NFTs are a dangerous trap. Like most traps, they’re mysterious and then appealing and then it’s too late.
CREATORS may rush to start minting NFTs as a way to get paid for what they’ve created. Unlike alternative digital currencies which are relatively complicated to invent and sell, it’s recently become super easy to ‘mint’ an NFT. I could, for example, turn each of the 8,500 posts on this blog into a token and sell them on the open market.
“Alternative digital currencies” are not “relatively complicated to invent and sell” at all. Just like how it’s easy to mint an NFT, it’s trivial to create an ERC-20 token (an alternative digital currency) on Ethereum in just a few clicks. After that, anyone can buy or sell the ERC-20 token via Uniswap.
Unlike some stocks, it doesn’t pay dividends or come with any other rights. And unlike actual works of art, NFTs aren’t usually aesthetically beautiful on their own, they simply represent something that is.
What if I said, “Unlike planes, bicycles can’t fly hundreds of people across the ocean”? That’s akin to Godin’s comparison between NFTs and stocks, which are completely unrelated in the context of this conversation. By the way, tokenized stocks can be traded on Mirror, and they’re super cool.
The comparison to “actual works of art” makes a little more sense because the primary use case for NFTs now is tokenizing works of art. However, Godin gives off a privileged vibe here. What constitutes an “actual work of art” and what does “aesthetically beautiful” mean?
If Godin thinks an “actual work of art” is physical and tactile, that would be an insult to all the digital artists out there. I don’t think anyone in their right mind would argue that digital art is not art. So, let’s assume that digital art qualifies as an “actual work of art”. Then what, specifically, excludes NFT artworks from being “actual works of art”? The impression that I get is Godin thinks an “actual work of art” can be physical or digital – as long as it’s not an NFT.
I think NFT detractors always miss a core difference between NFT art and physical art. NFT art has a discrete distinction between ownership and interaction – something that physical art doesn’t have. The interaction layer of NFTs is a digital primitive to build APIs on top of, which means it’s infinitely extensible. For example, a VR application can parse the NFT data and render a visual interaction experience in a VR world. I suspect part of the disconnect may be due to a generational gap. Just like how I don’t get the appeal of TikTok, I think Godin may not fully grasp the appeal of artwork with distinct ownership and interaction layers.
Lastly, statements like “it doesn’t pay dividends” or “it doesn’t come with any other rights” shows a fundamental misunderstanding about what an NFT is. An NFT is a scarce digital asset that is governed by logic embedded in the issuing smart contract. So, statements like “it doesn’t pay dividends” and “it doesn’t come with any other rights” are irrelevant because those features can be included in an NFT smart contract. In other words, those two statements describe a specific smart contract implementation with NFT characteristics (also known as a “token standard”), and says absolutely nothing about NFTs as an overall technology and asset class – it’s like saying all cars suck because a manual transmission car doesn’t have an automatic transmission.
THE REST OF US are going to pay for NFTs for a very long time. They use an astonishing amount of electricity to create and trade. Together, they are already using more than is consumed by some states in the US. Imagine building a giant new power plant just to make Christie’s or the Basel Art Fair function. And the amount of power wasted will go up commensurate with their popularity and value. And keep going up. The details are here. The short version is that for the foreseeable future, the method that’s used to verify the blockchain and to create new digital coins is deliberately energy-intensive and inefficient. That’s on purpose. And as they get more valuable, the energy used will go up, not down.
It’s interesting how NFT detractors never qualify their usage of the term “NFT” when bringing up the power consumption argument. The truth is, there is a huge difference in power consumption between an Ethereum (proof of work) NFT and an NFT minted on a proof of stake blockchain. Saying “NFTs consume a lot of energy” without specifying the host blockchain is like saying “cars consume a lot of gas” without specifying the make and model – it’s a completely pointless blanket statement that lacks contextual nuance.
Another point that “Ethereum” NFT detractors miss is the role of NFTs within the Ethereum ecosystem. Minting NFTs is one use case for Ethereum out of many. Other use cases include decentralized lending and borrowing, transfer of value without gatekeepers, tokenizing real estate, and more. To call out NFT minting as a worthless high energy activity without thinking about the potential energy savings of the host platform (Ethereum) is hypocritical. This point is really important because it completely changes the argument.
Calling out NFTs for high energy consumption without any additional context about the merits of the host platform (Ethereum) exists makes NFTs look bad. On the other hand, if you talk about NFTs from the perspective of Ethereum as a decentralized settlement layer that is much more power efficient than the legacy financial system and provides incredible yield opportunities to the average person through peer-to-peer lending and borrowing, then it’s highly possible that even with NFTs, Ethereum presents a clear path towards a more power efficient settlement and ownership layer for society.
By the way, Ethereum’s power consumption will drop dramatically once it switches to Proof of Stake consensus upon activation of Ethereum 2.0 (expected within the next 2-3 years).
It’s an ongoing waste that creates little in ongoing value and gets less efficient and more expensive as time goes on. For most technological innovations the opposite is true.
This is a lie. With EIP-1559 and the transition to Ethereum 2.0, Ethereum will get more efficient and less expensive as time goes on.
The trap, then, is that creators can get hooked on creating these. Buyers with a sunk cost get hooked on making the prices go up, unable to walk away. And so creators and buyers are then hooked in a cycle, with all of us paying the lifetime of costs associated with an unregulated system that consumes vast amounts of precious energy for no other purpose than to create some scarce digital tokens.
I agree that creators are hooked on creating these. That’s because a ton of them are making money, and there is nothing wrong with capitalizing on hype to make some money – as long as no one’s getting hurt. I mean, I suppose you could make an argument for how NFT minting is polluting the Earth, which in turn changes the toxicity of some body of water, which in turn poisons the fish, which in turn kills someone who eats said fish. However, if you have to jump through so many mental gymnastic hoops to make an argument, it’s probably not a very good one in the first place.
What’s really happening here is that NFT detractors like Seth Godin are forming opinions without taking time to understand the technology and the potential of the technology first – this is crystal clear based on the amount of misinformation in Godin’s post.
NFTs are undoubtedly a bubble now, but that doesn’t mean the technology is an “ongoing waste that creates little in ongoing value”. On the contrary, the idea of tokenizing the ownership of an asset in a blockchain-native way (able to be parsed and acted upon by smart contracts) is a powerful one – and it all starts with NFTs and SFTs (semi-fungible tokens).
I don’t agree with Godin’s statement about NFTs being a “dangerous trap”. The current state of the NFT market can manifest itself as a trap for certain market participants, but the market’s characteristics is not a reflection of the intrinsic qualities of the technology. NFTs provide us with a way to tokenize ownership of a creative work in a blockchain-native manner – a completely mind-blowing concept if you take a few minutes to actually think about it instead of jumping to regurgitation of energy consumption statistics.
If you know, you know.