Don't get into NFT art!

2021年10月28日 00:00

Preface

Hello, this is a page made to briefly explain the dangers of NFT art, which is rapidly spreading in Asian countries, under consideration and discussion by individual parties with an interest in this topic.

(This article was originally written by swmr (@sawamuradacun) in Japanese, primarily to promote discussion of the problems with NFT art among Japanese artists, and it became the most relevant source of debate in Japan at the time. Now, it has been reorganized for the international audience with the help of Lystrialle (@Lystrialle). She has also provided a great deal of input on NFT-related incidents, reactions to them, trends, etc. outside of Japan in the writing of the Japanese version of this article. I am very grateful to her.)

Japanese version of this article:

The macroscopic negative effects of NFTs on economic activities and the natural environment have been pointed out many times before (you’d only need to Google "problems with NFTs" in Japanese), but this article discusses the structural flaws of the NFT art market and its expected future effects (economic or legal risks) on the market, and describes them as clearly as possible. It is a must-read for any artist who wants to enter the NFT art market or has already entered it.

Very little technical knowledge is required to read the text, but instead, you must make sure you understand all the explanations. If you don't understand any part of it, I don't recommend that you enter the NFT art market at this point. What I'm about to explain is such basic knowledge and insight that if you lack even a little of it, you should understand that the NFT art market is still dangerous for you.

In preparing this paper, I have also referred to the following article (which discusses the problems with NFTs mainly in terms of economic activities and environmental destruction).

(Lystrialle’s note: Since the main purpose of this translation is intended as an example of the nature of the NFT discussion in Japan, I’ve mostly left this article untouched from its original version, other than some minor grammatical cleanup on swmr-san’s request and a personal footnote at the bottom. While there was some consultation with me for section 5 and the ending digression, the rest of the below content was based off swmr-san’s independent research and analysis, and does not necessarily reflect my own personal understanding of the situation.)

1. What’s an NFT?

If you are reading this page, you probably don't need it anyway, but let me give you a brief explanation of NFTs.

NFT stands for "non-fungible token". It is the application of blockchain technology, usually used for cryptocurrency, to digital data, using the digital ledger to prove that “this piece of data can only be this piece of data, and anything that is not this piece of data cannot be this piece of data.” And the NFT does nothing else. In short, the NFT does not interfere with the data in any visible way. For example, it cannot prohibit the duplication of data, prevent the loss of data, or anything like that. The only thing NFT can do is to prove the “uniqueness” of digital data (only when it is verified).

(Additional correction: The features of the NFT described here are limited to current NFT art platforms. The author understands the requirements of NFT as "cryptographic tokens for proving uniqueness", but other technical applications are beyond the scope of my knowledge. In particular, the problems with NFT art described below may very well be resolved as the NFT technology develops. This article was written in October 2021, and describes the problems of NFT art at that time. The bottom line is that we should not assume that the technology used for NFTs is evil in itself. Please read on with this in mind.)

2. The basic structure of NFT art

First of all, in trading NFT art, it does not mean trading the ownership, use, or other rights to the art itself. What is actually being traded is the ownership of the "token" that accompanies the NFT art. As mentioned earlier, the token proves the uniqueness of the data, but does nothing else. Therefore, when the NFT art is traded, nothing really happens. There is no transfer of ownership to the purchaser, no ability to do anything with the purchased work, and all the purchaser of NFT art can do on the spot is to feel as if they paid for the painting and look at it all the time, and nothing else. What's more, the transaction is completed within the platform, so if you don't have access to the platform itself, you can't even do that.

So what exactly are the advantages of buying NFT art?

The answer is "speculation": when NFT art is first published, it is in the hands of the artist, but after that, it is put up for sale and sold (as in an auction) to someone else. The person who wins the bid for the NFT art can then sell it to someone else. This is just like stock trading, where it is up to the original owner and buyer to agree on whether to sell a piece of NFT art at a higher or lower price, and if they can sell it to someone else at a higher price than they originally bought it, the difference goes into the pocket of the seller as a profit. The NFT art that moves from one owner to another through transactions is the stock. In other words, the reality of NFT art is that it is a financial instrument issued by the artist rather than the artist's work.

