NFTs: A Double Edged Sword

I can’t speak for everyone in crypto but I can certainly speak for those I know and listen to.

We all hate the trajectory NFTs took while being mainstreamed.

Well, that’s not completely true. Many folks made a lot of money during this period and I’m pretty certain they are in favor of NFTs no matter what they are.  But in general, the consensus in my circle of crypto enthusiasts is that the trajectory of NFTs has had more of a negative impact so far.

The introduction of NFTs has nearly crippled Crypto in part and mostly overshadowed what the technology can bring to the world.  OK, so how can something be good and bad at the same time?  First, let me explain what an NFT is and how NFTs are being used now.

A NFT is a digital representation of a scarce item. It could be anything like a nation’s constitution, to a house deed to, yes, a stupid blocky square of pixelated digital art.  By the pure dissection of that sentence you can see how diverse this technology is and has the potential to be.  In each case, you have one thing that exists in only one space and time that is represented by a Non-Fungible token, or an NFT.

There can be multiple versions of similar items, but no matter what, EACH NFT is unique.  Even if all NFTs show the same silly looking image, the technology ensures that each NFT is it’s own and not an instance of a shared thing.  Think of each NFT as its own unique bar code rather than a shared barcode.

These are items that are supposed to be owned by one crypto wallet but also have the ability to be sold to another crypto wallet by the owners individually. This can happen on auction or fixed price sites and even in traditional auction houses like Christie’s.

What does “non-fungible” mean?

Sounds fancy, but it’s really not. Non-fungible merely means that there is no existing thing that can be substituted which has the exact same properties.  Therefore a NFT is a digital representation of a unique thing.

Most folks think of NFTs as digital images as that’s what has hit the news first.  Lofty prices to pay for silly looking digital images.  The NFT definition starts to fall apart when you consider digital pictures as NFTs as you can right click and save the digital file to create another copy of the image, right?  Not really…  And here’s where the first usability lesson comes in.  NFT’s can be a gateway to a private ecosystem and that (potential) experience is the reason some folks purchase some NFTs.

Imagine an NFT fan club for your favorite sports team, or a famous investor allowing a private group to ask them questions on a forum only available if you sign in with your NFT pass.  All you need to do is purchase and hold an NFT and you have anonymous access to a private system.  Perhaps this NFT allows you into special parts of the (physical or virtual) stadium, or zoom sessions with the athletes?  Perhaps even, the NFT is your ticket you use for each of the games you are able to attend by buying a season pass.  Maybe, just maybe, you can attend away games with the same NFT?

Minting

Minting is the act of giving birth to NFTs.  You can now mint NFTs on several platforms using a myriad of blockchains supported by many coins.  A NFT is purchased with the platform’s core coin, so if the NFT is built and minted on the WAX blockchain, folks need to purchase it with the core coin of that blockchain: WAXP.

NFT technology allows for someone to mint a certain amount of NFTs and assign certain properties as well as pick a base platform to list and make an initial sale.  Once those released NFTs are bought up they can continue to be sold on a secondary market.  The cool thing here is that a percentage of the future sales are automatically returned to the original artist.  This is a way to constantly reward the creator as additional value is being accumulated onto their creation.

If you think about it, fancy gated communities work in a very similar way.  You need a membership to a club to live inside the gates and, once purchased, that becomes an asset you own.  You can sell the membership and move out, just as you can sell the NFTs and move on.

I’m not up to date with the projects out there as I don’t yet own an NFT, but some projects out there have built up a community and access to the community leaders is only granted if you have a certain NFT.  Special meet-ups are becoming common at industry events.  I can see the future having several closed-door sessions for these “clubs” at the general Crypto conferences.  Watching folks walk into that room creates a bit of envy for the others.  These could be large parties or closed conversations with industry experts.  Whatever is coming is interesting, but what is here now is distracting and has already destroyed part of DEFI.

Gaming and Government

There are two places where I see the most long term value of the NFT: gaming and government.  Certainly there will be other uses, but the current selling of jpegs with absurd price tags is not something I support.

Gaming

Ironically the concept of an NFT has been in gaming for decades.  They called it skinning.  Skinning is the act of taking in-game components and making them “better” outside of the game, then re-introducing them into the game.  Some folks did this with hacks while other games developed a sort of development studio that was available to anyone who wanted to do this with the game manufactures blessing and assistance.  Folks created these skins and extra props for a game and were able to sell them to their friends.  I did a lot of skinning in my gaming days and this concept stuck with me as it seemed really unique to the digital gaming space.

