Are N.F.T.s All Scams?

Vitalik Buterin is the founder of the Ethereum Project, a multifunctional blockchain system.

Blockchain has been described as a distributed digital ledger, but Vitalik Buterin has his own definition: Blockchains, he says, are “a form of money, but they’re not just a form of money. Blockchains have some properties of things like nation-states, courts and even religions.”

“So that would make Buterin not just a crypto inventor but a central banker, a king, a judge, maybe even a priest. He certainly has fans who consider him all that, and more.” (Stephen J. Dubner)

Buterin realized “the horrors centralized services can bring” when he was in high school and the centralized authority behind the game World of Warcraft made changes to his favorite character. He went on to study computer science and relevant mathematics during a brief stint at the University of Waterloo before he dropped out and joined the Mastercoin project. Eventually, he saw the limitations of Mastercoin, and went on to start his own blockchain project, which he called Ethereum. Ether, Ethereum’s tokens, are “fully programmable.”

The bitcoin blockchain is essentially a database of who owns bitcoin; Ethereum could be described as a “rich design space,” and Ether as “programmable money.”

Ethereum is the second most valuable cryptocurrency, trailing only bitcoin. Buterin has praised bitcoin, particularly because it introduced blockchain technology to the world. But he wanted more from a blockchain token. He likens bitcoin to a pocket calculator – it has one job, and that’s to keep track of who owns bitcoin. Second-generation blockchains like Mastercoin behave more like Swiss army knives – they can do a handful of things well. Ethereum-style blockchains are more like smartphones. They can do anything you program them to do.

“The Ethereum blockchain is essentially a database of code; it is therefore more complicated and more versatile. (Stephen J. Dubner).”

Ethereum provides the infrastructure, and each time a user uploads code, the system can operate as a new application. No one knows the innovations that will emerge from Ethereum’s “fully programmable system,” but the technology is promising. For example, a senior engineer at Google once took eight months to build a bitcoin crowdfunding platform. If Ethereum had been available to him, he would have been able to build that platform in a couple of hours.

Ethereum-style blockchain systems can be used to produce “smart contracts,” which operate according to a series of if-then statements.

Imagine that you’re nearing the end of your life, and you want to pass a sizable fortune on to your grandchildren, but with a few stipulations. To receive their inheritances, your progeny must prove that they graduated from college, and show that they aren’t on drugs. In the current system, you’d have to find a human trustee to carry out your wishes. You would hope the trustee was trustworthy, but all kinds of problems could emerge. The trustee might end up running off with all of your money. Your grandkids might find a way to convince the trustee that they’d met the stipulations even if they hadn’t.

“From the medieval era to now, the way you do that is – you go find somebody younger than you, and you appoint them a trustee or an executor. And you say, ‘Here’s what I want done when I’m dead’.” (former chairman of the US Commodity Futures Trading Commission, Chris Giancarlo)

With a programmable smart contract, you wouldn’t need a human executor. You’d simply program the stipulations into the money itself. Your grandkids could then upload their college transcripts, and submit proof of sobriety, and the money would appear on their devices. These “smart contracts” can apply to almost any type of transaction, but so far, art NFTs (non-fungible tokens) have led the charge.

Dollars are fungible; one dollar is essentially the same as another dollar. NFTs are each programmable and distinct.

When it comes to NFTs, probably the most common question people ask is, “Why should these things have value?” It’s a reasonable question when digital artwork featuring apes wearing sunglasses sells for millions of dollars. But if you examine traditional money, it holds value the same way NFTs hold value. The “bored ape” NFTs that sold for millions have value because a community of people believes in their value.

“Money is an illusion. An illusion by which we all live and die, but it works because we all believe that piece of paper that says ’1’ on it, is worth 1. And the one that says ‘100’ on it is worth 100 – because we all agree on it. And that’s why NFT is working – because enough people agree on it.” (contemporary artist Tom Sachs)

The difference between traditional money and the highly speculative NFT market is that currencies have been around for a long time, so people have built a history of trust around using currencies. NFTs and cryptocurrencies need to build the same trust, and because they’re programmable, NFTs have promising applications beyond that of traditional currencies.

NFTs have dynamic anti-fraud potential.

Tickets for the 2022 Champions League final between Liverpool and Real Madrid were in demand, and counterfeiters knew it. On the day of the game, about 3,000 extra people showed up with counterfeit tickets. The stadium became overcrowded. Chaos ensued. The police came in with tear gas. Paper tickets are easy to fake, but NFT tickets would be impossible to counterfeit.

“One of the things that seems neat about NFTs is you can track ownership and provenance really easily.” (economics professor, Eric Budish)

NFT tickets wouldn’t only protect against counterfeiters, but scalpers as well. Sports teams, musicians and other performers tend to keep their ticket prices low so their fans can afford to attend live events. Then scalpers swoop in and buy mass amounts of tickets, jack up the resale price, making events unaffordable for average fans. The artists lose out on money, the fans pay too much, and the people walking away with the surplus are the scalpers, who haven’t produced anything of value. NFT tickets could prevent scalping, and ticket fraud, while ticket resales would be trackable and could have built-in price stipulations. Exclusive memberships, credit scores and other applications no one has imagined yet could also benefit.