The difference between NFT art and stock trading is that about 10% of the profit generated from all transactions between parties other than the author is given to the author as a margin. This is one of the reasons why NFT art is called a Ponzi scheme.

Again, NFT art is not about trading ownership; it is about trading tokens tied to the art on an individual basis for each platform. Exhibiting NFT art and issuing a token for the art does not create any authority over the art. The token proves the uniqueness of the art, but does nothing else. Of course, nothing happens when you buy the token. Having the token there and not having it there does not change the situation for the art.

In short, there is nothing in the market for NFT art to begin with, except for speculative or collecting purposes. This does not mean that the market for NFT art is an ideal market with no risk to the seller. Rather, it means that there are serious flaws in the structure that are being ignored. Let's look at them one by one.

3. Problems with NFT art: Part 1 (how it works)

In order to discuss these issues, let's review some economic facts that we need to keep in mind. This is a bit difficult, but absolutely necessary to understand the unsoundness of the NFT art.

(1) The trading of financial instruments (Conventional ones. stocks, ETFs, etc.), and the gains and losses associated with them, are permitted because of the cooperation of governments, corporations, and securities firms, through a vast amount of laws and contractual documents, and the resulting guarantees of the exact value of the financial instrument itself (the fact that it is part of the capital of a corporation, in the case of stocks, or the price movement it aims to achieve, in the case of ETFs).

(2) Speculation is the most dangerous form of financial transaction that can be endorsed, and it is prone to large upfront profits and vulnerable people being taken advantage of. The quickest way to correctly identify this structure is to refer to the anecdote of the shoeshine boy. To put it simply, a novice who usually shines shoes on the street will hear about a good deal late and be preyed upon by investors who have already entered the market.

(3) As seen in the subprime mortgage crisis, within investment behavior, the attitude of "not assessing the real value of traded products" can lead to the formation and collapse of bubbles all at once. In a speculative market, capital is concentrated in the hands of large capital through a single scheme of bubble formation and bursting.

4. Problems with NFT art: Part 2 (development of laws and responsibilities)

However, the reality of NFT art is worse than a Ponzi scheme.

I don't know how much explanation I should give about Ponzi schemes, but every Ponzi scheme has an individual mastermind, who issues goods and mediates transactions. Even if you are enticed to join, it does not necessarily mean you were complicit in the scheme with clear intention to do so, even if a large financial loss is incurred, because the only thing the lower members do is trade. Legally, it is treated as simply buying and selling something that is already in circulation. (Strictly speaking, it is possible to be complicit in the mastermind by involving other people and expanding the organization, but that does not mean you will be charged with any crime.)

In contrast, with NFT art, it is the artist who issues the transaction, and they do so with the express purpose of selling the work. In other words, when NFT art is traded, the artist who is the issuer of the NFT art has participated in the formation of the speculative realm of the NFT art market with clear intention to do so. This responsibility is quite large. If, for example, NFT art were to be called "fraud" (and it very well could be, as will be discussed below), the artist would be responsible for the creation of a speculative market for NFT art, since the fraud would not have been possible without the "intentional" issuance of the trade by the artist .(At the very least, the artist would be held more responsible than a subordinate member of a Ponzi scheme.) Because this risk is not disclosed in advance, I have to suspect that NFT art is a rather "unsustainable" system.

Another thing is that the fact that the artist is the issuer (the part that will be "discussed later"), along with the problems it may cause, complicates things greatly.

To begin with, in trading stocks and ETFs, why can't people who lose money or go bankrupt sue the company or brokerage firm that issued the stock?
(In other words, why aren't the gains and losses from trading stocks and ETFs unfair?)

