The Paradox of NFTs

NFTs in their current iteration are meant to solve the unique problem on the internet of personal property ownership.

“What’s an NFT? NFT stands for non-fungible token. Non-fungible is an economic term that you could use to describe things like your furniture, a song file, or your computer. These things are not interchangeable for other items because they have unique properties” (“Non-fungible tokens (NFT)” NP).

Whereas in real life an item can not be copied without strenuous effort, on the internet, obtaining a copy of that “cool new picture John Doe took of his cat” is as simple as one right click. This creates a potential dilemma, as anyone could claim to be the originator of the cat picture on the Internet, and as the image spreads of the originator’s work, it would bring exposure to the false originator. The proof of ownership dilemma has been most prevalent when trying to find the original creator of a meme - a modified image, .gif file, or video that is meant to spread a humorous idea (Myers NP). Current research has been looking outside of this limited application to see what else NFTs could be capable of. While NFTs may seem like the path to a ‘Web 3.0’ they are not a viable technology because of their current limitations. This includes their in-ability to hold large quantities of data on-chain for permanence, scale with an increasing number of transactions, and work within a centralized system.

The most current implementation of NFTs is with original artwork, in the form of .png, .jpeg, .gif, or .mp4 files, being sold on an Etsy-like visual storefront called an NFT marketplace. With the most popular market place to list these digital artworks being the website OpenSea. The concept and practice is as follows: Create a unique digital item, list it on the site, a customer buys the item and then it gets transferred to them. In reality, it is not that simple. NFTs in their modern adaptation are like gold certificates: you have proof of ownership for the gold, but you don’t actually have the gold. NFTs, instead of having the underlying piece of digital property within them, contain a metadata pointer for the property. Even though the token is contained within a digital wallet, giving the proof of ownership; the item itself is not contained within the digital wallet. The problem has already been gleaned with the shutdown of Editional, an NFT creation platform, having to move ALL of their underlying data, the actual images and pictures, to OpenSea. If it were not for this business transaction, then the only way you would be able to view these files would be from a locally downloaded backup (Stuven NP). This same scare of disappearing data would occur if OpenSea itself were to shut down because the metadata used to show the files are hosted on centralized web servers (“Non Fungible Token (NFT) platforms must secure Metadata” NP). How “immutable” of a technology claiming to be censorship resistant (Cornelius 4).

There are two solutions to this problem, neither of which are satisfactory to solve the issue. One of which, called the InterPlanetary File System [IPFS], would use content identifiers to host the file on a decentralized network so the data is distributed through multiple clients leading to a longer term permanence (“How IPFS works” NP). The Achilles Heel in this idea is that, for the data to remain ‘suspended’ or ‘retained’ within the IPFS, the data in question needs to be “pinned”. Pinning an item either requires a self-hosted solution or a bought server to pin that data. Again, you get the same issue in trusting these NFT market places. If the company shuts down, then there goes the underlying mechanism that keeps your data hosted (Stuven NP). Once that item stops being pinned, it is gone for good.

Some projects, such as Autoglyphs, have tangles with putting the image itself onto the blockchain (“Autoglyphs” NP). Then you run into another drastic problem. The point of a blockchain is only to record a history of transactions, not to store a massive amount of archival data (Raghunathan NP). Trying to fit megabytes of data into a single block makes absolutely no sense since it would practically freeze the network with how long verification for a single block would take. There would need to be computers with significantly increased random access memory and processing speed for this to even be feasible.

To reduce this weight, some groups have started to experiment with the idea of ‘regenerative NFTs’, which would recreate the files from extremely compressed source data (Yevtushenko NP). Once again, there are limitations to this idea. Since the compressed files cannot inherently hold the decompression algorithm, the NFT becomes reliant on outside sources (Stuven NP). If the algorithm were to stop working with newer operating systems and all developers had abandoned the project, then the only hope for seeing the decompressed data would be for solo software developers to make updated versions of the software. That is not a stable system for something that is meant to hold an item permanently.

Outside of art tokens, NFTs have caught the attention of academic researchers for some proof-of-concept applications. One of which involves third party certifications for the agriculture sector. The issue is most seen in the wine industry where premium producers have other retailers counterfeiting their name and subsequently tarnishing their brand and quality (Dos Santos, Ricardo Borges, et al. 21: 5307). The purpose of NFTs ensures that a non-broken supply chain is used in the delivery of the product. Since “current regulatory framework is not only inadequate to the task of regulating domestic organics, but also incapable of ensuring the integrity of imported organics” (Chenglin Liu 47: 333) the need for some kind of verifiable and adaptable system to assure quality would be necessary. While the proof of concept is solid in its foundation, it forgets one of the basic limitations of blockchain: the underlying system of NFTs.

Blockchain, for it to be sustainable and secure, must ensure that enough nodes have verified a specific transaction. Given that these certification mechanisms would use a public blockchain, the third party minting the NFTs for certification would have no control over the individual computers in the network verifying the transactions. As more computers come in to process the transaction, the system inherently becomes slower rather than faster (Preethi Kasireddy NP). If even one product or commodity were to take on this technology, that would be hundreds of thousands, if not millions, of transactions per day. Leading to a laggy system. The fix to this, again, has proof-of-concept solutions but no large scale implementation.