Bringing this into the crypto space, an NFT being minted could represent an in-game sword.  Say that is a sword that can be used in many games and you were the only one who had that sword.  Say it was really helpful in one game but not so helpful in another game.  There’s a market for those who want good weapons.  This makes your NFT sword more valuable to those who play one game and not quite as valuable to those who play the other game.

Sure, you could sell it, but folks I know are taking this to the next logical level and parking their game NFTs in a few new platforms that allow other folks to rent your NFTs while you aren’t using them.  This gives passive income to those folks who own the popular gaming NFTs and allow for more usability of the digital assets inside the games.  Think of this as a digital arms closet that someone can open up and borrow from.

So, say there is a player that wants to play the game that your sword is really good to use in.  They can pay YOU to rent your NFT to use for a certain amount of time in that game and of course the creator of that sword would get a piece.  All of this stuff is interesting and certainly very forward thinking, though it’s funny to note that all of this already exists today.  With AND without NFT technology at the core of the in-game markets.

Government

As it relates to government and NFTs I came across this after I wrote a bit of the below.  It looks like on a protocol level NFTs are settling into the worldly discourse.

I believe NFTs will fundamentally change society as we know it in all aspects.  As a technology it has the ability to replace many facets of our weakening (or non-existent) governmental bookkeeping systems.  The blockchain’s everlasting nature is a perfect home to allow for easy minting and storage of simple or complex land agreements.  NFTs also should usher many governments without proper private property ownership systems into the new age of private (provable) citizen owned property.

Deeds

Nearly ⅓ of the world lives in a dwelling that they can not prove they own because their government doesn’t have the ability to create a proper deed system.  Imagine a country with the area of California and the GDP of Vermont trying to create a computer-based deed system from scratch with all their other expenses. It’s hard to imagine how they would be able to pay for, create, secure, and maintain a nationwide properly cataloged list of all the property in the country and staff enough people to make it a plausible upgrade.  How would land disputes be remedied?

NFT technology is relatively inexpensive and doesn’t rely on building and keeping a ton of web servers and software specifically designed for the country’s use.  NFT environments already exist and to mint new NFTs is easy and nearly cost free (in some cases.)  Minting a new NFT with the deed of the land, ownership information, and specifics about the property construction and contents can be included as well as a valuation or price tag paid for the property.

NFTs allow for easy multiple levels of access and force folks to authenticate in real time by proving they have the NFTs that give them the access.  So, government officials can see certain aspects of an NFT if they are allowed to, whereas the owner of the NFT can see / store way more information inside that NFT without fear that it could fall into the wrong hands.  So, if the owner wanted to keep the blueprints to their house within the NFT and restrict them from the public but allow the government to see them, that’s something that’s already supported with existing NFT tech.

NFTs have the ability for digital measurements to be included and be based on satellite data.  NFTs can compile materials over time on their own such as pictures of the property for insurance purposes or lists of what damage has happened on the property and, most importantly, a keen tracking of who owned what and when.

None of this NFT information is fallible to general environmental concerns such as a break in at the government office, fires, earthquakes, genocide.  Storing on the blockchain ensures these records will live forever and be public facing, so long as the blockchain picked continues to operate in perpetuity.

Titles

Imagine not having a need for the DMV!  No lines, no paperwork, just an NFT minted for each car as they come off the factory line and a purchase of that NFT (and the car it represents.)  Anytime the car is serviced or even filled with energy (gas, electricity, plutonium) it can update the blockchain with the details to keep with the “title” so the quality of the information is preserved.

I was going to write more about this, but it looks like this is already here…

https://decrypt.co/92491/new-alfa-romeo-suv-will-come-nft-service-record

Agreements

Imagine the point where the middle east realizes killing people is counter productive to the survival of our race.  They will have to come to a super complex agreement in order to satisfy all the stakeholders properly.  Where do you put such a document?  And more importantly how do you know it won’t be altered at all after it’s out of the public eye?  An NFT would be best as the actual agreement would be memorialized in perpetuity as it was executed and could be compared against the real paper, or perhaps the real paper is destroyed as the blockchain is public and everyone would be able to see this.

