How can NFTs be used?
Proponents argue that NFTs offer a new revenue model for artists, allowing them to sell photos, videos and other digital assets such as online collections or fine art. Ukraine raised tens of millions of dollars from NFT auctions last year to support its war against Russia.
Unlike standard digital files, NFTs can contain small computer programs called “smart contracts” that can sometimes provide royalties to the original NFT issuer when the NFT is resold. Because NFTs are unique and transferable, they can also act as tickets, membership certificates, or even registrations for carbon credits. Blockchain-based video games like Axie Infinity use NFTs as in-game characters and items that players can own (and even pay other players to acquire).
Some artists hope that NFTs (and the art scene they spawn) can shake up the traditional business models of the creative industries, offering artists more lucrative and equal opportunities. Artists are already using NFTs to organize collectives of fans and patrons called Decentralized Autonomous Organizations (DAO).
At its most optimistic, NFT advocates argue that the technology can reinforce people’s identities within the “metaverse.” According to this vision, people will use virtual “avatars” to work and play in multiple interactive digital spaces. Just as we have unique elements in the real world, proponents envision NFTs to act as a scenario for metaverse equivalents.
Beyond digital ownership, the decentralized nature of NFTs means they can be used to protect digital files from tampering or to track a file’s chain of custody. In June, the Starling Lab research group, co-founded by Stanford and the USC Shoah Foundation, presented a case to the International Criminal Court that used NFTs and related technology to archive records of Russian military attacks on Ukrainian schools.
What are some of the criticisms against NFTs?
Just as NFTs have attracted a vibrant community of supporters, they have also received considerable criticism.
First of all, many of the proposed uses of NFTs either do not require NFTs to function (such as club membership) or have not yet been implemented. For this reason, some critics see the proliferation of NFTs as nothing more than a “gold rush” that has little to do with the underlying technology.
There are also technical problems. Regardless, one of the most promising use cases for NFTs, an interoperable “metaverse,” is certainly technically feasible. And if you’ve ever clicked on a link to a hacked website, you know it’s hard to keep a digital asset online. NFTs typically do not contain digital assets themselves, so often any NFT will only be as stable as the computer (or network) holding the asset file. Even if the computer that holds the asset is properly maintained, it is difficult to prevent “bit rot,” or the tendency for data to degrade over time. In response, developers are proposing ways to store files in a redundant, decentralized format.
Like other emerging technologies, NFTs have also attracted a lot of bad guys. Fraudsters have inflated the prices of NFTs through a “gold brick” scam and produced and sold many NFTs based on stolen artwork. With disturbing regularity, NFT projects emerge, promise buyers an exciting long-term vision, then shut down and buy with buyers’ money. Fraud is so common that there is a term for it. ragpool (“pull the blanket”).
Fraudsters got help from the blockchain itself. NFT scammers regularly use hacking attacks phishing and other ways to empty people’s digital wallets. More than $100 million worth of NFTs were stolen in 2022 alone. But because NFT transactions are decentralized by design, illegal transfers cannot be reversed by a third party.
Additionally, NFTs have been criticized for their carbon footprint. Many depend directly or indirectly on the Ethereum blockchain, which until recently was a source of energy. For example, in one day in January 2022, the estimate of Ethereum emissions exceeded 136 kilograms of CO2: for an average transaction, which can be equivalent to setting fire to more than 60 liters of gasoline.
However, in September 2022, Ethereum switched to a “proof-of-stake” architecture, which reduced energy use and CO emissions.2: more than 99.9 percent. The Crypto Carbon Ratings Institute, a German analytics firm, estimates that the electricity for an Ethereum transaction is now equal to 0.0063 kilowatt hours, or about 3 grams of CO.2:the emissions of driving about 12 meters of the average American passenger car.
Although the power consumption of NFTs has been drastically reduced, they are a key gateway for many people into the vast “cryptocurrency” space. The most popular blockchain itself, Bitcoin, produces millions of tons of CO2: and thousands of tons of e-waste annually.
What is the future of NFTs?
NFTs are currently mired in a deeply skeptical cryptocurrency market, which has cooled from highs reached in early 2022. After billions of dollars in losses and thefts and the collapse of some of the largest cryptocurrency companies, regulators around. the world is wondering how to classify and tax assets.
And yet, NFTs haven’t gone away. Perhaps, like the dotcom bust of the early 2000s, many NFT startups will wither under intense market scrutiny, and the few that survive will transform the digital world.