Seeing the same concept of linking physical objects to the digital world, the easiest implementation, it would seem, would be to replace items that already have proof of ownership certificates. The most popular theorized approach would be transitioning real estate property titles to being NFTs. Since current systems of property ownership are just pieces of paper, there is nothing stopping those pieces of paper becoming PDFs, or in this case, NFTs (Karayaneva NP). The first main problem is that of any new technology; ‘How will you get mass adoption from the public?’ For someone to hold an NFT within their possession, they must create a digital wallet. There will then need to be a whole new effort within the real estate industry for the consumers to get an understanding of how to create and manage their digital wallet. Besides the consumer, the finance industry would have to create a new division dedicated to managing third party relations for properties that still have debt balances on them. There is little reason for these changes to be made. Introducing NFTs in this regard only complicates a process that already works.

This gets to an even more interesting point of how real estate will be managed once a person is in sole possession of their property. Eminent domain is the power of the government to take private property and convert it into public use (“Eminent Domain” NP). There is no way this power can be ensured if NFTs were to be used. The government would not be able to take the title of property for public use. While the government can still evict you from your home and justly compensate you it cannot force the transfer of the NFT since in a decentralized system, the technology NFTs are built upon, you are the sole controller of that item. This is unlike when someone does not pay taxes. The government can go to the bank where you keep money and garnish your account. The chain-of-NFT-title would leave an improper record of who currently owns the property since no one can force the transfer. While in reality the government owns the property the NFT would still show that another individual owns the ‘title’ to that land. This is the fatal flaw of using a decentralized technology in a centralized system: It does not work. When looking at new emerging technologies such as NFTs, Kristin Cornelius says it’s crucial to look “at how this new technology replaces the past functions of records and how well it lives up to solving the problems associated with that practice” (16). NFTs themselves break the vital role that the US judicial system has when settling property disputes and the local governments role of recording the record of land. Since disparities can start to emerge between what has happened in the history of the property, versus what is actually happening to the property, then usage of NFTs for real estate are pointless.

NFTs have no promising hopes for the future and there are no good solutions as of present for why they should see the limelight. These problems include their ability for archival and permanence, scalability and transaction speed for it’s underlying technology of blockchain, and an inherently decentralized concept working within a centralized system. Without putting these complications to bed, NFTs are doomed to fail.

Works Cited

“Autoglyphs.” Larva Labs, https://larvalabs.com/autoglyphs. Accessed 30 November 2021.

Cornelius, Kristin. “Betraying Blockchain: Accountability, Transparency and Document Standards for Non-Fungible Tokens (NFTs).” Information (Basel), vol. 12, no. 9, 2021, p. 358.

Dos Santos, Ricardo Borges, et al. “Third Party Certification of Agri-Food Supply Chain Using Smart Contracts and Blockchain Tokens.” Sensors (Basel, Switzerland), vol. 21, no. 16, 2021, p. 5307.

“Eminent Domain.” Legal Information Institute, https://www.law.cornell.edu/wex/eminent_domain. Accessed 30 November 2021.

“How IPFS works.” IPFS, 22 June 2021, https://docs.ipfs.io/concepts/how-ipfs-works. Accessed 30 November 2021.

Karayaneva, Natalia. “NFTs Work For Digital Art. They Also Work Perfectly For Real Estate.” Forbes, 8 April 2021, https://www.forbes.com/sites/nataliakarayaneva/2021/04/08/nfts-work-for-digital-art-they-also-work-perfectly-for-real-estate. Accessed 30 November 2021.

Kasireddy, Preethi. “Blockchains don’t scale. Not today, at least. But there’s hope.” Hacker Noon, 22 August 2017, https://hackernoon.com/blockchains-dont-scale-not-today-at-least-but-there-s-hope-2cb43946551a. Accessed 30 November 2021.

Liu, Chenglin. “Is ‘USDA Organic’ A Seal of Deceit? The Pitfalls of USDA Certified Organics Produced in the United States, China and Beyond.” Stanford Journal of International Law, vol. 47, no. 2, 2011, pp. 333-378.

Myers, Amber. “Why Do People Steal Memes?” Airing My Laundry, 2 August 2017, https://www.airingmylaundry.com/2017/08/why-do-people-steal-memes.html. Accessed 30 November 2021.

“Non Fungible Token (NFT) platforms must secure Metadata in their ERC-721/ERC-1155 implementations.” Medium, 7 December 2019, https://medium.com/@showcaseteam/non-fungible-token-nft-platforms-must-secure-metadata-in-their-erc-721-erc-1155-implementations-88f55e987fc7. Accessed 30 November 2021.

“Non-fungible tokens (NFT).” Ethereum, https://ethereum.org/en/nft. Accessed 30 November 2021.

Raghunathan, Vijay. “How does the Block in a Blockchain look like?” LinkedIn, 21 August 2018, https://www.linkedin.com/pulse/how-does-block-blockchain-look-like-vijay-raghunathan. Accessed 30 November 2021.

Stuven, Ricardo. “On-Chain Artwork NFTs.” Medium, 1 February 2021, https://medium.com/treum_io/on-chain-artwork-nfts-f0556653c9f3. Accessed 30 November 2021.

Yevtushenko, Taras. “Fully On-Chain Generative NFTs.” Medium, 21 June 2021, https://taras-evt.medium.com/fully-on-chain-generative-nfts-6c636fde831a. Accessed 30 November 2021.