Even more amazing will be when a country will put their constitution or founding papers up on a blockchain for anyone to see at any time.  This reduces the potential for conflict with improper translations and expands the audience to a worldwide scale. It would also allow the document to live in perpetuity, well beyond the physical limitations of the fancy paper it was printed on.

Corporate use?

Certainly as corporations merge they could utilize the blockchain to memorialize their intentions. However I don’t see that as a high usage since blockchains are public and corporations like to hide their inner workings, but perhaps they block out visibility to all but the two organization leaders and their lawyers as that’s technically possible.

Corporations can also release SEC paperwork via NFTs and that can erase the need to print and mail hundreds of thousands of those books you get each year.  One NFT that holds everything needed to do a proper review of a company and their financial situation.  Perhaps that’s the same NFT that banks use to approve loans AND governments use to assess taxes?

NFTs can help close loop holes major developers have been using for years to skirt the system.

Usernames and Passwords

Anyone who knows anything realizes that Usernames and Passwords suck.  Up until now any system that needs a unique login to differentiate between users would need to exist in the Web 2.0 infrastructure.  You’d need to build a web application, host it on servers and create user credentials for your registered users, employ folks to work support, and hope it’s not hacked.

What’s to say that each username and password is only being used by one person?  More importantly, what’s to say that the company didn’t give a million people access to the system and make it so the insides aren’t worth the price?  This need for web-based systems has created many challenges and although NFTs aren’t able to provide fixes for every issue, one thing is certain – digitally signing a wallet to prove you own an NFT is easy to do and requires less from a user then remembering a username and password.  This is by far a better way to log into an ecosystem and NFTs are uniquely structured to operate as gatekeepers to extra abilities that NFT owners have or will gain over time.

Perhaps community banks will issue NFTs as a unique way to enter their community and transact online with their accounts.  I can see NFTs being used to access banking and trading accounts as they are just as unique to you as a username and password and FAR easier to prove ownership rather than keeping thousands of unique username/password combinations in a password manager.

Whatever the way forward, these potential use cases are years if not decades away and THIS is what excites me about NFT – not a $50 million jpeg.

Beanie Babies

NFTs as we see them now in the public media are like Beanie Babies.  Did I get your attention?  I can’t take credit for this analogy, but it’s true. What you see and hear now is the beginning phase of a societal fad.  A point in time where people with far too much crypto are given a way to flex by spending absurd amounts of it on seemingly foolish things.

The economics of a single thing being valuable within a sea of other single things has been around forever.  Baseball cards, beanie babies, Lionell Trains, and many others have this ubiquitous everlasting scarcity value creeping up over time as the physical world affects its aging process on the paper, plush, and metal.

NFT purchases are made for many reasons, but taking the initial stance to spend $50 million on a blurry image is something not many of us can understand.  The only thing I can give you for context is that these decisions seem to be for one of two reasons: utility and/or bragging rights.  Let me explain both.

The utility possibilities of a NFT-driven environment are enormous.  It is possible that some of these environments will get lots of cash back into them from the purchases and re-selling of their minted NFTs.  It’s possible they can use this new money to create a whole environment for the NFT holders after they have purchased the NFTs.  In these cases folks who are knowledgeable about the crypto project that minted the NFTs may know something we don’t.  This may be a way they can get future value, though it’s hard to imagine why they’d spend obscene amounts of money for such a potential future opportunity.

The other reason why early crypto adopters have to spend insane amounts of money is for the flex.  Unfortunately the flexing is usually what comes first in a fad and NFTs are no different.

The Wealth Machine

It’s hard to imagine a world without NFTs but they really are only a few years old.  During that time a massive wealth shift occurred without folks really realizing it.  Many in the crypto community know this, but not many understand it.  The actual word “wealth” grew to mean more things.  Owning digital assets became something that was possible and something that qualified as wealth.

Some of those who were early in ETH are massively wealthy at this point and, although I’d like to say I am one of these, I am not.  When I say early, I mean folks who have actually been around since the Ethereum project began.  Back then it was super easy to mine ETH, in fact you could make 3 or 4 a day from a simple rig. However ETH was worth barely a dollar, so folks who didn’t believe in the project didn’t think it was worth wasting a computer on the effort.

Imagine if you had the money to buy massive computers back then and deploy them to mine massive amounts of ETH. Even if you were able to get 1,000 ETH in today’s prices that would be $3,072,000 worth of ETH and that’s not even close to what these folks were able to pull from the network.

