Pros and Cons of NFTs

Published 7 March 2021 | 1,812 words | Categories: Art, Finance, Technology

For those who aren’t familiar with the space, let’s start with a quick rundown of blockchains/NFTs.

Bitcoin (BTC) was invented in 2008 as a decentralized digital currency. It allows secure peer-to-peer transactions on the internet without intermediaries like banks. These transactions are recorded in a public ledger called a blockchain. This ledger is distributed across the entire network for security. When transactions are verified and recorded, it’s called “mining,” and more Bitcoins become available. Only 21 million Bitcoin can ever exist, and mining becomes more difficult over time. More computational power is required. “Cryptocurrency” is a combination of “cryptography” and “currency” since computers solve cryptographic algorithms to gain currency.

There are now many different cryptocurrencies and blockchains. Each has their own goal. The second most popular blockchain technology is Ethereum. It allows for transactions to be encoded, so people can do more with the blockchain than exchange digital currency. People can upload artwork, build websites, create applications, and more. This is where we get to Non-Fungible Tokens (NFTs). Basically, an NFT is a way of combining an asset (like artwork) with a digital certificate of authenticity. It gets recorded on the Ethereum blockchain and can’t be altered. People can collect and sell unique assets in a way that proves they own it.

This is an oversimplification but hopefully explains the process. Blockchain technology has become quite popular, so there are many resources available to explain more in-depth. Just put any of the above terms into your favorite search engine. Cryptocurrency exchanges like Coinbase also have information.

The NFT craze has extended to the NBA, Twitter, Grimes, Kings of Leon, William Shatner, Mike Winkelmann (Beeple), and many others. You can read about it in NPR, The Verge, CNN, and countless other news sites.

 

Downside #1: Fees and Inequality

Some people are saying this wave of “crypto art” is indefensible and immoral. Initially, this sounds hostile, considering how most people are praising the NFT concept. Proponents say it’s a new way for artists to make a living. They can buy and sell their work in new ways, and in some cases, receive royalties on future sales—for the rest of their life. It’s revolutionizing how art and music are sold.

The first obvious downside is cost. As an artist myself, I decided to look into NFTs and turn my own work into some. (This process is known as “minting.”) What most people aren’t talking about, is how this costs money. From what I’ve heard, it averages $100 per piece, although it can change drastically at any moment. 

Ethereum has transaction costs when changes are made to the blockchain, called “gas.” Poor artists can’t afford this. Especially when it’s possible to “run out of gas” and lose money. This happened to me when I created my first NFT; I tried to set a cap on the fee I’d pay, and the transaction failed to validate. Fortunately I set the fee ridiculously low, and only lost $3. (Transactions on a blockchain can’t be reversed once set in motion. If you lose money, it’s lost forever.) It cost $36 to successfully create my NFT ($39 including the lost money). That’s not including the fees to purchase Ethereum cryptocurrency on an exchange, then transfer that Ethereum to a digital wallet. NFTs can’t be created without a digital wallet like Metamask to hold them.

In some cases, it can cost money to even bid on artwork or sell it. This means only artists with money can make money from NFTs. This might drive further inequality in the art world. And when new artists start out, they usually have lower-priced works to try and gain more exposure. With Ethereum’s fees/gas, it’s easy to lose money to selling NFTs. If a piece of art sells for $50 but costs $300 to sell, that’s a losing proposition for the artist. One artist wrote “Cryptoart recreates some of the worst aspects of existing art markets, pitting the super-stardom of those who have gotten lucky or who already had money and connections to play with against the realities of countless others who will see no such return.” While the general point is debatable, this is still a real concern.

Ethereum does intend to change how mining works (“Proof of Work” to “Proof of Stake”). This will lower fees, but implementation won’t happen until July 2021. In the meantime, the NFT craze might be over by then. Other cryptocurrencies are adding NFT support, but it remains to be seen whether they’ll overtake Ethereum in popularity. Meanwhile, some people say we can’t wait—because of the environmental impact. Which brings us to...

 

Downside #2: The Environment and Energy Consumption

Digiconomist says (as of March 2021) that Bitcoin’s carbon footprint is comparable to New Zealand, and its power consumption is comparable to Chile. A single transaction could be “equivalent to the power consumption of an average U.S. household over 23.71 days.” Overall, Bitcoin’s network is more energy-intensive than a traditional network like Visa.

The introduction of one 2020 study says “...we illustrate that today’s PoW cryptocurrencies do, indeed, consume an amount of energy which may be regarded as disproportionate when compared to the currencies’ actual utility. However, we also argue that the energy consumption associated with a widespread uptake of PoW cryptocurrencies is not likely to become a major threat to the climate in the future.” This is being hotly debated. One source claims 39% of proof-of-work mining is done with renewable energy. This number varies by source, anywhere between 29% and 75%. 

