Are NFTs a case of the ‘emperors new clothes’, or worse, another worthless hype curve?


It is time to tell you what really goes on when you buy an NFT…



Let’s face it would you buy and NFT (Non Fungible Token? The only people that seem to be buying these tokens are the crypto whales as a means to park their crypto so they don’t have to pay tax, or plain dumb people sold the dream they will go up in value due to scarcity and originality. Just because crypto whales and millionaires have accumulated lots of crypto to spend doesn’t mean they are right or know how crypto works. Most got lucky, took a punt of BTC in the early days while others ars are intuitive traders that play the emotions of the crypto markets.

Well there is nothing like a bit of ‘front running’ to get a market moving, right! Look I have nothing against NFTs, they are a great concept. The issue is the engineering of them.

When you buy an NFT what actially happens? What do you get? Well, you sort of own a token that is meat to give you rights of redemption and ownership in something. An asset, — some art, a car or something ese. The problem is it doesn’t. Not even close. Yes you own a token which is natively worthless. Unless all the market participants agree to be honest and agree that you have access to the thing you bought. Good luck with that one.

Unfortunately 90% of people in blockchain still don’t understand is a blockchain only records token movements — that you have handed 10 BTC to some address. It doesn’t record what was actually purchased although the NFT platform may tell you their smart contract handles, verifies and does the rest. Which is sort of a lie. This is because blockchains can’t do this, nor can you write data directly to a blockchain. And that means all of them. To keep blockchain secure, immutable and safe, only the movement of tokens is recorded — this is because as soon as outside data/information/communications happens, the properties of a blockchain to be safe and its consensus disappear.

I will explain how NFTs can work so keep reading.

Why the current generation of blockchains struggle with NFTs?

Look NFTs are indeed a great concept. But they are currently not engineered properly because the underlying blockchains, and consensus models aren’t up to the job. For example any ‘ledger based’ protocol such as Ethereum (rather than unspent) has no native ability to ‘track and trace’ tokens that are apparently defined as a security or asset token (linked to a commodity). All kinds of shenanigans have to happen to fudge this. Sort of re-centralisation effects and promises.

Unfortunately the asset you think or are told you have purchased is somewhere else, and the binding authority that confirms ownership is also somewhere else. A sort of custodian or notary services of you like — the problem this is yet another layer is a tech stack thats already vulnerable. So rather than removing the centre, and the human propensity for fraud, NFTs solutions involve too many parties and rely on trust. The ownership of what you have purchased is or isn’t validated (real or copy), and its certainly not part of the one sided token transaction.

So when you handed over some BTC to buy an NFT. The thing you have purchased is mentioned probably in a solidity script, with a URL link pointing to a website or JPEG destination address. And then there are rug-pulls — where the owner packs up and disappear with their assets. Some NFT platforms claim the asset is apparently linked to another blockchain that hosts the asset if by magic, or describes the asset or confirms the storage of the asset in a digital sense. But this happens somewhere else and they are not bound as a single transaction under law. Yes, you heard it hear.

What you purchased for the tokens you hand over isn’t recorded with the exchange of tokens. There is also NO basis of Law that protects the Buyer of an NFT! Do not let anyone convince you otherwise. Any redemption rights granted are not part of the token exchange, and also not valid under any form of business law. And to call it a token exchange is also stretching the truth because it is one way.

Here is the other issue.

How do you know what you have purchased is real?

How do you know what was purchased is the real thing? Is the provenance proven? Is the owner of the asset you have apparently purchased been validated? How do you know who is looking after it? The problem is everything can be Copied and Edited when its digital, and this is why ‘data’ in generic terms has zero value, and why the Internet doesn’t work and destroys the value of everything. All because of Copy, Edit, Paste. Unless the data is smart that is — smart data changes everything.

NFT platforms will tell you the assets have been validated, but often won’t disclose by who, of share the chain of title remains unclear, apparently due to privacy? Then there is the identity of the buyer and seller. Are the parties known? Are they real and are they good actors. And this is where crypto falls down so many times with the demands for anonymity.

The item you purchased, on which you have spent your crypto is recorded on the ledger, the token amount recorded, but it is not an ‘exchange of value’ at all. There is no value coming the other way. All you have is the transaction ID on Etherscan or the location URL, that can be copied, changed and closed. Good bye crypto. I will explain how NFTs can work so keep reading.

