Behind The Apes and Scams

Answering Frequently Asked Questions About NFTs

Published August 6, 2022in Blockchain11 min read

Imagine this: there are physical paintings at an art gallery and you are responsible for managing the paintings. You have to go through paintings and sell them off to various buyers by getting a stamp and adding it to the bottom right corner of the painting indicating who about the painting

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The catch is that as a part of the museum policy the paintings always stay in the museum where everyone can see them. So in this scenario, “buying” a painting at the gallery means getting a seal in the corner of the painting itself that indicates that you are the “owner” of the painting. In this scenario, all you are paying money for is the seal which is the proof of ownership which is officially recognized by the art gallery.

A digital version of this seal that uses cryptography/fancy math is basically what a Non-Fungible Token or NFT is. You can best think of it as a cryptographic watermark when dealing with image-based NFTs. Or more generally, it is a digital contract that shows the transfers for a digital asset between various “owners”. Another interesting aspect of an NFT is that it is unique, which is where the “non-fungible” comes from. Just like how you can’t exchange one hand-made art piece for another as they are uniquely different. This means that you do not have exclusive access to the painting itself as it is available for everyone to see but that seal means that you are recognized as its owner by the art gallery.

I think this analogy should give you a good understanding of the question “What is an NFT?” and the following section can go into more detail about other questions surrounding NFTs.

Frequently Asked Questions (FAQs)

Q: Can’t someone just copy the painting/the content of the NFT?

Yep! If you want to copy the painting you can easily do that. If we follow the analogy of the physical painting, then anyone can just take a pixel-perfect photo of the painting and then print it out and effectively have a personal replica of the painting. Since NFTs are a digital proof of ownership, commonly used for digital assets, taking a screenshot or getting the exact photo file of an NFT is even easier. As said before, you do not have exclusive access or copyright over the content of NFT itself, you simply have your name on a seal attached to the content/what it represents.

Q: So why would one buy an NFT? What is the value in them?

This is a loaded question and is at the heart of what a lot of people get wrong about NFTs. Let’s go back to the art gallery and painting analogy.

Now, the organizer at the art gallery wants to throw a special party for all those that have purchased from the art gallery. You, as the organizer of the event, can just check who has that seal/proof-of-ownership and allow them entrance to the event. Now let’s say, as the organized you also want to give everyone that came to that event 50% off your next event. You can easily do that again by just checking who has that NFT. This is like using a signup form that uses email and password to get people to pay for tickets to the event.

However, The way an NFT-based ticket would be different is that the event organizer doesn't have to set up their backend system (servers and database) as the blockchain functions as the backend in this instance. Additionally, NFTs can be exchanged between users super easily meaning that you will be able to always invite the current holder of an NFT (which may change from event to event). Not to mention that NFTs use cryptography so it is impossible for someone to forge or counterfeit these NFT-based tickets.

To take it one step further, let’s say one of the attendees at the event wanted to buy more paintings, so they want to check who owns the most amount of paintings and buy them off from them. He can easily do that since all the data regarding an NFT like when it was created (the term “minted” is also commonly used), who its previous owners and previous selling prices are all fully public and transparent giving everyone access to this information and making such tasks of finding who owns the most paintings very easy.

Hence, in this case, you bought the painting because of what it represents to you, entrance to some exclusive art gallery events, and some permissions over the painting itself as recognized by the art gallery.

When most people think of NFTs, the first thing that comes to mind is probably this:

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This is just digital art and due to the very nature of art, it is purely subjective. However, people often get confused when they buy an image-based NFT as they think they will have exclusive access to the image. As we saw from the art gallery analogy that isn't what happens.

If I was browsing across an NFT marketplace and found a cool image that I want to use for my profile photo: Rig #2811 - Tableland Rigs | LooksRare. I don’t have to buy the NFT from a marketplace since I would just be buying the seal. Instead, I just want to use the image which you can obtain but just right-clicking on the image on the marketplace website or going to the metadata of the NFT.

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For legal reasons, I am not condoning anyone just stealing images from the web (for NFTs or from Google images, etc) without a proper usage license.

The more technical way would be to search for a token_uri which almost all NFTs, even ones without images, will have and which is just the URL to the digital content of the NFT. There are many services for finding out the token_uri for any NFT and for the NFT I just showed earlier here is what the digital content looks like:

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If you have interacted with JSON data, the content in the image should be very familiar as it shows the links to the original image of the NFT (some sites like LooksRare clone that image and store it on their servers as well) along any other metadata of the NFT. Even the token_uri is publicly available so it is not that you are buying that either. What you are buying is shown in the image below where it shows all the exchanges for that NFT and that you would be recognized as its owner if you decide to create a transaction to buy the NFT from its current owner:

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Source: Tableland Rigs (RIG) Token Tracker | Etherscan

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I think it is very well summarized by this article from Putnam: “Like a concert ticket or a deed to a physical property, an NFT reflects the value of the thing it represents.”

