NFT’s… So, what is the point, and why all this hype?
Further insight into the mechanics and terminology behind the NFT phenomenon with a summary on ownership and their ecological effect – Part 2 of a personal view by Tiny Spark’s Anton McCoy.
Without trying to be too cynical, the hype is there so that news organisations can talk about something new and interesting, with most of the people generating the hype having a vested interest in validating the value of both the NFTs and the main currency NFTs are purchased and traded in.
For example, the owners of OpenSea are the billionaire cofounders Alex Atallah and Devin Finzer. Both have a history within blockchain technology and have their own collections on OpenSea for people to purchase. Even though they know they are selling rows in the database, they hype the concept of ‘owning digital art’ even though you cannot own it. This is at the very least disingenuous.
Then there is confusing fact that even though all this hype exists, particularly on social channels, and is also reported on more classical news outlets, the NFT market is still currently very, very small.
There are an estimated 330 million cryptocurrency users, but from these only around 335,000 own an NFT. This is 0.1% of the overall crypto market – ie of those capable of purchasing an NFT. Even more eye opening is that 80% of the total wealth of all NFTs is currently owned by 10% of this 335,000; so ~33,500 people (technically 33,500 wallets) own 80% of the collective considered value of NFTs. Of course, they go on TV and hype them up, talk on YouTube about how they made money and pay celebrities to endorse or consent to the production of their own sponsored NFTs. It’s in their own interests to keep the market alive and fresh, get more people into it, introduce more cash into the system – effectively to bump and dump that market. But as a point of information, a market that’s only profitable if more people join is called a pyramid or Ponzi scheme…
What about that Christie’s NFT?
One of the biggest NFT stories covered the press was the $69.3 million sale of ‘Everydays – The First 5000 days’ by an artist known as Beeple. Again, this wasn’t for the piece itself of course – you know that by now. The sum paid therefore sounds completely insane, until you pick the transaction apart at the seams.
The buyer of this NFT was Vignesh Sundaresan, better known online as MetaKovan, a cryptocurrency entrepreneur. He owns some other NFT pieces from Beeple, so it might be that he likes the artist and wants to support him. It might also be that he was doing what many physical world art collectors do – buying anything from an artist they have a large collection of for an inflated price in order to keep the perceived value of the rest of their collection high, with a sale price often the only indication of a piece of art’s ‘worth’. The fact the same person is purchasing all the pieces from the same artist is glossed over.
However, the most likely true reason is more in the realm of the ‘Dark Arts’.
Prior to this $69.3m purchase, MetaKovan set up a company and a new cryptocurrency called B20. This currency / token could be purchased and exchanged for part-ownership of Beeple-produced pieces they had the NFT for. MetaKovan only allowed 41% of the token to be purchased, keeping hold of the remaining 59% within this new company. Throughout the hype leading up the sale at Christie’s, the value of the B20 token went up and up, with people wanting a slice of what might be a high value sale. During the time the between the hype and sale, the value of a B20 token rose from $0.36 to $23. A few weeks after the sale it dropped back to $7.00. However, this is still a 1944% increase in value over two months, with the new company issuing these B20 still owning well over half of this more valuable (in real money terms) token.
Oh, and do you know who the other member of this new company is? Well, it’s none other than the artist Beeple. Classically, this would be considered a massive conflict of interest, but Christie’s were happy with their $9m return for holding the auction, and again, when it comes to the fine art world (and NFTs), the government frankly doesn’t care. It’s not really any of their business if someone wants to pay far too much for something with no labour-effort-to-value cost. If someone wants to show off that they own of piece of art for ‘the status’, so be it. If someone wants to show off that they own a row in a database that is associated with an image via a URL link for ‘the status’, so be it too…
Beyond conflicts of interest, there’s also out and out crime, because NFTs and crypto wallets also represent a perfect way to launder money.
