NFTs have been some of the most hyped products in the blockchain industry. While we all love the technology behind NFTs, it’s hard to stay ignorant of the many reasonable arguments critics have expressed on why NFTs are bad.
Since touching an all-time high monthly volume of $5.6 billion in January 2022, total NFT sales have declined by over 90%, with a projected volume of under $500 million by August 2022. The hype has settled, and it begs the question of whether this was all just a momentary fad, or a fundamental rethinking of digital value.
Why Are NFTs Bad? The Potential Arguments
1 Failure To Serve Their Purpose
NFTs were designed to be the first legitimate digital proof of ownership, i.e. once you buy an NFT, the token contract belongs to you, and nobody can seize, censor, or destroy it. This is because they’re issued using smart contracts on decentralized blockchains, beyond the unwarranted reach of any central authority. However, with the current state of affairs, this is far from reality.
An NFT, whether image, audio, or video, requires space for storage. If you don’t already know, blockchains are bad for storage because it makes them bulky, increasing transaction times and network costs. This makes it a no-brainer for issuers to not store their collections on-chain, and if they’re not on-chain, they’re not really yours when you buy them.
The easiest and cheapest way to launch an NFT is by storing it on a server, where all other Web2 content goes. The token contract of your NFT probably includes a link that requests the file from this server, rather than from the blockchain itself. Not to say that all NFTs take this route. The Ethereum OG, Cryptopunks, is actually stored live on-chain.
Many other blue chip collections like BAYC have taken the middle path. Although they aren’t stored on-chain, they aren’t susceptible to the vagaries of a central server either. BAYC images are pulled from the InterPlanetary File System (IPFS), which is also a server, albeit a decentralized one. However, this presents challenges of its own, like if the nodes storing your Bored Ape data are offline, you probably won’t be able to retrieve them until those nodes are back online.
However, the majority of NFT projects have taken the easy road, simply tagging their NFTs to a centralized internet server link. This exposes the holder to black swan events, theft, and complete value wipeouts of million-dollar ape assets, along with DDoS attempts by malicious actors.
2 Moral Hazards
NFTs are nowhere near the revolutionary concept they aim to become. Scammers, rug-pullers, and hackers always lurk in the background to take your wealth. The problem heightens because of the information asymmetry that prevails because of the complex technology and economics behind NFTs.
Projects are using stock images and getting Fiverr freelancers to upload and mint them as NFTs. During a bull market, it’s not tough for them to use the hype to their advantage, creating a sense of urgency and scarcity to get your dollars. Most of them have pulled the rug by now, and if not, the market certainly won’t be kind to them next time around.
Scams and hacks are omnipresent. From basic phishing attempts on Discord and Twitter, to sophisticated bots stealing blue chip NFTs through OpenSea loopholes, the space has seen it all. Countless blue chip NFTs were lost to old bids being reactivated, malicious transactions signed on Web3 wallets, and compromised private keys. The ease of accessing NFTs certainly puts the holders at risk, because most hackers will know their way around the tech better than any layman.
3 NFT Price Volatility
NFT volatility can be nasty, especially for those looking to flip NFTs for a profit. This is because NFTs lose (or gain) value not just from people speculating on the NFT, but also fluctuations from the base trading currency – ETH, in most cases.
Trading NFTs usually means getting them for cheap at the mint and immediately selling them on secondary marketplaces. NFT flippers care little for the actual art, long-term value prospects, or utility of these tokens, luring unsuspecting buyers unaware of these traders’ modus operandi. If crypto is the stock market on steroids, NFTs are crypto on steroids. Pumps are more glorious and dumps are more debilitating than in any other market.
One example nicely ties these aspects of volatility to drive the point home – Pixelmon, a gaming project that didn’t exist until it went to the mint. NFTs were minted at 3 ETH each in February 2022, when ETh was valued at $3,200. This made the minting cost $9,600 per NFT. When the Pixelmon NFTs hit Opensea, ETH had already lost 1⁄3 of its value! Fast-forward six months later, Pixelmon’s floor price is 0.19 ETH – a 93% loss in ETH value.
What’s more painful is when losses are calculated in terms of dollar cost. Ethereum has averaged at around $1,500 recently, making the absolute floor of these NFTs roughly $285 – a 97% drop from the $9,600 spent on minting each Pixelmon.
4 Environmental Impact
Beyond the problems mentioned above, NFT critics also point to its environmental impact. However, this argument isn’t limited just to NFTs, and applies more to the broader ecosystem. The environmental impact of NFTs arises from the blockchains used to mint them. Today, the two largest blockchain networks, Bitcoin and Ethereum, operate using Proof-of-Work consensus, which is energy intensive. However, most NFTs are minted on Ethereum, which will be undergoing a Merge in September, shifting its consensus mechanism to a Proof-of-Stake model, and largely nullifying this argument.
5 A Lack of Use Cases
With how things are currently playing out, the use cases for NFTs have been few and far between. Music NFTs are struggling to find their role in the existing industry, and image and video NFTs are yet to go beyond the PFP utility phase. Existing NFT games are not keeping users engaged, shifting the player’s focus to profiteering over just having a good time.
Are NFTs Bad for Artists?
When the NFT hype had first hit, many had heralded these digital tokens as a sign of an artistic revolution, providing artists and creators with a direct, monetizable channel to their audiences. However, over the years NFTs have failed to provide a reliable means for independent artists to generate revenue. There is little scope, especially for individuals, since traction primarily circles around large 10,000-piece collections from behemoths like Yuga Labs.
Unless they’re savvy with both tech and marketing, individual artists have little chance of getting their work’s worth from NFTs. In short, artists need entrepreneurial, not artistic skills, to make it with NFTs.
So Are NFTs Good or Bad?
While some say that NFTs were a fad and that the recent hype was an aberration, others believe that what we saw was only the tip of the iceberg. So are NFTs bad? Perhaps they can be, but they might not be forever. VCs are certainly not backing down from funding NFT projects.
For any inquiries contact us at firstname.lastname@example.org
Phemex | Break Through, Break Free