As Indians make a beeline for non-fungible tokens (NFTs), as more and more celebrities join the bandwagon, NFTs are fast changing the landscape of art and entertainment by making it easier than ever for fans to support their favourite creators and for artists to mint and trade unique, collectible pieces.
NFTs are slowly gaining the attention of the masses, with celebrities like Amitabh Bachchan and Sunny Leone entering the fray, and the increased interest calls for a deep dive and better insights for all stakeholders — artists, startups, investors or individuals.
NFTs are files on a blockchain whose ownership is traceable on the Ethereum blockchain. The concept shot into prominence after the first NFT artwork auction in March 2021 was won by an Indian-origin crypto entrepreneur Vignesh Sundaresan (aka Metakovan) who paid $69.3 Mn for a digital collage of 5,000 images by artist Mike Winkelmann (aka Beeple) titled “Everydays: The First 5000 Days”. Unlike traditional auctions, the bidding was done in the cryptocurrency Ether.
A String Of Concerns
Talking about the NFT Marketplaces (a place where users can buy and sell NFTs) during The Crypto Summit hosted by Inc42, Melvin Thambi, an NFT artist and cofounder of NFTMalayali, stated that the NFT phenomenon has helped him connect with other artists around the world much faster than Facebook-owned Instagram that only resulted in likes.
However, with an increased interest in NFTs, reports have surfaced that the new phenomenon has caught the attention of fraudsters who are posting fake artwork.
With community building, how do NFT Marketplaces ensure that users are not manipulating transactions by trading within themselves (wash trading) to increase the value of the NFT? How do buyers ensure that the NFT that they have purchased is the same rare thing that the seller promised? On the other hand, how do artists maintain that their artwork is not duplicated or their identities are not being stolen on NFT marketplaces?
For example, a verified profile of artist Derek Laufman, creator of the comic series RuinWorld, BOT-9 and designer of Marvel’s Super Hero Adventures, appeared on NFT marketplace Rarible which turned out that was not him.
This is 100% NOT me. I thought the point of NFT was that the artwork and artists needed to be verified? Apparently super easy to scam people. What a joke that platform is. https://t.co/FrBy4zuhQy
— Derek Laufman (@laufman) March 13, 2021
While each NFT is unique, yet, forgeries and even artists’ identity theft are not preventable due to their digital nature.
In another instance, fraudsters started taking an interest (and advantage) of popular artist Qing Han (aka Qinni)’s work, who lost a battle to cancer. In April 2021, barely a year after her death, her brother’s friend reported that five accounts were stealing his sister’s identity to sell NFTs of her artwork.
But like most emerging technologies, it was the tip of the iceberg. Talking about bottlenecks in NFT marketplaces in India, BuyUCoin CEO Shivam Thakral states, “Some of the major challenges are copyright rules, document storage, forgery issues, high carbon footprint, high taxes and ownership defaults.”
“Artwork like Leonardo Da Vinci’s painting Monalisa has been in existence for centuries. We need to find a way to ensure similar existence of digital artworks in the form of NFTs,” he added.
In an interaction with Inc42, when NFT-policing startup bitsCrunch raised $750K in its seed round, its founder Vijay Pravin Maharajan underlined that the NFT ecosystem faces many challenges including forgeries, wash-trading (trading within personal networks to enable higher rewards and prices) and inefficient asset valuation.
The Environment At Stake
Not only on personal levels, the environmental hazard of storing digital art, on a blockchain ledger is — to put it mildly — disastrous. For example, Beeple’s $69 Mn digital art is responsible for the annual emission of more carbon into the atmosphere than most small countries!
Reportedly, Ethereum is consuming roughly 44.94 terawatt-hours of electrical energy annually, which is comparable to the yearly power consumption of countries like Columbia. It is also responsible for about 34.58 metric tons of carbon dioxide released each year, comparable to the carbon footprint of Denmark.
A single transaction — minting, bidding, cancelling, sales and transfer of ownership — on Ether emits carbon equivalent to watching YouTube for 13,000 hours and uses electricity that could power a house in a developed country for 6 days!