The management of the verification of NFTs immutably links to a person – technically their wallet – and is very computationally-intensive. The blockchain is replicated and verified across many thousands of computers, which consume a huge amount of energy. The technology behind blockchain is probably the most interesting feature of the world of NFTs. A real ‘world-changing’ purpose for blockchain certainly hasn’t been worked out yet. Yes, it’s secure, as in it cannot be hacked or interfered with. For this to happen it would need to be in public or for private information to be stored on it. Although this shouldn’t be possible, personal information often ends up in there to ‘Dox’ (revealing previously private personal information in public) someone, as it can’t be removed. Actually, you can pay for it be removed, but the original entry would still be there because effectively you would have only have added a new block to remove it from the live ledger again. Like many aspects of NFTs, this would turn into another very long story.
The darkest aspect of NFTs is the power consumption needed to keep it running. You might imagine a fancy home computer processing the blockchain, but that’s not the case. You would as a minimum a GPU with 3Gb of memory. Blockchain calculations are actually carried out on a computer’s graphics card, instead of the main computer’s CPU for complicated reasons. In fact, massive GPU-heavy server farms are used to keep the blockchain up and running, processing complicated maths 24 hours a day, 365 days a year, until the graphics cards burn out. The Ethereum’s blockchain (as different currencies use different blockchains) consumes around 100 TWHrs of power per year. This represents twice the power used by the entire nation of Romania or Portugal in a year. In order to keep the Ethereum blockchain going, you could power every home, streetlight, business… everything in these two entire European nations, with a combined population of ~30 million people. This is pure madness. Even if the power was coming from 100% renewable energy, it would be a waste, but it’s not of course. It’s not only a huge waste of resource but is driving up the cost of electricity for all consumers at the same time.
It’s fair to say that NFTs are just a small percentage of all the activity on the blockchain, but it’s been calculated that the average power usage required to mint and sell an NFT is the equivalent of one month’s electricity usage in a typical home within the EU; and in the case of marketplaces like OpenSea, this is where the GAS fees come from – and how the miners / processors of the blockchain make their money.
The NFT market is, as we have ascertained, small, currently representing around 335k people with 33.5k cornering the market, holding 80% of the overall value and minting, selling and reselling NFTs – sometimes between each other to inflate the price of an item, whilst waiting from someone from outside this circle to be foolish enough to buy something that has no value and offers no rights or actual ownership of a thing they most likely they thought, in error, they were buying, whilst each mint, sell, flip step uses a month’s worth of a domestic house’s electricity.
If you, an honourable person, saw NFTs as a way to support an artist you like, what should you do instead?
If there’s an artist you like, who works at least partially in the digital domain, check out their social profile and website. They may have a support platform such as Patreon, where you can give them money directly. There are often different levels of support, from simple thanks to receiving gifts, prints and so on in return for your donation. You could see if they have a way you can pay for a print of a work that you like. Pay for them to print out a high-resolution image on high end gloss paper, for example, that you can put in a frame and personally enjoy having in your home.
For many artists this is how they might make extra money, beyond commissions, so by all means show them your appreciation. If you’ve been looking at NFTs as an investment, however, then you perhaps care more about the potential to make money than about the artist. If this is the case, sadly the time to make money from NFTs has long passed already. By the time it’s in the mainstream media, the moment to join any hype bubble has gone. The players at the top might make money, which is why they promote themselves so much, but it’s snake oil. They need to add more layers to the bottom of the pyramid and talk up the value of their own existing collection of – well, nothing.
Any promise to make easy money should always make you sceptical.
Do your own research, and don’t invest more than you can afford to lose.
Be aware that statistically, you have a better chance of making a profit on a fruit machine!
I’ll leave you with this comical take:
Like with any industry, the world for web design and build has its own array of buzzwords and terms. Some of these terms escape and make it into the common parlance, where are others remain only known to inner circle of geeks.
An insight into the mechanics and terminology behind the NFT phenomenon and a warning not to get involved without plenty of prior knowledge about the pitfalls – Part 1 of a personal view by Tiny Spark’s Anton McCoy.