You don't need to be angry about NFTs (Part II)
If you were never angry about JPEGs, you don't need to be angry about JPEGs people can own.
This is the second in a two part series — I recommend starting with Part I. This post first appeared in Cointelegraph Magazine. The content is almost the same but Cointelegraph elected not to include the majority of the links, so while both make the same argument in the same way the posts here include more context, detail and footnotes.
There is nothing evil about Etsy
Of course, Olson’s argument that NFTs are pointless and bad art would be incomplete by itself because there is lots of pointless and bad art in the world and there is nothing wrong with that. Two thirds of Etsy would qualify as pointless and bad but no one would make (or watch) a two hour documentary about it. Arguing that NFTs are not good is not enough. Olson’s real argument is that NFTs are bad. He argues that NFTs are bad for three reasons:
NFTs are harmful to the environment
NFTs are dangerous to users
NFTs exploit artists
Let’s explore each of these arguments in greater detail.
The environmental impact of JPEGs
The environmental impact of cryptocurrencies in general is a large and complicated topic that we don’t have space to do justice to here, but if you are interested I’ve written in greater detail about the energy impact of Bitcoin mining and why we don’t need to be alarmed by it. But for the sake of argument let’s suppose that proof-of-work mining was bad for the environment. What would that mean for NFTs?
How much energy miners spend to validate the network is a function of how much money they make mining — the better miners are paid, the more willing they are to mine. Anything that increases miner revenue will increase the energy footprint of the network and anything that decreases miner revenue will reduce that energy footprint. To reduce the environmental footprint of proof-of-work mining, make mining less profitable.
When users trade NFTs back and forth they pay transaction fees to miners, which does increase the revenue for mining somewhat. But those fees are in proportion to how often/urgently NFTs move, not to how valuable they are. For example, the most expensive NFT collection at the moment (Bored Ape Yacht Club) has generated ~200 transactions a day since launching. For context Ethereum processes around ~1.2M transactions per day.
On the other hand, NFTs are priced in ETH — so anyone buying an NFT is selling ETH. When lots of NFTs go up in price that means lots of people are selling ETH — and lots of people selling ETH pushes the price of ETH down. Miners are paid in ETH, so anything that puts pressure on the price of ETH is putting pressure on their revenue. In other words, every time an NFT project goes up in price it is actually bad news for Ethereum miners. Want to discourage people from mining Ethereum? Buy some monkey jpegs.1
Of course, the real story is more complex. NFTs get a lot of mainstream attention which attracts more users to Ethereum. Different NFT projects will have different prices and create different transaction volumes. Even the same project may look different over time as it evolves. Anyone who tells you a simple story about an economic system is oversimplifying. But NFTs are only one part of a large and complicated ecosystem and it is far from clear whether they make mining more profitable or less overall.
Don’t confuse tools with the hands that wield them
Over the course of Line Goes Up Olson swings back and forth between contempt for the people who own NFTs and a paternalistic fear that they are being taken advantage of by scams and fraud. He can’t seem to decide whether he’d rather blame the technology or the userbase — personally, I think we should blame the scammers. Frauds and scams predate NFTs and would be here in a world where NFTs never existed.
Overpromising naive investors and pocketing their money is nothing new and didn’t particularly transform when scammers started adopting NFTs. Fyre Festival didn’t need NFTs and neither did WeWork. The still unlaunched MMORPG Star Citizen raised more than $400M since its initial Kickstarter in 2012 before NFTs even existed. There are definitely scammers using NFTs to execute old playbooks in a new market — but NFTs aren’t really enabling anything new or different about the scams. NFTs are just a trend scammers are attaching themselves to.
Part of the fear here seems to stem from a technical misunderstanding where Olson claims that NFTs can contain hostile code that will “live in your wallet forever like a landmine” — but that is fundamentally not the case at all. NFTs don’t contain code and they don’t exist anywhere. When someone sends you an NFT what actually happens is that a record is sent to the blockchain that causes the smart contract for that NFT to give your address new permissions.
Nothing is “put” anywhere and the NFT itself is just a record written into the blockchain, not a payload of potentially dangerous code. The goal of scammers who send unsolicited NFTs is not to inject code, it is to convince victims to go to an attacker’s website and sign a malicious transaction. An NFT like this is like a spam email that lures victims to a phishing site — it’s not the attack itself. It’s just the bait.
Olson (correctly) observes that bad people are using NFTs and then presents that as evidence that NFTs must be bad — but that is the wrong conclusion. Bad people use lots of tools that good people use, too. Drug dealers use dollars. Terrorists have cell phones. Hitler wore pants. When bad people use a technology all that tells you is that the technology must be useful.
Lots of artists have made money with NFTs
The last major family of arguments that Olson makes against NFTs in Line Goes Up is the idea that NFTs are actually bad for artists. That’s a commonly held belief but it is also an extraordinary one given that the third-highest paid living artist of all time (Beeple, $69M) made his money almost exclusively from selling NFTs.
