Imagine that you went into an art gallery. You saw a nice piece of art and decided that you want to store that in your house. You buy it. Now you own it, and you can keep it in your home. Not that complicated. Now reconsider the scenario slightly. You never left the house. The piece of art you saw was a digital artwork that you saw on your phone. You paid a lot of good money for it, and now it’s yours. But the thing is, you didn’t buy a real piece of art. You bought an NFT. An online image. And now it’s yours.
NFT stands for Non-Fungible Token, and while the above example may not be the best, it’s a pretty dumbed-down version of what exactly an NFT is. They can be…kind of confusing, but don’t despair just yet. I did all the hard work, so you don’t have to. Today, I’m going to be clearing up the confusion surrounding NFTs. We’ll look at the good, the bad, and at the end, you should be able to make a pretty educated opinion on how you feel about them. From personal experience, most people that I’ve spoken to don’t really understand what they are or how they work, they’ve just heard that they’re bad. On the flip side, some people love NFTs.
Let's start simple, and we’ll slowly build upon the concept as we go. NFTs are digital diles. Videos, images, jpegs, and even real estate. They’re an asset, something you can own. They use blockchain technology to keep them secure. This means that fraud is a lot less likely, making the process of buying and selling much more efficient.
Blockchain has been defined as a ‘distributed and attached-only database that maintains a list of data records linked and protected using cryptographic protocols.’ This solves the so-called ‘Byzantine Issue’ (otherwise known as the ‘Byzantine Generals Problem’.) While this issue is originally a game theory problem, it also applies here, given that the issue that decentralized parties experience great difficulty in arriving at a consensus without relying on a trusted party; so basically, nobody can trust the answer or agree on any certain truths, because no one member can verify the identity of another. The way that Blockchain solves this issue is by invalidating all subsequent data when changes are made to the original data.
The next point of interest when it comes to NFTs is smart contracts. These were originally introduced by Szabo and developed by Ethereum. They aim to improve, verify or execute digital negotiation, and within the blockchain, they adopt Turing-complete scripting languages. They allow unfamiliar and/or decentralized parties from conducting business without the need for any trusted individuals to oversee it. This helpful technology is used by most NFT solutions, occurring on smart contract-based blockchain platforms.
The Confusion of Cryptocurrency
Cryptocurrencies are a type of digital currency created using encryption algorithms; making them able to serve both as a currency and a virtual banking system. While there has been some confusion regarding if NFTs are a type of cryptocurrency, they are not. While both use blockchain for ownership verification, NFTs cannot be exchanged with another. (Although that doesn’t mean that you can’t sell your NFT and buy another). You can use cryptocurrency to pay for an NFT.
The subject of cryptocurrencies does bring up a red flag when it comes to NFTs. Despite the blockchain technology, NFTs have failed to not fall victim to scammers looking to make a hefty buck, and there are various dilemas to do with insider trading. Furthermore, considering this from the perspective of a person whose studied the law, they fall into a very questionable grey area. Despite the fact that insider trading is quite notorious within the NFT craze, there is no laws regarding it, because it is technically not considered insider trading, given the fact it is regarding cryptocurrencies. If I lost you at the mention of insider trading, it's basically the illegal occurance of trading on the stock exchange specifically for personal advantage because of confidential information. Research proves that there is insider trading occuring within cryptocurrency markets.
The General Public Consensus
Before you’re ready to make your own opinion, I figured it may help to give you the opinions of others. Having a look at google trends, it can be seen that at least in the United Kingdom, the amount of people who have searched for the term ‘NFT’ peaked at around January 23rd to the 29th, before starting a rapid decline overtime. The search term ‘what is an NFT’ shows similar results, peaking from January 16th to the 22nd before beginning a rather stagged decline. One graph shows that he number of first time buyers of NFTs as well as returning buyers peaked during what the study considers an ‘NFT Craze’ during January, before dropping considerably. To put this into context, the number of irst time buyers dropped from a peak of 10,000-15,000 to around 5,000-10,000. Furthermore, the trading volume dropped from around $2.5 billion in January to below $1 billion in May. My final piece of evidence concerning what appears to be the steadfast decline in interest of NFTs, is that on the 14th March 2022, the number of people selling their NFT’s overtook the number of buyers, proving that there was less demand.
While the general public’s interest in NFTs may be slowly dwindling as time goes by, what about industry perspective? NFTs have been gaining some traction among the healthcare industry; an industry that I have found over the course of these articles, are not afraid to embrace new technology with open arms. One example of where they have shown a keen interest is for patient privacy. Turning confidential files, videos, encounters or perhaps documents or certificates as NFTs helps overcome a number of issues such as data security vs patient privacy. They also help protect the security of robotic surgical systems which are becoming increasingly popular by allowing surgery to occur remotely. Despite the interest, it has been asserted that blockchain technology and NFTs needs to be further evaluated and issues with current healthcare systems need to fully evaluated before the great effort to changing the entire system is changed to incorporate blockchain. After all, when you’re rebuilding a toy house, it’s important to be aware of which toys need to be put back.
The Crumbling Climate
The final thing I wanted to touch upon before leaving you to make your own opinion, is what NFTs mean for the climate. The NFT Craze stirred up a Climate-Change related controversy while it was present, and by the word 'NFT' it was often you would find wild claims such as how Ethereum (the second largest cryptocurrency) uses an estimated 78 terawatt hours of electricity every year, which is comparable to the power consumption of Chile. It has been reported that between April and August 2021, electricity consumption for bitcoin mining in Sweden increased by a whopping 700%, accounting for 1TWh annually, which is equal to the electricity consumption of 200,000 Swedish households. Yeah. It's bad. Companies do recognize this, and Ethereum announced plans to rid itself of any intensive codes and cut 99% of its energy use. Furthermore, they recently began 'The Merge'; a two stage process that has been commented to "prove that a decentralized and permissionless network can operate in an energy-efficient manner". This merge will consist of two stages - BellaTrix and Paris. Bellatrix occured on September 6th 2022, and was a network upgrade on the consensus layer. Subsequential upgrades afterthis have been named 'Surge', 'Verge', 'Purge' and 'Splurge'. Hopefully this merge will be the dawn of a new horizon when it comes to NFTs and Cruptocurrencies VS our Climate.
And with that, I shall leave you to form your own opinion. Personally, I can't say I'm the largest fan of them, but I find it more important that everyone makes their own, unbiased opinion on them based on real, factual information rather than your bog-standard, typical internet drivel.
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Wang, Q., Li, R., Wang, Q., Chen, S. (2021) Non-Fungible Token (NFT): Overview, Evaluation, Opportunities and Challenges, Tech Report V2. Available at: https://arxiv.org/pdf/2105.07447.pdf (Accessed: December 20, 2022)
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(2022) Insider Trading in Crypto Markets, UTS. Available at: https://www.uts.edu.au/news/business-law/insider-trading-crypto-markets (Accessed: December 31, 2022)
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(2022) The Ethereum (ETH) Merge Is Finally Here! Coinbase. Available at: https://www.coinbase.com/ethereum-merge (Accessed: January 03, 2023)