you might have me there; my need to pay bills and taxes is unfortunately not circumventable right now.
Q: How can I learn more about how NFTs are marketed?
A: This video is my favorite single resource to show someone who would like to learn how they can get rich quick by copying the well-known methodologies of the pros. This video is not about cryptocurrencies, but you’ll find that the common tactics of market manipulation work just as well in cryptocurrency markets as they do in traditional finance.
There’s many tactics commonly used that are not mentioned in this video as well, including purchasing social media interaction (Twitter followers, retweets, Discord server members, Reddit posts, Reddit upvotes, many others), having multiple levels of insiders who get stakes in projects before anyone else does and then consequently hype them up, purchasing press releases and news article about projects encouraging positive price action with forward-looking statements, wash trading and painting the tape in order to increase the perceived price and price increase of items (things like this may even be outsourced or fully automated. There’s money to be made, after all), copying art and code from others in order to quickly seek a profit with even less original work, and in general many other forms of fraud, of which the goal is to convince users that they will make money when engaging in actions that have specifically been designed to enrich parties other than themselves, often where said other parties are 1) significantly more well-versed in the workings of cryptocurrencies and the markets they are operating in, as well as 2) acquired their NFTs/coins/tokens/DefinitelyNotSecurities at significantly lower prices far before most other users were able to, and thus stand to gain asymmetrically better risk and reward for their activities, which generally consist of marketing in every shape and form imaginable, no matter how annoying or fraudulent (hence NFTs being an inherently viral phenomenon – there is no better way to artificially induce a high R0 in a meme than to directly incentivize it via rewarding large profits to those who are the most effective at spreading it).