The point is, blockchains require a ton of energy to operate/mine. Ethereum too; not just Bitcoin. A computational engineer calls it “ingeniously idiotic” that the algorithms are compute intensive. And “...of the ~18000 CryptoArt NFTs that I analyzed, the average NFT has a footprint of around 340 kWh and 211 KgCO2. This single NFT’s footprint is equivalent to a EU resident’s total electric power consumption for more than a month, with emissions equivalent to driving for 1000Km, or flying for 2 hours.” That’s pretty concerning, to be honest. 

One artist says it will take 12 years for one tree to offset the emissions from creating one NFT. An illustrator said “While corporations and systems, rather than individuals, are the main producers of global emissions… NFT art as it stands is a completely unnecessary source of harm & vastly expands the speed & scale of an individual's carbon footprint”

Although Pipkin’s article about the environmental impact of the NFT craze has good points, the author is obviously anti-cryptocurrency. They call it a “pyramid scheme” and “ecological disaster” which has value “because they burn energy.” This is a somewhat common argument. Even famed investor Warren Buffett called it “probably rat poison squared” and “a mirage.” However, this neglects the actual value of cryptocurrency and real-world use cases. Pipkin writes “...Bitcoin’s continued financial return depends on coins being harder to make in the future… This is why cryptocurrency is valuable. There is nothing high-tech about it. There is no miracle. It is simply futures speculation without the speculation…” This is untrue. Bitcoin has a hard cap on the amount of coins which can exist. It isn’t just that mining becomes harder, it’s that a limited supply exists (like anything else of value). All mining could stop today, and Bitcoin’s price could still rise. People aren’t using cryptocurrency purely for speculation. It’s popular because it’s a new technology that can upend how the world works. 

Blockchains have the potential to put banks out of business and make Wall Street obsolete (via Decentralized Finance). The first-ever Bitcoin transaction was over a decade ago. The cryptocurrency/blockchain community has grown by leaps and bounds since then. For example, Stellar Lumens (XLM) allows international transactions without foreign exchange fees, completed within seconds (instead of days or weeks). It’s used by Deloitte and several countries. At this time, each coin can be traded on cryptocurrency exchanges for real-world money. It has a value and practical usage. This one concept, which isn’t even Bitcoin, could shutter billion-dollar companies like Western Union. Imagine what else is being done. The largest bank in the United States, Chase Bank, adopted blockchain technology. Their version, according to CoinTelegraph, “has enlisted more than 400 financial institutions and corporations in 78 countries, including 27 of the world’s top 50 banks.“ Not to mention decentralized applications and Web 3.0 via IPFS.

The list goes on. Cryptocurrency is here to stay, in one form or another. As for NFTs in particular? Most people don’t know about the environmental cost, so NFTs won’t stop overnight. Personally, I won’t be creating more until Ethereum 2.0 launches. The fees and environmental cost are currently too high. In the future, however, we’ll see how it goes.

 

Downside #3: No Legal Protections

Cryptocurrency has been criticized for its semi-anonymous nature despite the public ledger concept. It can be used on the black market instead of more easily traceable cash. Some forms of crypto, like Monero, explicitly aim to be 100% private and untraceable. NFTs have their own legal problems: protections for artists are lacking.

When I first looked into NFTs, I noticed that a lot of NFTs are memes or terrible clipart. Created with copyrighted images, without the consent of the original creators. And because the blockchain is forever, people don’t have a way to prevent others from using their work in unintended ways. Some NFTs use photos of celebrities who probably wouldn’t agree to have their likenesses used. Although I think copyright laws can be overbearing at times, people shouldn’t be able to do literally anything with any image they find online. Art NFTs should be for actual art.

The only solution at the moment is “verified” artist profiles, or “curated” NFT collections. But creating fakes has never been easier. Some people were scammed by a guy pretending to be Banksy… although those works are arguably valuable now because they’re fakes. Also Banksy-related, a group purchased one of his works to burn it, and create an NFT from that. It’s a bit ridiculous.

NFTs allow artists to sell “originals” of their digital art, which is great. Unfortunately, there isn’t a way to stop thieves or scammers either. Quite the trade-off.

 

Conclusion

NFTs are a new concept. As with all new concepts, there are growing pains. Some good uses, some bad uses, and lots of people are in the mix. No one knows where the dust will settle—or if it will settle at all. In the meantime, this is a rapidly growing technology we should keep an eye on. There’s lots of discussion and people are actively working on making everything better.

I’m certainly a proponent of using less energy. As I mentioned in my previous article on web design, Low Tech Magazine has a great write-up on the energy costs of the internet. They partly inspired the redesign of my own site.


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