There is no exchange of value as NFTs stand today

Example: Bob sends Alice 10 BTC to buy a share of a painting , BUT what Bob receives isn’t recorded on this blockchain. It isn’t atomically bound to the token exchange or value exchange as part of (combined) single transaction. The recroding of the thing — asset - you have purchased part happens elsewhere, probably supported by another business, whos owners, morals and security status remains unknown. In any event your adding ‘t’ connectors to the piping that introduces vulnerabilities that will be exploited.

The blockchain that records and holds the assets also doesn’t record the token payment (because it didn’t happen there), so if there is a dispute or a need to validate or audit what went on, you cannot as the information isn’t held or recorded in a single tech stack. The parts of the transaction sit in different places and who knows if they are complete when they are reassembled?

It is worth remembering blockchains only have key qualities because they are self contained. When you have to get the information from elsewhere, the script calls to an oracle, or deals with a storage node, everything comes at an extra cost, and doors (channels) are opened. The compute cost to run the script that executes an instruction to do something gets expensive. Each off-chain or chainlink structure is owned by another business, has different rules, structures and protocols. They will charge you fees to execute of the simple script to simply report on it, but the report for say an audit is touched by a third party who have access to change things. But who these people are? Will they sell it on, how good is there security isn’t known. Is there trust? Have they made a secret deal?

In the sense of this discussion: Non Fungible means ‘unique’ and cannot be replacted or another one exactly the same reproduced.

What gives something non fungibility? To guarantee the items is unique, a one off. NFTs as currently engineered cannot guarantee this. That is because all data can be copied, edited and changed unless it is smart data, and why ‘block headers’ in a blockchain become part of the next block and so on for continuity, but also a show of strength confirming nothing has been changed.

Yes NFT platforms will tell you its all good and there blockchain talks to other blockchains and handle this automatically. Well the bad news is blockchains do not talk to one another, not easily and mostly at all. The smart contracts struggle to interoperate but they do call for information or wait for inputs. Which could be we’ve received 10 BTC from this sucker, its time to sell the asset again or move it, or delete any record the exchange tokens for it. After all the asset isn’t recorded with the token exchange transaction. This gap is called a Byzantine Fault and its very bad.

NFTs are brilliant and they can work

The only way for NFTs to work is for the token exchange and asset exchange in return to be done at the same time, timestamp, an held on the same ledger. This is a true value exchange and why our current capital markets still operate and haven’t collapsed. The only way for NFTs to work is for the token to be replaced by the Asset, and record the full transaction in what is called a dual double entry, thus creating something called a Non Fungible Asset. The token and asset exchange happens atomically within the same blockchain stack and yes you guessed it, is written to a single file (version of truth) where the commercials basis, identity and law is also reflected buyer and seller.

Bob sends Alice 10BTC and Alice Sends Bob the deeds, the rights, the asset directly, in a binding transaction under a legal jurisdiction. Within this dual double entry transaction that is instantly auditable by the way, are all details of the identity of both parties — yes shock horror, the details of the asset (provenance) and the commercial principles of the deal, as well as the price discovery are bound as a single transaction. This is called ‘real value exchange’ and only this can support NFA — Non Fungible Assets, as let us not forget.

Tokens have NO value, only assets do, so any time you want to buy an asset make sure what you paid is recorded at the point of purchased. Get a receipt and confirmation, see evidence of the change in ownership, title and rights. Yes some evidence of the value and thus how the price was established would be nice, rather than someone simply setting the token price randomly, because they can. All of this has to be compiled into a ‘smart data’ file gives the transaction value. Give the data value. Value that can be exchange traded immediately and audited immediately.

One last thing. Remember tokens have no intrinsic value. They are not linked to value. They are given value by parties of the market, unless they are a protocol token that follows Metcalf’s Law — that respond to economic activity of participants in a network, such as ethereum.

Non Fungible Assets are the answer, and there is only one protocol today that can write both sides of the transaction at the same time, in the same stack, running datanomics alongside tokenomics and this is because the protocol makes the data about the asset and the transaction smart, because it knows the tokens are merely that, a token, a proxy for making frictionless payment, but not exchange, because there is no exchange. Don’t be taken in by the hype. NFTs have to mature to become grown up NFA’s.

If you want to know how to create NFAs or fix the NFT problems there is only one company I know that can do this, and I am happy to share.

Author. © Nick Ayton 2021

By Nick Ayton

Keywords: Blockchain, Cryptocurrency, Emerging Technology

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