NFTs can help artists benefit from the secondary art market, but despite their anti-fraud potential, they are prone to fraud themselves.

The smart contracts built into NFTs are already helping visual artists keep more of the money that their work generates. Imagine that you’re an artist and you sell a piece for $50,000. While you’re still alive, the same piece sells at auction for $5 million, and you don’t get a dime from the resale. Would that seem unfair? Artists have never benefited from the secondary art market, but when trading in NFTs, a smart contract can ensure that every time their work is traded, the artist gets a percentage of the resale.

“Hopefully they’ll allow creators, whether it’s journalism, music, media or art, to retain more of the value of what they create.” (economist Christian Catalini)

Art has been the first application, but different markets and myriad applications that no one can predict will likely adopt NFTs. Still, various types of fraud have plagued the NFT art market, with hackers, phishing attacks, plagiarism and rug-pull rip-offs. Scammers in the NFT market have managed to walk away with about $3 billion.

So far, the markets for cryptocurrencies and NFTs have been vulnerable to tremendous speculation.

In 2021, cryptocurrency transactions swelled by 550%, and the market soared to the tune of $15.8 trillion. People who had invested in cryptocurrencies believed they were on the cutting edge of a new world, and many who hadn’t invested felt like they’d missed out. Then came the fall. In one 24-hour period, $200 billion dollars disappeared from the crypto market. It wasn’t just bitcoin. Even “safer” bets like Vitalik Buterin’s cryptocurrency, which was supposedly linked to the value of the US dollar, fell nearly to zero. As The Wall Street Journal put it, TerraUSD’s fall from grace is “a reminder that crypto…is often little more than a casino, with weak regulation and few means of recourse for the losers.”

“What’s challenging with NFTs today is that you do have some actors that come in and just want to ride the wave of attention and speculation. But on the other side, you have very serious founders who are trying to create something different to emancipate creators.” (Christian Catalini)

So far, NFTs haven’t fared much better. First created in 2015, they didn’t get much attention until 2020, when total sales were $83 million. By 2021, total sales increased to $18 billion. In March 2021, a digital work by unknown artist “Beeple” sold at Christie’s for $69.3 million. Celebrities were promoting various NFT projects, and this increased interest in blockchain technologies among a broader base of people. Then, suddenly, NFTs lost their shine for investors, and the market plummeted, just as cryptocurrencies had. It’s not just NFTs. According to Eric Budish, an economist at the University of Chicago, “There’s some chance that we’re in the midst of a massive speculative bubble.” But skeptical as he is, Budish is still excited by some potential uses for blockchain technology, as are many other blockchain boosters from all walks of life.

Blockchain still has the potential to alter the modern economic system, limiting or obliterating the centralized power of banks.

Though they have the potential to improve the world, blockchain projects have yet to fulfill the visions of their founders. When asked about speculation, and the “Bored Ape” NFT series that sold for millions of dollars, Ethereum founder Vitalik Buterin says, “I have some hopes for the space, like one of the things that’s kind of excited me since the beginning is this mechanism designed for public goods. If we can somehow get $3 million monkeys where the proceeds go to giving anti-malaria bed nets to people in Africa, that’s an amazing social technology, right? I really want to try to push this toward more of that kind of stuff.” Francis Suarez, bitcoin enthusiast and mayor of Miami, agrees. He even takes his salary in bitcoins. People are always afraid of new technologies, he says, but as the torch passes from baby boomers to the next generation, “we have to be on the forefront of the innovation tsunami.” Suarez predicts that someday blockchain will dominate 80%-90% of the economy.

“We don’t want to be the person who in 1993 says, ‘Why do we need the internet?’” (economist Antoinette Schoar)

For artist Tom Sachs, NFTs are more than a way to make more money – and he is making money. His Tom Sachs Rocket Factory NFTs have generated between $30-$50 million, and his studio gets 10% of the NFTs’ trading resale value. But Sachs also sees blockchain as a way to create a “peaceful revolution,” wresting power away from the banking industry, which he describes as “racist and classist.” According to Sachs, blockchain can be a tool for “getting the money out of the institution into the hands of individuals. To not depend on this completely slanted, immoral banking system that makes the rich get richer and the poor get poorer.”

With his art, Sachs wants to represent the world as it could be, rather than representing the world’s current state. His goal is to make NFTs that people want to engage with, so that more people will get on board with blockchain technologies. The best way to usher in the new economy, Sachs says, is to participate; if you sell pizza, accept bitcoin at your pizza parlor, for example. Economist Christian Catalini also has advice for people who want to get involved with blockchain technologies – don’t put all of your energy into trading cryptocurrencies. Instead, go to school for computer science or economics. “These markets have crushed souls before,” he says, “ [and] when it all crashes down to zero, hopefully, they don’t take it too personally.”