Many of these early ETH miners and project founders have hundreds of thousands of ETH sitting in their wallets, waiting for them to use.  One might question again why they don’t turn these ETH into USD. Although I’m sure they did that with some of the ETH, it presents a problem to cash out lots of ETH at once. With quantities this large surely some slippage will occur resulting in their selling at lower prices.  Plus as you cash out to USD the taxman cometh and many of these early ETH miners were under the assumption that the ETH they mined is “off the grid.”  This ETH wouldn’t ever be known, so they needed to keep the ETH as ETH and not move it around.

Also, they’d be tipping off folks that they are sitting on such a stash of wealth.  Many uber rich folks could be doxed as there are folks who keep their wealth a secret for security reasons.  Mining began as a private thing that no one can peg back to any one person and many believe this should still be private.  So, allowing their wallet addresses to be associated with a person is something these folks don’t necessarily want and the only ways (I know) to “cash in” such large amounts of crypto require filling out a KYC (Know Your Customer.)  This requires someone’s social security number, pictures of their drivers license and a facial scan.  These are the things many crypto folks are against as it makes crypto less private.

Enter NFT jpegs

Breaking away the potential of NFT technology and speaking only about only the foolishness NFTs have brought it’s easier to see how the NFT trajectory has destroyed crypto progress.  The first NFTs came to the Ethereum network as that was the only network for a long time that had the ability to mint NFTs on.  As the NFT fad picked up pace the Ethereum network started getting more and more difficult to use for common folks like myself.

I believe this is the greatest contention with NFTs: the fact that the NFT hype – where folks exchange ETH for crap – has all but destroyed the ETH defi system.  I’m not saying that buying one NFT on topps is bad or even if you buy a bored ape, that’s not the end of the world. It’s really the ETH overlords that have caused this issue to metastasis.

It’s all about timing and the fact that when the NFT craze started there was only one network it could run on: Ethereum.  So, folks were spending ETH on NFTs and using the Ethereum network to complete transactions by spending their ETH on gas fees.

First off, if I had these amounts of money, I’d be donating and NOT flexing – but in general, the answer to this question of why these things sell for so much is just that: a “flex.”  They buy this stuff to brag to their friends, just like you may buy an expensive purse, car, or house.

One can use a purse, drive a car, and live in a house.  So, it may make sense to you to buy these things.  But ask yourself, why didn’t you get the less-expensive car?  Or buy the knock-off purse rather than the brand-named purse?

OK, so why so bad then?

As this ETH on ETH bidding war happened several factors came to the forefront that challenged the construction rules the Ethereum network was created with.  The main problem on the Ethereum network has always been throughput – no matter what, there are a limited amount of slots in each Ethereum block to store transactions, so you need to bid to be included.  This coupled with the enormous amount of actual transactions a NFT bidding and purchase process creates nearly crippled the network before it became mainstream.

ETH overlords

Soooo, when ETH came out it was actually super easy to mine.  You could mine a ton of ETH, but it wasn’t worth much.  When I started mining I think ETH was like $30 and if I had proper capital I could have mined quite a few ETH.  Most early ETH miners were involved in creating most of the fully developed projects you see now and that early ETH that was created was mostly left untouched until NFTs came.

Imagine owning 1,000 or even 100,000 ETHs at this point in time.  For context, one ETH is worth $3,072 today and owning 100,000 ETH gives you the buying power of 307,200,000 USD in today’s market. ETH is promised by many analysts to hit $20,000 eventually.

What do you do with the ETH once you buy your boat, helicopter, jet, 3 houses and 2 lambos?  All your friends have the same, but what don’t they have?  A crappy jpeg NFT. Since there’s only one of those in the world the one-upmanship begins.  They can’t have it if you do.

Sitting on a crap ton of this ETH can cause folks to become desensitized to the dollar value.  They bid in ETH increments without looking at the dollar value.  The dollar value of the bid increments up to the final sale price are in the thousands but to them it looks like 30 – 50 ETH.  To these ETH overlords, this is small money as it represents such a small portion of their overall wealth, so what do they care if they have 100,000 ETH or 99,950 ETH – it’s all the same.

I think that’s why people bought crappy jpegs for a lot of money, because to them, it was such a small fraction of their wealth it was worth it.  However, the question is will these things retain these high values?  I bet not.  But I also bet that folks who bought some of the most publicized NFTs most probably aren’t looking to re-sell them for a profit.  They will probably keep forever and pass down to an heir.