In the last seven days (September 19-September 25) there have been 87K+ NFT transactions worth over $225 Mn, just imagine how much electricity has been consumed and how much carbon has been emitted into the atmosphere!
Imitating the concerns, Elon Musk, despite stating in March 2021 that Tesla would accept Bitcoin as a mode of payment to purchase electric vehicles, discontinued the project in May 20221 citing climate change as the main reason behind the company’s decision. Bitcoins and other cryptocurrencies are used to trade in NFTs.
Seeking Sustainable Options For The Environment
“Major industries in the world are working towards reducing their carbon footprint. The use of renewable energy to power the NFT industry seems like a perfect solution to environmental issues,” claims Thakral. “We are actively working to explore the use of nuclear power, wind power, hydroelectric energy, or any other form of renewable energy to power its NFT business which will significantly reduce the impact on the environment.”
On a similar note, OKEx chief executive officer, Jay Hao stated, “After the industrial revolution, industries that were the major growth engines of the world faced some criticism from environmentalists. They have now maintained sustainability and reduced carbon footprint as an integral part of their long-term business strategy.”
“Similar to that, we [NFT platforms] are aggressively working towards making NFT marketplaces environment-friendly by exploring the use of renewable energy to power NFT-related business,” Hao added.
“The energy issue primarily exists with the ‘Proof of Work’ algorithm, used by Bitcoin and temporarily by Ethereum, states Gartner analyst Avivah Litan. “Tezos is much more preferable to users because it is energy-efficient. It uses a form of Proof of Stake for its consensus algorithm and, Ethereum is upgrading its network to the algorithm.”
Need For Regulatory Intervention
The only thing that differentiates a real NFT from a fake is a token that comes with it. But, anything can be tokenized on the blockchain with a unique record being created. It is easy to create and manipulate an NFT, and even the token that comes attached to it.
As the market is decentralised, it is difficult to track fraud in the marketplaces. Thus, it becomes necessary that platforms partner with providing a policing service such as bitsCrunch, that allows buyers to be safe while maintaining that a centralised ecosystem is enabled to regulate the digital market.
Iterating the idea of government regulation, Thakral adds, “There is an urgent need to create a positive regulatory framework to enable the growth of NFT marketplaces in India. NFT marketplaces will need to deploy eco-friendly mining so that their existence does not harm the environment.”
“Tax exemption could be another way to boost the growth of the NFT market in India. The presence of well thought and dynamic policies and governance protocols around the technology would protect early adopters. The artist rights organizations need to accept the NFT ownership models which will open up the marketplace for the masses,” he said.
What Can Organisations Do?
In a research note shared by Gartner to Inc42, Litan underlines the threat of the uses and ownership of NFTs, especially by artists and buyers who are not particularly aware of how to mint NFTs.
She states that organisations can:
- Use distributed storage systems that support persistent storage and secure integration with blockchain networks
- Utilize escrow services for NFTs
- Purchase owner insurance to insure against the destruction or disappearance of NFT objects/files
- Engage custody services that ensure the safekeeping of NFT objects/files over time
NFT file and object storage should use a distributed file system (DFS), such as InterPlanetary File System (IPFS). Nodes should be replicated across many servers, ensuring system tolerance of the disappearance of a single (or even a few) nodes that contain the NFT file/object.
Partnering with blockchain analytics startups such as Chainalysis, CipherTrace, CoinMetrics, bitsCrunch and Elliptic, among others is another way for organisations to keep track of transactions on NFTs and maintain moral hygiene.
Personal Resilience And Education Should Be Top NFT Trading Priority
“A revolutionary technology like Blockchain needs to be properly studied and understood by experts. It’s important to educate everyone around us so that genuine users are not manipulated by fraud and scam sites. We feel education about this new tech is of paramount importance along with clarity on the regulatory framework,” states Hao.
Further, Litan states, “Buyers cannot assume that NFTs are legitimate just because they are cryptographically secured on a blockchain. There are already reports of “sleepminting” attacks — proven to work, at least theoretically — whereby NFTs are minted to a well-known user/artist wallet and then transferred to a hacker’s wallet without triggering any of the typical smart-contract security checks.”
Thus, buyer’s should exercise caution while minting NFTs.