Slide
[ARTICLE] The Bronner report makes new proposals about social media
19 January 2022
[REPLAY] Webinar: Content Policy in the Age of Transparency, a Transatlantic Discussion
11 February 2022

[INTERVIEW] Deflating the NFT hype – An interview with Jack FRANSHAM

By Rachel Griffin

Lets start with the basics. What is an NFT and how do they relate to blockchain and cryptocurrencies?

NFT stands for ‘non-fungible token’, a term that manages to be almost entirely jargon despite being two words long. A ‘token’ in this context is an asset that exists on the blockchain. The term ‘token’ colloquially refers to an asset which is created by a user of the blockchain using some kind of ability the blockchain provides, as opposed to the native denomination of the network, such as Bitcoin (BTC) or Ether (ETH). 

While NFTs have existed for a long time, they are now being used to signify unique ownership of an image or another type of digital file, and this use is now synonymous with ‘NFT’. ‘Non-fungible’ means that a token has a unique identity. Fungible assets, like Bitcoin, are interchangeable. If you have $5, give $1 away and then receive $1 from someone else, it would be impossible to know just by looking at the current and original states of your account. If you tried to do the same with, for example, children, it would be pretty easy to know from looking at the original and current state that something had changed. In theory NFTs are more like children, in that they cannot be subdivided and even if you get two that look identical, it is still possible to determine which is which by examining data which cannot be forged. 

The image that is associated with the NFT isn’t usually actually part of the NFT directly, as storage is extremely expensive on the blockchain. If you have a JPEG on your hard drive, only one copy of that JPEG is stored and the price of reading and writing that data is negligible. If you store a JPEG on the blockchain then it must be stored on millions of hard drives and sent over the network sometimes billions of times, so the cost starts to add up. To work around these costs, the image associated with the NFT will instead be stored outside of the blockchain and the NFT will only contain a URL that points to that image.

The current public and media interest in NFTs can be traced to March 2021, when artist Beeple sold an NFT of one of his artworks for $69 million, through the prestigious art auction house Christies. Since then many other NFTs have sold for millions of dollars each. Why are people paying so much for them?

So the short answer is, they aren’t paying so much for them at all. The justification for most is that the NFT will be worth more in the future, which is similar to the pitch made to early adopters of cryptocurrencies such as Bitcoin and Ether. However, it is clear that the biggest names in the space do not consider this to be a worthwhile investment by itself. Instead, the real money is in creating your own projects and flogging them to others. The person who won the Christie’s auction, Metakovan, used it as marketing for a follow-up project called B.20, and Beeple owned 2% of the entire supply of B20 (the project is spelled with a dot and the coin is spelled without one) at the original creation time of the network. 

So-called ‘wash trades’, i.e. selling assets to yourself or an affiliate for a deliberately inflated price, are endemic to the NFT space, as they are trivially easy to do. Without extensive evidence, it should be assumed that any big-ticket sale of an NFT is motivated by the often-uncritical publicity that comes with spending such a large sum on a new technology, and/or some way of spending less than the apparent amount on the purchase. Even smaller purchases that get no publicity are made with the expectation that the NFT can be later sold on to someone else, who in turn buys the NFT with the expectation that they can sell it and so on. NFT projects will often have vague promises about access to a club, an invitation to a party, some stake in a real-world project and so forth to sweeten the pot, but if these were the primary motivations people could easily use existing methods such as ticket sales or crowdfunding to accomplish the same goal and there would be no reason to attach such benefits to some digital token. Not to mention that without the technical hype, the promises made by these projects would be considered less reliable than Kickstarter projects, as few of the people involved have any prior experience in other projects outside of the very insular crypto world.

Even the promises of future returns are predicated on the insane return on investment seen by early investors in cryptocurrency, but the differences between the two are stark. An argument made by David Graeber in the book Debt: The First 5,000 Years is that currency only holds value because ultimately people need it to pay the state – who issues the currency – taxes, or at least to buy goods and services from other people who pay taxes. Similarly, returns on investment in cryptocurrency are predicated on that cryptocurrency becoming some local monopoly. In order to interact with the online black market, one must own BTC or XMR. In order to interact with the various projects built atop Ethereum, one must own ETH, and so on. Due to the fact that these chains are disconnected from one another without a third party, vendors or project leads cannot simply accept ‘any cryptocurrency’ and so centralisation on a handful of blockchains can emerge, rewarding the early adopters. Ultimately, someone has some exogenous reason to own some specific coin, or at least that’s the promise sold to investors – you’ll notice that BTC and XMR are the only coins mentioned that have uses that are not themselves blockchain projects, and those uses are just crime. 

