The discussion around NFTs is mass hysteria all around

Posted by Unspector Blog on Tuesday, February 8, 2022

When a technology is misunderstood by everyone, is it doomed to fail?

NFTs aren’t a new technology and aren’t even new in their current form. CryptoKitties launched in 2017 and the team developing it helped define the ERC-721-token-standard, which still is the basis for most current NFTs (technicalities be spared).

CryptoKitties already had nearly everything current NFTs have - and more: Algorithmically generated pictures (of questionable quality), permanence and tradeability. The pictures were not placed on the blockchain, but relied on a central server to retrieve them. Additionally a rudimentary “game” was attached: you could combine two CryptoKitties to “breed” a new one, which then inherited traits from its “parents” with some probability.
Every interaction (breeding, listing on the marketplace, bidding on the marketplace, buying, etc.) with your CryptoKitties cost ETH, one part gas fee, which is payed towards the miner as compensation for running the “smart contract” (program) on their machines and one part a fee, payed towards the developers of the game.

The current wave of NFTs don’t really divert much from the five year old blueprint CryptoKitties provided and often deliver less value, by skipping any game mechanic all together. The heuristic to describe NFTs: think about the art market (not about art itself, but just the market).

This is a difficult heuristic, which is of no real use to anybody. Some people may wonder, why traditional art is traded for millions (and soon enough possibly billions). Some people may have bought or sold art for a profit in the past and will remember their feelings of success. Other people will have traded art unsuccesfully and remember their fears. Nobody really understands the art market, because it is such a difficult concuction of manipulation, speculation, definition of social status and perceived future value, that it cannot be accurately predicted or understood.
Though some venture capitalists may think they understand the art market (even though they probably don’t) may see time, storage, transport and security as the biggest cost drivers, when it comes to trading art. Which are exactly the cost drivers digitisation on the blockchain will solve.

Additionally entering the art market has two problems: goods cannot be traded without provenance and nothing can earn reliable provenance without being traded on the art market. Therefore art worth bidding on already has provenance, while art, which will be worth bidding on in the future, will need to earn this provenance. This problem is not solved on the traditional art market and is the main portal for fraudulent pieces to enter: Cheap artists aren’t worth taking track of - until they are “suddenly” not cheap anymore. But nobody took precautions, while they were cheap and therefore anyone can claim owning a “long lost piece” and may succeed convincing experts and the public. Since NFTs are created and traded on the blockchain every piece comes with built-in provenance for marginal (compared to traditional art) costs. The business case writes itself.

On the other side of the discussion are a lot of people:
Journalists and influencers fed up with crypto bros and their “convincing business cases”, which often turn out to be pump and dumps and rug pulls. Nobody made sure to curate the initial marketplaces, therefore only pieces of questionable quality - cheap and often AI generated nonetheless - are presented in the spotlight (surprise: people who write convincing business cases aren’t guaranteed to be great artists).
Lawyers, who point out, that a trade on the blockchain doesn’t facilitate the transfer of copyrights - or even ownership - of anything tangible by law. Therefore the promise to really own the art is already rather fraudulent.
Gamers(TM), who buy billions of USD of micro transactions every year, when nobdy is looking, but cannot stress enough how much they hate micro transactions, publically. I don’t really know what their point is, micro transactions - no matter if they are on a blockchain or not - aren’t going away any time soon, as long as everybody continues to buy them.

The challenge for the NFT-technology: Both sides misunderstand the technology massively, but force each other into engaging with their point of view - though not with the underlying technology itself.

So what are NFTs? NFTs based on the ERC-721 standard are smart-contracts (scripts on the blockchain), which allow the creation and movement of unique tokens. How do these unique tokens look? They have no pictures, they have no “content”, they are just receipts, that the token has been created, or moved from one wallet to another. As long as the underlying blockchain is safe from attackers, these receipts are safe from tampering. How do the pictures (which are not part of these transactions themselves) come into play? Their raw data is used during creation to generate a unique identifier. Therefore one token is itself unique and it “fits” the raw data for one particular picture - or any other raw data provided during creation.

This technology is extremely valuable to proof digital authenticity or signage of documents, when somebody is unable to trust their counterparty.

The two sides of discussing NFTs specifically and usage of blockchains in general fail to share one critical presumption, which differs between the two sides: Is the counterparty to a trade trustworthy?
Blockchain-adversaries may not think about this question much. Societal rules (e.g. laws) are enforced by the society and every market participant is part of society, therefore it can be expected that the participant will follow the rules - and if they don’t, the rules will be enforced.
Blockchain-proponents may have a very different worldview in which following and enforcement of rules is not guaranteed or even expectable. Blockchain is a technological solution for a problem not everybody perceives as critical. And therefore the discussion often derails into two sides screaming hysterically.

The success of blockchain and NFTs won’t be determined by rating how great the “artwork” of NFTs is, but how many of us have trust in the rules of our society and how likely we think these rules will be enforced.