On 12 February 2022, Reuters reported that NFT marketplace Cent was forced to suspend sales of non-fungible tokens (NFTs) six days ago following ‘rampant’ fraud on the platform. As a marketplace, it may be small (with only 150,000 users) but it is one of the most reputed. It was this marketplace that sold Twitter co-founder Jack Dorsey’s first tweet as an NFT for USD 2.9 million. Yet, Cent witnessed what can be called the dark side of NFTs.
The Cent debacle was described by its co-founder, Cameron Hejazi, who told Reuters that users kept on “minting and minting and minting counterfeit digital assets” despite all efforts by the marketplace to ban them. He went on to say that the ban was ineffective because a new account would crop up and engage in the same activity.
But Cent’s problem was just a part of the larger issue involving NFTs.
A brief history of NFT and its growing popularity
NFT is a creation of tech entrepreneur Anil Dash and digital artist Kevin McCoy, who introduced “monetised graphics” in a live demonstration at the 2014 Seven on Seven event held in New York City’s New Museum of Contemporary Art, US. Their idea was to give artists a chance to make some money and retain control over their work.
Three years later, NFTs took off when prices of CryptoKitties tokens began showing an upward tick.
However, the real ‘revolution’ happened only in 2021. For now, the history of NFTs can be divided into ‘pre-2021’ and ‘post-2021’.
But why is 2021 so significant? For one, the world started seriously talking about NFTs only after the sale of an artwork titled Everydays – The First 5000 Days by American artist Mike Winkelmann, better known as Beeple, as an NFT on 11 March 2021.
The digital art was sold for a mind-boggling sum of USD 69 million at Christie’s. In a tweet, the auction house said that the sale placed Beeple among “the top three most valuable living artists.”
Everydays – The First 5000 Days remained the most expensive NFT artwork ever sold till an artwork titled The Merge by the artist Pak was sold for USD 91.8 million in December 2021.
On 13 February 2022, CryptoPunk #5822, one of the tokens from the much sought-after CryptoPunk collection, was bought by Chain CEO Deepak Thapliyal for USD 23.7 million. Therefore, CryptoPunk #5822 is the most expensive of all CryptoPunks and the fourth most-expensive NFT artwork of all time.
Many artists are certainly finding the world of NFTs attractive. Prominent Asian artists, including Takahiro Suganuma, Abdul Hafiz Abdul Rahman and Victor Wong, have launched their digital artworks as NFTs across platforms.
Secondly, renowned names from the world of fashion to football have joined the NFT ecosystem by launching their collectibles as well as buying unique NFTs such as the ‘apes’ of the Bored Ape Yacht Club (BAYC) collection.
These include NBA legend Steph Curry, Tonight Show host Jimmy Fallon, rapper Snoop Dogg, singer Justin Bieber, the band Kings of Leon and football great Lionel Messi. Music icon John Legend even launched his own NFT platform, OurSong, in partnership with Our Happy Company.
In fact, before Beeple made NFTs the talk of the town, it was singer-songwriter Grimes who grabbed headlines when a series of 10 of her tokens, including music NFTs, were sold on Nifty Gateway for USD 6 million.
The boom has been such that OpenSea, one of the biggest NFT marketplaces, recorded a trading volume of USD 5 billion in January 2022. Its previous high was USD 3.4 billion in August 2021.
It appears that NFTs are here to stay, at least because of their increasing significance for digital artists to showcase their work through this new means and make money from them.
A popular collectible plagued with uncertainties
Although NFTs have taken the world by storm, their future seems murky when one considers the ‘frauds’ on Cent. It raises questions about the authenticity of crypto art, its true value, resaleability and ownership.
But one has to first grapple with the thought that owning an NFT does not mean it can be prevented from duplication. For instance, a .jpeg file on the internet can be easily downloaded by millions even if it may be an NFT ‘owned’ by someone on the blockchain. This means unlike the Mona Lisa painting housed at Paris’s The Louvre, which may have duplicates but none as perfect as the original, copies of these digital images most likely mirror the original artwork.
Therefore, the very idea of ‘owning’ something worth millions that can be easily (and legally) used by just about anyone sounds absurd; yet records are being set for NFT sales almost every month. The craze is such that NFT-sceptics call it a bubble. Whether it actually is can only be known with time.
Therefore, the dark side of NFTs cannot be ignored even if one is a blockchain advocate who is sure that all of this is eventually coalescing as the metaverse.
Sale of unauthorised NFTs and the legal tussle
Unauthorised tokens are one of the larger problems surrounding NFTs. Cent was the latest in a long line of those struggling with this.