Since it is hard to get an objective value of art, digital art NFTs also apply the concept of “beauty is in the eye of the beholder” or otherwise, is someone else willing to pay more than the price I bought it for. But for things like an entrance ticket to an event or membership to a club (see [DAOs](Decentralized autonomous organizations (DAOs) | if that sounds interesting), NFTs are much more concrete in terms of how much would you pay to go to the event or buy a membership.

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Hence, NFTs are not intrinsically valuable.

Q: Who recognizes this seal/proof-of-ownership?

Let’s go back to the painting analogy:

As with the physical painting, the governing body is the art gallery (let's call it AGO). At AGO, the seals given to paintings are recognized. However, let’s say you go to another art gallery (VAG) and try to exchange your painting at AGO for a painting at VAG. VAG will likely not recognize the seal from gallery #1 since it was not authorized by VAG and hence, will not recognize your proof of ownership of the painting from AGO.

When going back to the world of NFTs, galleries can be thought of as various blockchain networks which create NFTs and allows for the exchange of NFTs between various users. Hence, the proof-of-ownership is per network. For example, you can easily create an NFT with the same content on different networks, like Ethereum, Polygon, and Solana, and these act as completely independent NFTs.

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An NFT is a proof-of-ownership per network.

This is why the same NFT on different networks usually sells for drastically different prices because of the popularity, features, and other aspects of the network the NFT is hosted on. This makes sense since even with the painting seal you would probably pay much more to get a proof-of-ownership for a painting in a more popular and prestigious art gallery (like the Louvre in Paris) as compared to a random local one (like MacKenzie Art Gallery in Regina; no disrespect intended).

Q: Why are there so many NFT/Crypto scams?

The obvious answer is that bad actors and scammers are just more concentrated in the NFT community, but, I think there is more to it than that. I think one important aspect of the whole NFT and more generally blockchain community is that its decentralized nature often leads it to kind of be like the wild west where there aren’t many rules and regulations and is just a free-for-all. In the blockchain, if you accidentally send money to someone, there is no way of getting it back since there isn’t a governing body, and is decentralized. Hence, the decentralized nature of blockchain makes it easier for bad actors to commit frauds and scams due to a lack of legal involvement and anonymity since accounts don’t belong to any person, it's just whoever has the private key (the password) for that account.

The other reason for NFTs in particular is because smart contracts can be malicious. “What is a smart contract?” you may ask. Smart contracts are code stored on the blockchain and can be interacted with through a transaction with the smart contract as the “to” address.

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NFTs are an implementation of a special type of smart contract known as ERC 721.

The smart contract address is public and one can view all the interactions with a smart contract. However, it's hard to reverse engineer the contract to see what it's doing under the hood. Hence, by interacting with a smart contract, you always risk losing all of your assets.

Also, smart contracts can’t be modified so if something was coded into the NFT, it will occur and even the creator cannot change that once it has been deployed on the blockchain. This means even the creator of a smart contract can’t escape their contractual agreement as per the code of the NFT since the blockchain will automatically execute the code when the specified conditions are met, hence, it is fully safe in that regard.

Now the big problem comes when the codified and thus practically guaranteed agreements of the blockchain and the verbal agreements of the real world clash. Let me explain with an example: let’s say I create an NFT and claim that everyone who buys my NFT will be given free dinner. Now, this seems all well and dandy and you buy my NFT. Once you do that, I, the creator, and everyone else in the blockchain can see that you own my NFT. So, when the time comes you will automatically be given free dinner right? Wrong.

Remember, that the only thing that can be enforced with NFTs is the code for a smart contract which is all digital. So, the creator can’t code that key reward mechanism of a real-life dinner into the NFT’s smart contract making it unenforceable (both via code and legally). Since NFTs are on the blockchain which aims to eliminate middlemen like the financial system, it also largely sidesteps the legal system due to its decentralized nature. For some, this is a good thing since the legal system can also be seen as an inefficient middleman that isn't always objective. However, in this scenario, I am not legally obligated to give you free dinner and you can not take any legal action against me.

From this example, you can see why a lot of scams surrounding NFTs take place as there usually aren’t any legal and enforceable that can be taken against a scammer. I think this divide between the digital world and the real world is one of the key limitations of smart contracts as it limits the potential uses of smart contracts in general.