What can you do with a crappy jpeg?

Usability and display technology needs to get far better to properly display this type of artwork.  Certainly you can hang a TV on a wall and display it as digital art, but imagine if you will, a SUPER rich person’s house with a holograph of a bored ape in the corner.  That’s the ultimate flex for some as no one else can own that bored ape.  But to me, the grainy picture would look stupid blown up, each pixel would be the size of a stickie note and the true nature of the crappy art will shine through.

There’s no way to carry these types of NFTs forward as unique since nearly everyone might be able to replicate these displays without actually owning the NFT.  NFT display technology needs to be developed that can’t be broken easily by right clicking, saving and making your own hologram as there’s NOTHING stopping everyone in the world from doing this now.

One defi network

The only network available to mint NFTs as the fad took off was the Ethereum network. Therefore that’s the network the majority of the super expensive NFTs were minted and sold on.  The ETH overlords were on the one and only defi network then to be able to spend their ETH earned by mining early and holding long term.  They were then able to bump up the prices to the insane level we see today and start into NFTs.

The Ethereum network has a purposely constructed bottleneck in it.  Some say this is by design to entice folks to pay more ETH to the network as gas for their transaction. Others think it’s perfectly normal and good to have.

This bottleneck is designed to operate a bidding war that each transaction must participate in to be properly processed and no matter the size of the transaction the cost is nearly the same.

As I started into ETH defi I was paying about $2 – $5 per ETH transaction and that allowed me to spend $100 or so on some coins I couldn’t get access to on exchanges at the time.  Once NFTs came OVER NIGHT this fee grew to nearly $50 to process the same $100 transaction.  This almost instantly locked my trading bags inside a system that it would cost me more to “withdraw” my assets than the asset was worth.  I have since watched these assets depreciate to near nothing without the ability to move them and liquidate without losing lots of my wealth.

Things were supposed to get better as the ETH network passed a new fee structure but left the bottleneck untouched. Therefore the bidding war problem was never really addressed.  Ironically this change increased the gas, but allowed the low side to be the $2-$5 range.  You still had to bid for your slot in making a transaction and if you bid too low your trade / withdrawal / deposit would be reversed and the ETH you bid to process the completed transaction would be taken from you even though the transaction did not complete.

This left even more of a bad taste in our mouths as it was the ETH overlords that proposed, passed, and benefitted from nearly all of this.  So, imagine if someone is in a NFT bidding war and has to submit an on-chain bid.  This means that it MUST be time sensitive, so they are going to pay WHATEVER they have to in order to secure that bid.  This means as NFTs went on auction the network fees blew up and in some cases were as high as $4400 for one $100 trade.

This led to a lot of disappointed early adopters as we watched our ETH defi bags grow enough to make a profit but we’d have washed away the profit by paying the gas fees.  So, in general I had to write off about 30% of my portfolio a long time ago and I’ve been watching it go down even farther now.  This was in early 2021.

Currently I have lots of crypto still stuck in ETH defi and unable to get out because it’s still too expensive to move it.  Those who are paying 50 ETH to buy an NFT won’t mind paying a full ETH to make that transaction go through, but folks like me transferring $100 worth of crypto can’t afford to pay 1 full ETH for that transaction, so many folks who have been doing this crypto thing for a long time look at the NFT boom as being the catalyst to us losing access to a lot of our wealth.

Not only have I lost access to it, I have lost control over it.  I watch as these assets have depreciated beyond use and certainly if something pops I move it out – but I fear I have had the last few pops I will see from ETH defi.  So, it’s all downhill from here.

Thankfully now there are way more platforms that can be used to buy and keep your NFTs. However it’s way too late to save ETH defi as still the vast majority of NFTs have been minted on the Ethereum blockchain and future sales of them are internal to the Ethereum ecosystem.

The two NFT worlds have such a different feel and, although the fact that a usability-enhanced NFT technology can be representative of a real-world asset is extremely promising.  NFT tech provides easier to manage fractional ownership of physical items and properties but I do believe the NFT rush sullied the whole thing as that’s all us “normal” people are talking about.

Who on earth would pay good money for these non-useful ugly things?  Not me I say but I also don’t own a helicopter, nor a plane, nor any lambos, and definitely not several houses – so I gotta get on that eh?