On 22 January 2022, The Guardian reported that French luxury group Hermès was initiating legal action against American artist Mason Rothschild over the use of the former’s iconic Birkin bags as digital tokens named MetaBirkins.
Similarly, Nike sued StockX, a shopping platform, on 3 February 2022 for using the shoemaker’s brand and iconic logo to create and market NFTs.
But Rothschild issued a statement in his defence which drew attention to the US law.
“I am not creating or selling fake Birkin bags. I’ve made artworks that depict imaginary, fur-covered Birkin bags,” he said, adding that the First Amendment of the US Constitution protects his “right to make and sell art that depicts Birkin bags” and referred to Andy Warhol creation of Campbell’s soup cans artworks.
“The fact that I sell the art using NFTs doesn’t change the fact that it’s art,” Rothschild underlined in his statement.
In its report on the developments, AFP quoted a lawyer, Annabelle Gauberti, on the subject.
“The ‘fair use’ defence works well, particularly in UK and US law, in which an artist can use a trademarked word or product to make a point or as a parody,” Gauberti said, referring to Rothschild’s defence of his artistic freedom.
On the other hand, StockX reportedly never claimed that its NFTs are works of art.
The two cases indicate the lack of legal definitions explaining what constitutes NFT artworks and how they should be treated. It also revolves around the companies and whether they can launch their own official NFTs.
Copyright is, therefore, a central point in NFT artwork. Filmmaker Quentin Tarantino wanted to sell NFTs associated with his film Pulp Fiction (1994) but was prevented from doing so by the studio Miramax, which holds the copyright to the film.
Legal actions appear to be increasing by the day as the popularity of NFTs continues to rise.
In February 2022, the Recording Industry Association of America (RIAA) sent a legal notice to music NFT platform HitPiece after artists such as Wolf Van Halen accused it of trying to sell NFTs in the name of the artists without authorisation. Reports say that the NFTs were not music files but artwork connected to the tracks — which are protected by copyright.
The NFT market is riddled with scams. In September 2021, a fake Banksy NFT titled Great Redistribution of the Climate Change Disaster was sold for over USD 300,000. Interestingly, the fake work was advertised as an auction on Banksy’s website.
Via his agency, Pest Control, the acclaimed street artist confirmed that neither was the art by him nor was any NFT been sold on his site.
CNBC reported that while the agency confirmed that the auction and art were fake, it did not comment on whether the site was hacked. According to the report, the money was returned to the buyer.
Furthermore, scammers and hackers are trying to lure unsuspecting enthusiasts through social chat apps, like Discord, using fake links that appear like opportunities to mint NFTs. They read and appear almost like click-bait phishing mails that were common in the early days of email. Not just Discord, phishing attempts can be made via Twitter and Instagram DMs, too.
Gullible targets are asked to invest with Ethereum tokens for NFTs that eventually never get created. In more serious cases, private keys to crypto wallets can be stolen, which could lead to the theft of all cryptocurrency and NFTs held by the wallet.
Alarmed by this, OpenSea partnered with NFT communications platform Metalink on 15 February 2022 to prevent such attacks through Discord DMs.
Hackers and scammers can target anyone they want to. The best solution for users is to practise a ‘buyer beware’ policy.
Even without the use of DMs, scammers can target people using rug-pull and pump-and-dump schemes. These involve scammers promoting an NFT or cryptocurrency and driving up their prices to lure prospective buyers. Once they have sufficient investment, the scammers shut operations and cash out. The investors, on the other hand, are left with zero value.
The Squid Game cryptocurrency scam is an example of such a scam. In November 2021, scammers used the acclaimed Netflix Korean drama as a pivot to create fake crypto. Within 11 days, the crypto’s value rose 310,000 percent to USD 2,861. The scammers sold their holdings and escaped with millions, bringing the value of the coin to zero.
Then there are bidding scams, which affect those who are selling NFTs. Malicious bidders can change the type of cryptocurrency listed as the preferred token with crypto that is lesser in value. This is done surreptitiously and leads to a loss for the seller when it goes unchecked.
In December 2021, a CryptoPunk NFT was sold for USD 532 million. In a way, it would have been a record sale in the art world, but it wasn’t. Reports reveal a major issue in the transaction. The value of the NFT was actually pushed up by a single user who was both the buyer and seller.
This sort of trading is widespread in the NFT world because buyers and sellers can remain anonymous on the blockchain. The only thing public is the record, which is verifiable. The wallets involved in the transactions are known but the person or user behind the wallet remains hidden.
A single user can have multiple wallets and carry on such transactions, creating an impression that an NFT is highly valued and has been traded many times for the public. This might also help drive the value of the NFT and add to the trading volume of the platform, which makes it look financially robust.