NFTs are, ironically, far more interchangeable than the so-called fungible tokens you use to purchase them. The price of creating a new blockchain is relatively high, requiring a whole team of developers for the most serious of offerings, and they are designed to have some form of lock-in, whereas creating a new NFT requires only a few hundred euros. As most NFTs live on the same blockchain they are tradable with one another as easily as one ETH is tradable with another ETH.

Of course, another important reason that people spend money on NFTs definitely is comparable to those of cryptocurrency investors, and that is circumventing the traditional financial system, for example for tax evasion or laundering money. I won’t talk about this too much further though because there’s nothing here unique to NFTs.

Like cryptocurrency transactions, the blockchain processes used to ‘mint’ and sell NFTs have a serious environmental impact, as theyre so energy-intensive. What other social or policy issues do they raise? 

So the energy cost of blockchain projects is something that has been covered far better by others, so I’ll only speak to the most-common counterargument – that the so-called ‘proof of stake’ mechanism (which has the unfortunate acronym PoS) will solve energy issues. While yes, PoS does require less energy for the same throughput than the more-common ‘proof of work’ (PoW), all blockchains – and in fact all decentralised systems – achieve their security by increasing redundancy to the point that the price of attacking the network outweighs the benefit to doing so. Because of that redundancy, the ultimate useful throughput and cost-per-transaction of the system will always be fundamentally limited by the fact that every operation in that system must be checked many millions of times over.

Let’s say, though, that blockchains solve all of these issues. Certainly there are some in the space working on solutions. We can imagine a perfect blockchain, which uses zero energy and takes zero time to process a transaction. That blockchain still suffers from the fundamental issue that all blockchains suffer from – the need to ultimately interact with the real world. There is a persistent unspoken agreement within the cryptocurrency space that the real world is a minor issue that can be dealt with later, once all the technical issues have been worked out. 

Developers of the technology will work on problems that only involve the interactions between computers – i.e. preventing overspending on accounts, preventing large entities from choosing which transactions get included in the network, avoiding DDOS attacks, and so forth. These are not easy issues to solve, but solving them ultimately comes down to the flipping of bits back and forth and transferring those bits between computers. However, we already have systems that solve these issues just fine. The issues that people have with the existing financial system has nothing to do with the interface between computers and computers, and everything to do with the interface between humans and computers. 

Traditional payment processors have fraud detection, where an account will be locked down if transactions seem invalid, and with any bank you can lock your card if someone gets access to it to prevent any payments. With cryptocurrency, not only are these mechanisms impossible, but attacks can be entirely automated so your money is gone before you would have had a chance to lock it away. Traditional payment processors have mechanisms like CAPTCHAs that prevent automated payments from being made, and if you do want to charge people automatically you have to go through a very strict vetting process to ensure that your automated payments have a limited scope. Traditional payment processors allow you to complain if you receive a bad product, hopefully ultimately resulting in a refund. 

In contrast, blockchains cannot distinguish between human and automated users, and cannot distinguish between a valid complaint and an invalid complaint. Any solution to the issue of refunds in the blockchain space amounts to escrow, where a third party holds the funds until the recipient either confirms or denies that the product they received is good. This massively slows down both valid and invalid transactions and requires involving a trusted third party, which opens the door again to collusion and fraud. Traditional payment processors have a lot of issues, but cryptocurrency solves none of them.

Cryptocurrency as a technology enables and encourages unregulated gambling, scams, fraud and exploitation. While the network itself is resistant to hacking, any individual who uses the network has no safeguards against being hacked whatsoever. The only security your NFTs or coins have boils down to whether you can keep a single number secret, a number which you must use every single time you interact with the network. Unlike a PIN, this number is too large for you to remember in your head and even too large for you to type in every time, and so it must be stored digitally, making it accessible to hackers. The cryptocurrency community’s solution to this is essentially ‘sucks to be you, you should have been more careful’, as if that is suitable for a technology meant to be used for the economic life of the whole world, all the way from pension funds down to buying apples from the market. Not to mention that even enthusiasts still get their funds stolen as more hacks are developed, such as a recent example where fake NFTs would be dropped into your account and any attempt to delete or send that NFT anywhere would result in your entire account being emptied. 

