The problem with NFTs (and why they're not really problems)

problems with nfts
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Sea stars (also called starfish) can regenerate a lost limb, and that lost limb can sometimes regenerate an entire sea star. The regenerated limbs share identical DNA to the original sea star. In a similar way, a blockchain records a small set of transactions and adds that to the larger chain, constantly growing and building and even occasionally branching off to form a new chain.

At this point, you’ve probably heard about non-fungible tokens (or NFTs for short). In case you haven’t, they are a new type of digital asset that is stored on a digital ledger called a blockchain. Because the blockchain keeps a record of all the digital transactions, the NFT is certified to be completely unique and secure.

NFTs seem to have a lot of value to some people. But why? Why would anyone pay money for something that just lives on the blockchain? Let’s take a closer look and see what they’re about, where they’re going in the future, and why it’s a big deal.

 

How are people using NFTs?

There are many different ways people are using NFTs, but the basic format is the same. An NFT typically includes the necessary information to identify the thing that is being licensed and some text that explains that the blockchain account that has the NFT is the owner of that item.

The owner of the blockchain account is technically irrelevant to the NFT. The NFT belongs to the account, not the person. Anyone who has possession of the account keys can access the account. There are no other security measures in blockchain! (More on that later.)

In the example of an art piece—the most popular NFTs right now—the NFT would include information about the title of the piece, the original author, etc., and a URL link to a location on what's called InterPlanetary File System (IPFS) where art is typically stored. Imagine the NFT is the “deed” to your baseball card, and you actually find the baseball card itself on IPFS.

So what’s an IPFS? Well, right now a lot of our digital information lives on private servers. For example, Amazon Web Services (AWS) is a privately owned platform that provides storage for many people and businesses. IPFS is a decentralized way to store information, where the server is publicly shared and operated, and anyone can use it. The positive side is that it’s generally free, but the negative side is that the data on IPFS can be accessed by anyone at any time. It is public and decentralized after all.

NFTs direct users to IPFS, where the “baseball card” can be downloaded. Right now anyone can download the “baseball card” but only the person who’s bought the NFT owns it.

The problem with NFTs, and why they’re not long-term problems

When it comes to NFTs, there are really four big things that people struggle with.

The first two are cost and sustainability. Currently, most NFTs are created on the Ethereum blockchain, which is expensive to use because users pay Ethereum miners to make their transactions. This is a nice decentralized way to do things, but the cost has gotten out of hand. Transactions can easily cost 20 dollars to simply exchange currency or ownership of an NFT. Secondly, mining itself is a very energy-intensive process, and having a chain run by mining (or Proof-of-Work) is not sustainable in the long run. The solution for both of these problems is to move to more modern blockchains—like Telos—that uses a Proof-of-Stake system, which has fast, free transactions and very low energy usage.

The third issue people have with NFTs is how tedious and technical the process of creating and purchasing them is. This is really a short-term problem. If you think about the first version of the internet, or your original smartphone, and look at your browser or iPhone today, a lot has changed in just a few years. Blockchain needs that layer of professional, commercial-level usability work that other technology has benefited from already. And it will happen as usage grows.

But beyond those more technical issues, the other big issue with NFTs is the loose link between an NFT and the asset it refers to. What’s the point of buying an NFT when anyone can access IPFS and download your “baseball card” for free? The solution is simple as an idea, but trickier to implement. It will require encrypting the asset file and providing the NFT buyer with a unique code to unlock the file. This means anyone can download the locked file, but only the person with the password can unlock the file and access the asset. The technical hurdle here is that all blockchain and IPFS is publicly visible. It’s pretty hard to hide a password when everyone can see everything on-chain. This final hurdle will get resolved, however, and there are already ways to get around it (although not completely on-chain).

The Future of NFTs

The biggest takeaway is that NFTs are here to stay. While they have essentially been launched in an MVP (minimum viable product) state, they’re still taking off because of how useful the idea really is. They’ve exposed a need in the marketplace as a way for the average person to show ownership of digital assets and trade them. With NFTs has come an exciting new world of possibilities, not just for artists but for any sort of licensing/title/contract situation. And the user experience and application of NFTs will only get easier and more ubiquitous. 

What is an NFT?

Non-fungible tokens are not swappable with other similar items—they’re completely unique. For example, you can swap one dollar for another dollar, or one bitcoin for another bitcoin, as those are fungible assets. But each NFT is a unique item.
Crypto-currency is just another type of currency, like dollars or yen, but NFTs are another type of asset altogether that lives on the blockchain and is not the currency itself.

NFTs are a digital way of licensing and selling, one that is decentralized and open to everyone with an account on the blockchain the NFT is written on. It can be confusing because when people say “NFT” you typically hear about a digital art file that is related to the NFT, but that art file actually lives separately from the NFT. The NFT is simply a license to own that art (or whatever you want to sell) that lives on the blockchain.