This is because, as mentioned in the previous section (1), in the trading of existing financial instruments, the stock certificate is part of the company's assets in the case of stocks, and the price movements that each issue of an ETF aims to achieve are guaranteed by the issuer, the securities company, and the law, and traders contract with the market as a whole with full trust in these guarantees. This makes it easy to predict price movements when actually investing, and even if someone goes bankrupt as a result of purchasing these financial products, the possibility of bankruptcy has been factored into the contract, so there is no lawsuit.

In the case of NFT art, however, as I mentioned earlier, such a guarantee is currently not functioning at all. It is unlikely that the platform would take full responsibility for the loss caused by NFT art, and if we think of it like a stock, the value of NFT art should be guaranteed by the issuing artist. (Otherwise, the gains and losses from NFT art would be unfair.)

This situation of "the artist should naturally be the one to guarantee the value of the work" is a huge problem. This means that even though there are no examples of artists explicitly guaranteeing the value of their work, it is somehow self-evident that the artist will be responsible for the work in the event of an emergency. However, since the artist is not prepared to bear the actual responsibility, there is a possibility that when some accident really happens, the injured party will say, "If neither the author nor the platform can solve it, let's settle it in court". When this happens, in the case of NFT art, where there are no proper laws or contracts, a lawsuit can be established without any barriers. To make matters worse, in combination with the incomprehensibility of the concept of NFT art, there is a high possibility that the side that actually loses money will be able to move in favor of the side that loses money in the courtroom (even the judges will usually want to support the side that lost money by buying, not the side that gained money by selling).

In the end, in the worst case scenario, the current law may result in fraud charges being applied against the artist who issued the NFT art.

To summarize:

If the NFT art market is found to have structural problems, the artists will not be exempted.
There is a possibility of lawsuits against artists by those who traded in NFT art to recover their losses.

What is most frightening is that the artist is made to participate in this structure without their conscious awareness (at least until something like this actually happens). Artists are not irresponsible; they don't know that they are responsible in the first place. Nonetheless, the purpose and intent of selling the work is clearly present. It is not at all clear at this point how such a double state of consciousness will work legally (whether it will be intentional or negligent) when a lawsuit actually occurs.

On the other hand, even though the mastermind is responsible for setting up the platform and mediating transactions between investors, there is no need to compensate the investors for their losses.

In other words, in this structure, the artist is treated as the most important contributor to the scheme, and in case of emergency, instead of the investor or the platform, he or she is dragged in front of the shoeshine boy and forced to explain his losses.

Of course, this risk is not certain, as it depends heavily on the behavior of the traders. But at the same time, it also shows that it is impossible to avoid.

5. Problems with NFT art: Part 3 (problems already pointed out in other countries)

In this section, we will look at what problems have actually been caused by NFT art in countries where NFT art was popularized before Japan.

The most serious and urgent situation is that many artists' works are being stolen without their permission and sold as NFT art. In one very recent case, visual artist Davison Carvalho revealed on his Twitter account that his work was sold as NFT art without his permission, with the total profit amounting to $170,000. The number of similar reports is still increasing, and I am sure the same thing will start happening in Japan soon. In the first place, the NFT art system is too easy for unauthorized plagiarists. All they have to do is download one nice-looking photo or picture, re-upload it to the platform, and leave the rest to the speculators. Then before they know it, they’ve already made a huge profit. In this case, copyright law would certainly be violated, but since the original image data remains after the sale, it is doubtful that the crime of fraudulent sale would be applied. Since appropriate penalties for ill-gotten gains have not yet been established, it can be said that the deterrent to crime is not working at all.

Second, there is the issue of money laundering. Simply put, money laundering is the repeated transfer of funds by one's own creation in order to obscure the source of funds illegally obtained through tax evasion or other crimes. The NFT art market is perfect for money laundering because of the high volume of money transfers that take place day and night and the lack of government oversight. It has also been pointed out that certain artists may be forced to be involved in the manipulation of such money transfers. Similar concerns arose in Japan when the request function was introduced to pixiv, but the speed of payment processing and the amount of funds transferred in the NFT art market are both orders of magnitude higher than those of pixiv, and experts are expected to take immediate action.