Olson’s argument is that the Beeple sale shouldn’t count because the buyer (MetaKovan) is also the creator of a fractionalized Beeple token called B20. That’s a funny argument for a couple of reasons. First, regardless of how sincere you think the valuation was, Beeple received $69M of actual money. This sale was undeniably good for the artist.
Second, if you actually look at the relative valuation of B20 and Beeple’s $69M Everdays NFT there is absolutely no way that MetaKovan turned a profit by flipping B20 tokens. There was just never enough volume to make that profitable. So it is reasonable to think MetaKovan might have been biased, but it was ultimately MetaKovan who paid for the bid.
Finally, there actually was another bidder ready to pay that price — Justin Sun of the Tron network posted a video of him trying to outbid the winner but hitting a website error. So even if you ignore MetaKovan entirely there was still a buyer ready to pay $69M to Beeple for the Everydays NFT. $69M may be a surprising price but it was real.
Olson uses the example of the Beeple/MetaKovan sale to build towards a broader claim that most sales in the NFT space are actually wash trades, where the seller buys from themselves to fake interest or price in their art. To someone unfamiliar with NFT markets that might seem like a legitimate concern but to anyone who knows the space it is pretty naive. A little more investigation into the mechanics of the proposed trades would have made that obvious.
OpenSea charges a 2.5% fee per transaction (plus miner fees) so wash trading is quite expensive. NFTs are also subject to capital gains taxes, so anyone creating fake profit for themselves is also creating very real tax obligations. It’s also largely pointless — it is much easier and cheaper to fake Discord and Twitter activity for a new project that hasn’t launched yet than market volume for a project that has. There is a lot of shadiness in NFT markets but there honestly isn’t that much wash trading.2
That means most of that money really is going to the project creators, which is why so many artists have, like Beeple, found NFTs to be a lucrative new opportunity. Olson asserts without evidence that most artists have lost money in NFTs but it is hard to see how. Minting NFTs has always been cheap to do and more recently has become possible to do for free. Not everyone finds the NFT market is lucrative for them, but making NFTs that never end up selling is not expensive. If an artist is losing money in NFTs, it’s as a buyer — not as a seller.
Stolen NFTs don’t make sense
So artists who sell their own work are benefiting from NFTs — but what about the artists who haven’t or don’t want to create NFTs? Art theft has been so rampant in NFT markets that DeviantArt had to launch a dedicated tool for detecting stolen art and issuing takedown notices. Doesn’t that mean that NFTs are being used to exploit artists?
Art theft is reprehensible but blaming NFTs for stolen art is like blaming RedBubble piracy on the existence of t-shirts. The problem is the theft of art, not the medium stolen art is sold on. NFTs don’t make art any easier to steal and they don’t make stolen art more valuable. In fact in practice NFTs are actually less useful to thieves: it is impossible to distinguish between a print sold by the artist and one sold by a pirate, but it is possible to know conclusively who created which NFT. Anyone who cares about whether they are buying the authentic version will buy the original and anyone who doesn’t can mint their own version for free. The art thief doesn’t actually have anything useful to sell.
Stolen NFTs actually make very little sense, really. They are like buying a certificate of authenticity from someone who has no authority to issue them — like John Cleese’s NFT of the Brooklyn Bridge, except less funny:
More sophisticated scammers don’t focus on selling stolen art so much as using stolen art to sell a broader scam, like pretending it is concept art from an upcoming video game. But just like more primitive RedBubble pirates the problem is the art theft and fraud — not the specific thing fraudsters trick their marks into overvaluing. NFTs aren’t actually critical to the scam at all, they are just a way of getting the attention of a group of wealthy potential targets.
No one needs to be angry about NFTs
To be clear, I am not arguing that everyone should understand or value non-fungible tokens. It is entirely reasonable to not care about them and not understand why other people do either. But I don’t think anyone should be upset about NFTs and I think Line Goes Up is a particularly good example of how that misunderstanding happens.
Throughout the movie Olson blames NFTs for everything from tacky art to economic inequality. The result isn’t really a coherent argument against NFTs so much as a long list of things Olson dislikes about the world and personally associates with NFTs. Guilt by association has led him to the wrong conclusions. NFTs don’t cause scams, theft or ecological disaster. They are good for artists and often genuinely loved by collectors. They’re not bad art, because they are not a type of art at all. They are a tool artists can use.
NFTs are not the final boss of late stage capitalism. They’re just a filetype. If you’ve never been angry about JPEGs you don’t need to be angry about JPEGs people can own.
Using ETH you already had lying around. Otherwise you will need to buy ETH first and that kind of defeats the purpose.
One noteworthy exception to this rule of thumb is LooksRare, a new competitor to OpenSea that launched recently and tried to bootstrap user interest by rewarding users for trading in well established NFT projects like Meebits or CryptoPunks. The result was lots of wash trading, not to fake interest in the art but to bootstrap liquidity in the marketplace. I wrote a bit more about that here if you are curious.