NFTs: The Good, The Bad and the Funny
- NFT, blockchain, ethereum
Last month I have spent a lot of time in researching and understanding Non-fungible tokens, also knowns as NFTs.
My experiment took place in one of the worst months for crypto. Bitcoin lost 19,30% and Ethereum 34.88%.
Newer cryptocurrencies lost even more: Solana -54.72% Avalanche -59.61%.
The main event to lead this overall downturn was the 99.9% loss of one the “stable” coins. In essence several billions of market capitalisations went to zero.
In a way this difficult environment makes it easier to analyze NFTs without hype.
I will start this artice with some warnings:
- NFTs and Cryptocurrencies in general present a very high risk. It has to be treated as a pure speculation without any intrinsic value;
- Under no circumstance you should consider this article financial advice. This is a mere reflection of my experience and you should conduct your own research and/own get advice by a professional licensed to offer such advice in your country;
- I look at NFTs from the technical prospective so if you are looking for an article with advice on recommendation on the NFT market this is not it.
My interest in NFTs sparkled from my experience in purchasing a blockchain ⛓ domainwhich is also an NFT.
This is a clear example that non all NFTs are created equal. A non-fungible token is exactly what it proclaims to be. Without fanfare it is simply a token that is not mutually exchangeable with others (like a crypto currency would be, Ethereums are all the same) so is unique.
It usually contains metadata linked to an intangible asset (e.g. an image, a song, a video clip) but in some cases might include the relevant data inside the blockchain itself (also called on-chain NFT).
In theory NFTs present an innovative approach to the creation and distribution of art. The original author can receive a royalty for his work and all this is processed in a transparent way in an open blockchain.
NFTs can also be useful. In my original case of an Ethereum Name Service domain you can use this domain in lieu of the log and impossible to remember Ethereum address. So it serves a real purpose.
In many or most cases NFTs just represents an image. That image has usually little utility beside looking pretty in your wallet (assuming that your wallet supports NFTs, from my experience support even for major blockchains like Ethereum is not as reliable as you might think).
But there is nothing bad on collecting a few NFTs just because they look pretty and make you happy when you look at them. Many people collect stamps, trading cards or game cards and comics not for utility but for the pleasure of owning them.
NFTs are the digital equivalent of these collectibles and can be fun.
In short the good features of NFTs are :
- Innovation: certainly an innovative way to represent digital asset (or in some case host it) in the blockchain;
- Utility: Domains NFTs can have real utility e.g. by representing your cryptocurrency address in a memorable format;
- Collectability: There is an element of fun in collecting digital asset.
I think the bad parts of NFTs kick-in when you see them as a plain investment, a store of value.
Now here is were things get a bit more complicated. Why woud a “crypto punk” NFT (the first
NFTs ever made inthe Ethereum blockchain, 10,000 punks NFTs were distributed for free) sell for 11.8 million US$ ?
Or why would a collection of 101 “Bored Ape Yacht Club” NFT sell at Auction House Sotheby’s for 24.4 million US$? ?
Clearly, for the sellers of Crypto Punk and Bored Ape this was a good return on investment.
Whist it is difficult to assess these sales, the art world is a strange one. A sculpture of a piece of butter Sold in 2016 for 2.2 million US$ and a basketball for 15 Million.
I have even less understanding for a door with cleaning supplies going for 281’000 US$
In the Art World all is dictated by supply and demand. The value is purely what people are willing to pay for it.
This said, NFTs are different as their creation process is much faster and inexpensive. A computer programme can generate 10,000 variations of an image (like in the case of bored apes or crypto punks) in a few minutes or seconds. Supply is abundant.
Furthermore, a number of celebrities made NFTs famous. Recently, Alexandre Arnauld, CEO of Tiffany now part of the conglomerate
LVMH, bought a Crypto Punk for 416,400 US$ which by itself is a pretty substantial endorsement.
Similarly, the famous rapper Eminem bought a Bored Ape for 450,000U S$
But the World of NFTs is not an easy one. In my research, which included spending time on discord (the chat used to communicate during the launch of a new NFT, also called minting), the market is full of projects that will most probably never reach these valuation.
Most of the new created NFTs end up selling for less than the original minting price.
Very few NFT collections will ever gain the popularity of Crypto Punks or Bored Ape Yacht Club but the potential of high returns is driving the market to issue a verified of NFTs at a pace that clearly outweigh supply.
In my interaction with NFTs collectors on discord I would say that 99% of them just buys different NFTs to get a profit. Which is not wrong by itself (after all crypto is about profits) but I think that just a handful of projects will be successful in terms of value appreciation.
Even South Park made fun on NFTs in their latest movie.
In Short the bad features of NFTs are :
- Considering it an investment: in most cases the value of a given NFT will not increase. This is due to the supply/demand imbalance;
- Risk of Fraud: there a number of frauds in the NFT markets both in terms of issuance but also theft. The nature of the blockchain makes it pretty much impossible to recover stolen asset;
- Scams: if you buy NFTs on OpenSea (the biggest NFT online Market) aways check for the verified mark before buying an NFT. I have seen a number of “cloned” collections listed on OpenSea. Another common scam is a “rug pull” when an NFT launch is promoted and then abandoned.Using discord to join a project channel is also problematic: often you receive messages with links that appear to be legitimate but are just trying to get access to your wallet.
- Sustainability: If the majority of buyers are doing it for investment purposes, the market will drop or disappear once the interest fades.
- Transaction fees: sending/receiving and minting NFTs is very expensive in the Ethereum blockchain. Other blockchains like Polygon, Flow and Algorand
offer NFT trading and transfer at virtually no transaction fees.
The fun part of NFT is the most interesting one. There is clearly nothing logical in finding an image or a meme funny. But it is!
So collecting a few, funny or endearing NFTs with the spirit of collecting digital art is not a problem. But “investing” in NFTs as
a financial vehicle is dangerous and certainly not as fun when the market turn against you.