Third, as I mentioned earlier, NFTs have the problem of environmental destruction, which is also being actively pointed out overseas. However, there is not enough accurate data on how much power NFT actually consumes and how much it destroys the environment, and as a result, the discussion is often not to the point. Anyway, one fact is that the NFT is currently using Ethereum, which requires no small amount of power consumption and carbon emissions to operate. You can find out the rest for yourself.

These are probably the three main issues that can be listed. Other controversial issues include those that question the morality of artists and claims about the handling of art works, but I will not discuss them here because they lack objectivity. To begin with, there is a wide range of understanding of NFT art even in foreign countries, and the opinions of the naysayers alone range from (seemingly) academic arguments such as "the NFT art market is an affront to the existing concept of economy" to emotional ones such as "this way of making money is unacceptable". It is difficult to give a judgment on the validity of all of them, which makes me realize how incomprehensible the structure of NFT art is.

6. Summary

Some parts here are a bit of a digression, but in sections 3 through 5, I have explained how the NFT art market can have a negative impact on artists. NFT art platforms always claim to help artists, but it seems obvious how they are conveniently structured (intentionally or unintentionally) from the perspective of investors. In particular, entering the NFT art market as an issuer of a financial instrument is simply a matter of lending one's responsibility to investors and receiving a small share of their profits, and artists just happen to be targeted as an element for this structure. I would even say that investors are thinking in terms of the price of the art, but not the value of the art itself.

From the above, I conclude that one should basically not enter the NFT art market, at least not until there is a solid and permanent legal framework. If you do decide to enter the market, you should consider the legal risks and have a good understanding of speculative trading and virtual currencies. However, this is only a personal measure of NFT art trading, and as I mentioned at the beginning, the impact on economic activities and the natural environment is still a matter of debate.

It is important to remember that the range of discussion topics for NFT art is vast and cannot be solved by sticking to one single issue. In particular, it is totally unacceptable to let one's intuition get the better of one's opponents and call them a cult. This attitude blurs the contours of the argument, smothers the opponent, and deepens the conflict. No matter what the reason, one should and should want to remain calm in a debate.

Digression

I've avoided mentioning it in the text because it's pretty vague from here on out. However, from time to time, I've seen overseas followers expressing unusual opposition to Japanese artists who are trying to get into NFT art. This apparently stems from the difference in understanding of NFT art in Japan and abroad.

NFT art has only recently started to become popular in Japan in the first place, and there is probably no one who has a completely accurate grasp of the advantages and disadvantages of NFT art.

On the other hand, overseas, as an example, there have already been formal papers on NFT technology, and the level of understanding of NFT art has progressed much further than it has in Japan, to the extent that artists at the forefront of the field know almost everything about it.

So, it seems that there is a certain amount of collective consensus that there is too much of a disadvantage for artists in general, and that unless appropriate improvements are made, it is indeed useless. I've heard that people who have been doing it since early on and are making money have no need or reason to stop, so they continue to do so. This is truly a subjective story. I don't have any data, and I think it depends on the region.

So when that happens, you can imagine that the opposition loses its patience. "We've already come to a conclusion, so could you please just stop for a second?" At that time, NFT art made a full-fledged entry into the Asian region and started attracting new artists and customers without making a huge fuss, which made the overseas opposition think, “the hell are you guys doing?!” They already know that NFT art is currently structured in an unfriendly way, so all they have to do is explain the reason to everyone and get them to stop, but here's the problem. Asian people don't speak their language. Also, there are so many things to explain that they don't even know where to start.

In countries where NFT art has already gradually developed, discussions have been actively held from the beginning, and people have been trying to find both good and bad aspects of NFT art through a kind of trial and error. In contrast to this, Japan is in the position of importing a completed NFT art platform, so it will still be fumbling with it trying to figure it out for a while, and that’s only natural. But from their point of view overseas, it seems like a bunch of nonsense. Their level of understanding is different, so they don't see eye to eye with us.

