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.
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 in the worst case is an http(s) link. Neither of these are guaranteed to remain in existence forever, but at least ipfs can be partially decentralized, replicated more easily, and verified more easily. As the blockchain is public, all files are generally public as well.
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 such as Mintable 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.
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. 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).
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.
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.
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 Everything Is Getting Super Rich Quick Doing 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 “Ethereum NFTs on the blockchain 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.
Q: Why do you hate cryptocurrencies and Ethereum so much? You must be a fiat supporter!
A: I don’t hate either, I actually love them, have invested in them on and off, and think bitcoin was a revolutionary idea. I do support fiat though, so you have me there. I need it to pay my bills and my taxes or I will have no power and be thrown in jail. Additionally, an inflationary currency is necessary in order to encourage spending, among other things.