Cryptocurrency is a technology that enables and even demands stepping on others if you want to make any kind of profit. It’s a technology that is built by and for the wealthy and advertised to the poor and middle-class, not out of empathy but because they know that the desperate and insecure are the easiest prey.

Signal founder Moxie Marlinspike recently published a critical investigation of NFT markets. He pointed out that even though blockchains theoretically permit very decentralised organisations with no single point of authority, in fact NFT markets are highly centralised, because to buy and view NFTs you need to go through one of a small number of intermediaries. Why do you think there is such a gap between the rhetoric and the reality? 

As I previously mentioned, cryptocurrencies encourage fraud and scams, which are rife within cryptocurrency communities. Sites like OpenSea act as a mediator, but the religious devotion to appearing decentralised and the lust for profit means that they will always provide the absolute minimum amount of oversight possible. The aforementioned hack where you could be given a ‘cursed’ NFT which steals all of your assets? OpenSea provided no defence against it, and it is even rare that they will prevent the sale of NFTs on their platform which are known to be stolen, except in the most highly-publicised cases. 

You can actually buy and view NFTs without these platforms, but people deliberately choose to use these platforms because the experience of using a platform with human oversight is better than a purely automated platform, because of the aforementioned risks of hacking and fraud. Besides, so-called ‘decentralised’ autonomous organisations (DAOs) are decentralised in name only. Any of these DAOs have some way of updating the code involved. The first experiment in DAOs (which was just called The DAO) did not have such a mechanism, and when a bug was inevitably found, the entire wallet, containing around 14% of all ETH in existence, was drained. This led to the developers behind the Ethereum blockchain making a new blockchain where they specifically reached in and fixed that bug in The DAO’s code. Again, once the consequences of being decentralised and autonomous were seen by the community that clamoured for it, they went running to a central authority.

I have to mention that in in this article from cryptocurrency trading platform Gemini, they discuss this exact situation and then immediately end the article with ‘Since The DAO hack, Ethereum has gone on to become an essential pillar of blockchain, cryptocurrency, and decentralized finance.’ Truly an astounding lack of self-awareness.

This exact same issue happened to the company I worked for – twice. Combined, the amount lost totalled over $180 million, including much of the funds collected by my former company with which to start a new blockchain project. These issues cannot be solved by just hiring better developers, or only trusting code written by good developers. The two pieces of code involved in the respective hacks were written by the CEO of the company, who was one of the original developers of the Ethereum network itself. If anyone was going to be trusted to write such code it would be him. He continues to command a great deal of respect in the cryptocurrency community, and the new cryptocurrency project whose funds were damaged went on to be one of the biggest networks by trading volume. Mark my words, people will continue to be hacked, people will continue to be scammed, people will continue to be defrauded, and the cryptocurrency world will carry on regardless because there is money to be made

Facebook is reportedly exploring plans to make and sell its own NFTs, and Twitter just announced that its users can use NFTs they own as a special, hexagonal profile picture. What do you think are the implications of big tech and social media companies trying to get into the NFT market?

Well, just after the announcement the prices for all major cryptocurrencies almost halved, so while it’s hard to figure out cause and effect that could be one implication. Of course, the reason that Facebook and Twitter intend to get into the space is that it’s a way to use their leverage to increase the price and the addressable market for NFTs and cryptocurrency. It would be asinine to assume that only the middle-class can earn money from cryptocurrency investment. Most all of the biggest names in cryptocurrency were filthy rich from traditional finance and used cryptocurrency to get even richer and even filthier. The upper management of Facebook and Twitter are no exception. This is no surprise. 

The actual result is that involvement from big players and such an unavoidable increase in discussion is bringing NFTs to a tipping point. Either they prove that they can be more than just another scam, or the harsh light of day will destroy any interest the average consumer has in them – and with that, any reason for investors to buy them. We’ll see, but in their current state I would say their future looks bleak.

Jack Fransham is a former cryptocurrency developer and educator. For over three years they worked at Parity Technologies GmbH, a blockchain technology development firm, where they worked on the Polkadot blockchain, as well as giving talks and workshops on blockchain technology and software development in general. They have now left the software industry entirely to produce techno.

Rachel Griffin is a PhD candidate at the Sciences Po School of Law and a research assistant at the Digital Governance & Sovereignty Chair. Her research focuses on social media regulation as it relates to social inequalities