But as usual, their words aren’t getting across. So, what happens in the end is that they either get angry or disappointed. In anger, they would send a reply saying, "what a shame" or unfollow the person, but their attitude seems to be unusually repulsive to those of us who don't know anything about the situation. We think, "Why is it necessary to go to that far?"

To be honest, I think that as time goes by, Japan will eventually follow the same path as other countries, but I don't really want to see this kind of unnecessary conflict. Let's try to get along for now.

Well. Something like that. Maybe.

Also, in my conversation with Lystrialle, we talked about how the difference in understanding of NFT art may not only be due to the timing of its introduction, but also to the differences in how commission-based drawing culture developed, which was quite interesting. I may write about it later if I don’t get too many angry comments about this.

I may have talked too much. See you soon.

If you have any comments or suggestions, please send them to Twitter: swmr (@sawamuradacun).

Footnote from Lystrialle

I’m Lystrialle and I’m an American who has some command of Japanese and occasionally works in translation.
I was contacted by swmr-san in October 2021 based on a thread I had written in Japanese earlier that year, meant to explain the violently negative reaction many overseas fans had to a certain NFT-related incident to many who had expressed confusion. swmr-san had independently been looking into NFTs and had many concerns, and contacted me in order to get an understanding of how they were perceived overseas.
After a long conversation between us about cultural differences, swmr-san created the original Japanese version of this article, which received a lot of attention in Japanese communities and incited a lot of discussion.

Obviously, I’ve already been very critical about the issues with NFTs in both English and Japanese in public (personally, my stance is that most of the attempted boycotts so far have never done anything by themselves, and nothing short of lobbying for outright legal pressure in some form is going to result in any significant change), but I also have a lot of concerns about the way people discuss it.
For a personal anecdote, at a family dinner recently, a relative casually suggested that someone get into NFTs as a good way to make money. It was a completely innocuous comment and the relative genuinely didn’t understand what it was, just that it was “trendy” and “potentially profitable for a struggling audience”, but my experience with seeing the horrors of NFT-related things made me instinctively start yelling angrily.
Eventually everything was cleared up, and my relative realized that he’d actually made a very reckless suggestion, but I realized how hard it was to quickly explain all of the problems and misconceptions around NFTs to someone who had no context to why there were problems, and I’d startled my relatives at the table who initially were confused as to why I’d suddenly seemed to throw a fit out of nowhere.
It made me think a lot about how I’d made the mistake of forgetting that even here, I can’t make assumptions about what the other party already knows about the issue before speaking to them.

By the time swmr-san had contacted me, I’d already seen a vicious cycle of “Japanese person even so much as mentions NFTs” → “overseas people throw a ton of one-line angry tweets that don’t actually explain the problem very well” → “bystanders dismiss Western reactions as overreacting or unfounded” several times. (In fact, the aforementioned Twitter thread was something I wrote because I was very hurt at seeing an article implying that the only reason overseas people thought cryptocurrency was environmentally unfriendly was because Elon Musk said so, which anyone who knows the political climate on that sphere of Twitter can tell you is a completely inaccurate judgment.)
swmr-san told me a lot about what people on the Japanese end were saying about NFTs and how they perceived them, including things I had suspected already from watching my own feed in Japanese, and things I had no idea of at all. In exchange, I also clarified a lot of the context behind why English-speaking people on Twitter tended to react the way they did, much of which swmr-san found to be very surprising.
We both concluded that the cultural gap was leading to some very serious problems in communication, resulting in this project.