Citing data from blockchain market data tracker DappRadar, Reuters reported on 7 February 2022 that the 27 most expensive recorded NFT sales in January came from only two wallets transacting on LooksRare — an NFT marketplace. The total value was USD 1.3 billion. The report also said that 16 wallets on the platform were involved in the top 100 sales worth USD 2.3 billion.
“There is a lot of activity happening between a couple of wallets — let’s say wallet one selling to wallet two, and then wallet two reselling it. It’s quite likely that this is not real demand, that these trades are not organic,” said DappRadar Finance and Research Director Modesta Masoit.
The energy problem
The fundamental difference between cryptocurrencies and NFTs is that the former is fungible. But like crypto, all NFTs exist on the blockchain — most of them on Ethereum. Therefore, like cryptocurrencies, the ownership of NFTs is stored on the blockchain, cannot be forged, and information is transparent.
Additionally, NFT transactions, including gas (fees), involve cryptocurrency, no matter the marketplace. Simply put, the more the numbers and transactions involving NFTs, the more is the need for cryptocurrencies.
Since nearly all blockchains follow the “proof of work” model, they become extremely energy-consuming. Cryptos are mined, which require constantly operating workstations for “mining” operations, which are essentially solving a puzzle to verify a transaction and add a block to the blockchain.
In 2021, Cambridge University researchers calculated that Bitcoin mining alone uses more electricity annually than the whole of Argentina. Therefore, one can easily estimate the carbon footprint of blockchain technology.
This means power consumption equals the burden on the environment. This is why the rise of NFTs directly contributes to climate change. Unless blockchain as a system becomes more energy-efficient and reliant on renewable energy sources, it may not be acceptable by those who are fighting on the ground against climate change.
Also noteworthy is the cost of power. The price of gas might cost artists more than the actual worth of their NFT art.
Can NFTs collapse if cryptocurrencies collapse?
The fate of cryptocurrency is ambiguous in several countries. In case most economies decide to ban them, it will impact the mining operations. This means there will be an adverse effect on NFTs since crypto is essential to the trade.
Some countries, such as China, allow NFT trading on semi-regulated blockchains. Since cryptocurrency is banned in the country, the tokens used as gas for transactions exist only on limited blockchains. This means they are not exactly cryptocurrencies, but the NFT trade continues within the limited sphere that the regulated blockchains offer.
However, this goes against the core nature of NFTs, which is basically a digital asset on a decentralised blockchain free from the control of a centralised authority. But the future of NFTs can be purview of government regulations.
More about the dark side of NFTs
There is much more to the pitfalls of NFTs. As gaming platforms become more metaverse-centric, fears of scams on them are rapidly rising. One such concern has gripped Axie Infinity, a blockchain-based game created by Vietnamese studio Sky Mavis.
Simply put, it works on the concept of ‘pay to earn’. Players use colourful digital creatures known as Axies to battle other players. The reward is called Smooth Love Potion (SLPs), which can be poured back into the game’s virtual world Lunacia or exchanged for cash or crypto.
Moreover, buying an Axie, which is essentially an NFT, can be expensive for some, and at least three are needed to enter the game. Like any other game, the more powerful the Axies, the better is the chance to win the SLPs. Within the game are powerful players who have formed guilds.
According to AFP, sceptics believe the game is a “house of cards” — a fraud driven by hype and speculation. There have been concerns about inflation and the unsustainability of the business model, too. Volatility has led to the value of the SLP skyrocketing and then falling steeply within months.
That is not all. Video essayist Dan Olson worked for 10 months to create a video titled Line Goes Up – The Problem With NFTs. In the 138-minute-long YouTube video (which can be viewed below), Olson delivers a scathing criticism of the concepts of blockchains, cryptocurrencies and the NFTs in a preface and 14 chapters, starting with zero.
The video was released on 21 January 2022. It has since been viewed over 5 million times and liked by 290K users on the streaming platform. Although the video has been received with positive reactions, there are others who disagree because the whole concept of blockchains and everything dependent on it are still somewhat new.
Speaking to TIME magazine, macroeconomist and Web3 investor Tascha Che took on Olsen’s arguments. In one of her excellent points, Che notes, “We’re suspicious about new things in general if it disrupts our world view. There’s an underlying fear of how it will become a disaster. You see this pattern happen repeatedly throughout history: with the industrial revolution and the digital revolution.”
Therefore, the current issues around NFTs might eventually get resolved and more investors might join in to make the concept of blockchain what it aims to attain.
Hero and Featured images: Mika Baumeister/@mbaumi/Unsplash