For an example, let’s say someone mentions NFTs and hasn’t personally experienced the direct, personal correlation of cryptocurrency to severe environmental destruction (the GPU destruction, the giant power factories, etc.) nor read any of the relevant articles about it. I don’t think a single tweet saying "NFTs are bad for the environment!" with no other context would really mean much to them, and it’s too easy for another person to come and say "but this network is eco-friendly now!" with just as little documentation.
On the flip side, imagine that you never read this article, and someone tried to argue against NFTs by saying nothing but "if you get into it, you might get sued for fraud." The entire chain of events as to how this makes sense would be difficult for a lot of English speakers, but according to swmr-san, perspectives about responsibility concerning the handling of financial products are a very commonly shared topic among Japanese people, and, indeed, when I was watching Japanese reactions to this article, the above explanation about fraud responsibility was often said to be very easy to understand, so I also got the impression that certain aspects of it were already understood there without needing too much elaboration.
In any case, I think the important part is that it's very confusing if you try and give your argument with no context, and leave it to one-liners like "it's a scam" without any real sense of elaboration. (Even among English speakers, there will still be people who question "but how?" if this is all you tell them, so it's not like it's always a good idea to be so oversimplified.) I understand it's easy to do things like this when you're emotionally overwhelmed by frustration, but from the perspective of the other party, it's too easy to sound like someone who's screaming for no reason, and thus someone who's too easy to dismiss.

At least, this is my impression of the situation, anyway. I may be wrong about a lot of things, but I promise we did our due diligence trying to figure out what was the best possible solution for everyone involved.

Since I think most people currently reading this English version of the article are unlikely to need more convincing about problems with NFTs, this translation is being provided mainly to provide context for “what kinds of things are prioritized and being discussed when it comes to NFTs among the Japanese community at this time.” (The article already caused a large shift in discussion when it was first published in October 2021, and it’s possible it may continue to shift further.)
That way, the next time there’s a conversation on social media between an English-speaking and a Japanese person about NFTs, hopefully, both sides will be more aware about how the other side sees the issue.
As said above, I deliberately did not make any non-grammatical edits to swmr-san’s provided English version of the original text, because I wanted to preserve the frame of the discussion so people could see it exactly as it was presented.
Also, please keep in mind that swmr-san prepared the initial article with the highest priority topics that would be easiest for the Japanese audience to understand without too much necessary extra context or technical knowledge, and especially with an emphasis on debunking many misconceptions that were circulating there about NFTs at the time. There are of course many other problems that both swmr-san and I are aware of, and some have been lightly alluded to in this article, but the immediate priority was to get those cleared up first (this was by no means meant as a comprehensive list of all of the problems with it, and was never pretending to be; rather, it was meant as a springboard to start discussion).

Some miscellaneous points of information I received from swmr-san:

･As mentioned earlier, the direct correlation of “cryptocurrency is bad for the environment” has not been directly made as strongly in Japan as it has here; in particular, the most common visceral evidence that led to this common understanding (the mass GPU destruction and the resulting market inflation) isn’t as well-known due to the much lower rate of self-made PC building there. There is documentation, but it’s not something you can expect the average Twitter user to personally have felt the impact of by default, at most maybe a more abstract correlation. (To be honest, even here, outside spheres that are familiar with PC building or have witnessed those videos on Twitter of those power factories with massive fans, people tend to think it’s just an abstract issue, and that’s why there’s still a Bitcoin management kiosk openly in the convenience store next to my workplace.)

･At the time the article was initially published, one of the most common pieces of misinformation was that “NFTs transfer usage rights for the art”, i.e., something equivalent to what would be paid commissions here. This is due to a disparity in commission culture (as was alluded to at the end) where the kind of “non-professional commission where you pay money and get usage rights for the art” commission isn’t a standard there, so NFTs were basically being framed as something to fill in that niche in the market. (Of course, as this article points out, this isn’t true to begin with.) This kind of misinformation would have never worked here in the West where commission culture already exists for that, so instead the relevant misinformation was that it actually contained the art itself somehow. The fact that different false information was fed to each side led to a misunderstanding where people would protest NFTs with “it’s not even the actual art!” whereas someone on the Japanese side would think, “well, of course it’s not, but it’s the rights to the art, right?” (when in actuality, it’s neither).

NFTs are such a ridiculously complicated issue that I don’t think there’s ever one right way to approach discussing it, regardless of language, but I hope this effort can help produce more productive discussion together and a better result for everyone.
I really hope that further discussion can lead to some kind of positive outcome, whatever it is.
If you’ve read this far, thank you for your time.

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