Hype and hypocrisy: The high ethical cost of NFTs

When you hear news of a collage fetching US$69.3 million (AUD$92.1 m) at a Christie’s auction or a pixelated punk selling for US$23.7 million (AUD$31.5 m), you’d be forgiven for thinking that there’s a new and exciting art market on the rise.

But the multi-million dollar sales and media buzz around non-fungible tokens (NFTs) mask a more complex and troubling picture of a technology that is plagued by a host of ethical problems. These include rampant scams, exacerbating wealth inequality, a staggering environmental impact and, not least, the exploitation of the artists NFTs were supposed to enrich.

It’s ironic that NFTs were originally conceived of as an ethical correction to an art market that often failed to reward artists for their effort.

One of the first NFTs was created in response to the rampant copying and sharing of digital artworks on the internet, often without attribution or compensation offered to the original artists.

The idea was to create a special kind of digital token that represented ownership of a particular artwork, similar to a digital receipt or the deed to a block of land. Artists could sell the tokens associated with their work in order to derive an income. It would also track who owned a particular artwork at any point in time, showing provenance all the way back to the original artist.

It was hoped NFTs would give artists more control over their work and create a thriving and lucrative market for them to make an income.

The blockchain seemed to be the ideal technology for creating just such a token, with it being a long ledger of transactions that is maintained by a decentralised network of computers. The most popular tokens on blockchains are cryptocurrencies, like Bitcoin or Ether, but other kinds of tokens exist as well.

The big difference between a cryptocurrency token and an NFT is that the former are fungible, in the sense that any individual Bitcoin is functionally identical and worth the same amount as any other Bitcoin. In contrast, NFTs are non-fungible, so every one is unique and they might be worth very different amounts. Some NFTs also embed code that enable the artist to take a cut of all subsequent sales of that token, which could be a lucrative form of revenue if their art appreciates in value over time and is sold to new buyers.

What have I bought?

Since 2014, NFTs have evolved and become more sophisticated, many moving to the Ethereum blockchain. Most NFTs are essentially a record of ownership of a particular digital asset, like an image or video. It is important to note that the asset itself is not stored on the blockchain – it might be stored on one or more servers somewhere on the internet or offline – the NFT only contains a link or pointer to where the asset is stored.

In terms of moral rights, NFTs don’t give the owner control of the intellectual property, such as copyright, which usually remains with the artist. Owning one also doesn’t prevent the asset from being viewed, copied or downloaded by others; someone might have paid US$23.7 million for that digital punk but you can copy it to your heart’s content. Unlike traditional property, an NFT doesn’t give the owner a right to exclude others from using or benefiting from what they own.

All an NFT allows the owner to do is sell that NFT to someone else. It’s like buying the deed to a plot of land, except you’re not able to fence it off, and you can’t even prevent others from creating a second (or third, or fourth…) deed for the same plot of land.

So what does an NFT owner really own? It’s not the artwork, nor is it the right to prevent others from accessing it. What they own is the NFT. This has led some people to suggest that buying an NFT only offers “bragging rights” over a particular piece of art.

Even so, some clearly see value in that right to brag – sometimes to the tune of millions of dollars – but those bragging rights can come at a cost to many of the artists that NFTs were supposed to benefit.

Crypto patrons

One of the main selling points of NFTs is that they are a way to support artists. And there’s no doubt that some artists have done extremely well by selling NFTs. However, the promise of opening up new markets and new buyers to smaller and emerging artists has, so far, failed to materialise.

Like with conventional art, a majority of the revenue from NFT sales has flowed to a small minority of popular artists, with a tiny proportion of NFTs and buyers accounting for a vast majority of purchases and sales.

Thus, to date, NFTs have served to concentrate wealth among a few artists and investors rather than spread it around. And as new artists have entered the NFT sphere, it has only further crowded the space, lending greater advantage to those with the name recognition or resources to advertise their work.

There have been initiatives to encourage artists to create NFTs of their work in an attempt to tap into what appears to be a lucrative market, such as venture capitalist Mark Carnegie working with artists from the Buku-Larrnggay Mulka Centre in Yirrkala in the Northern Territory. However, in order to create an NFT on the Ethereum network, the artist must pay blockchain processing fees, which could cost hundreds of dollars per transaction. If the artwork doesn’t sell and they don’t have financial backing, they might end up out of pocket.

Shark infested

NFTs have also stung many artists in other ways, particularly through plagiarisation, where someone else creates an NFT of their artwork and sells it without their knowing about it or receiving any revenue from it. This has forced some artists, like DC Comics artist Liam Sharp, off platforms like DeviantArt, where they previously displayed their work. The problem got so bad that in January 2022 one of the main platforms for trading in NFTs announced that over 80% of the NFTs created for free on its platform were “plagiarized works, fake collections, and spam.”

NFTs are also vulnerable to fraud. One popular scam is called wash trading, where one or more traders buy and sell NFTs amongst themselves, thereby inflating the price before selling them on to some unsuspecting buyer.

Another common scam is a rug pull. This is where someone generates buzz by announcing a new and exciting NFT project with big promises of future features. But after the creators sell the first tranche of NFTs, they close the project, take the money and run. Sometimes they have even locked the NFTs from being traded, preventing buyers from recouping any of their money by selling the NFTs on the open market.

Another example of NFT fraud includes classic social engineering, where scammers pretend to be official representatives of NFT marketplaces, thus gaining access to victims’ crypto wallets, enabling them to transfer cryptocurrency or NFTs into their own wallets.

All of these scams represent a deeper ethical problem than just a few miscreant operators exploiting rare loopholes. They’re due to fundamental problems with the NFT system itself because it contains few protections against these kinds of exploits.

If a commercial business opened an auction house that had no protections against people selling things they didn’t own, or failed to follow through on delivering promised goods, or that didn’t have robust policies to protect against social engineering scams, it would likely be closed down by regulators.

Decentralised means unregulated

One of the claimed merits of the blockchain is its unregulated nature. The network of technologies, financial tools, cryptocurrencies and NFTs is sometimes proudly referred to as decentralised finance (DeFi) by enthusiasts.

The deregulated nature of DeFi also means that users are not reliant on banks or other conventional institutions to handle transactions, so they are also not covered by the same regulations and protections that people enjoy when using a bank.

This has led some commentators, including prominent technology journalist Cory Doctorow, to refer to DeFi as “shadow banking 2.0”. This is a reference to the first generation of “shadow banking,” which included all the highly obscure and largely unregulated financial instruments that contributed to the global financial crisis in 2008.

Compounding the problem is the inclusion of “smart contracts” in many NFTs. These are small bits of code that trigger under particular circumstances, like allowing an artist to receive a future cut of sales. But smart contracts have also been used for nefarious purposes, such as directly stealing money from people who own NFTs.

Hot air

Every time you make a transaction on the Ethereum network, such as buying or selling an NFT, you burn through roughly 229 kilowatt hours (kWh) of power, generating 128 kilograms of carbon dioxide equivalent (CO2e). That’s about the same amount of energy consumed by a typical NSW home over two whole weeks. Ethereum, the most popular platform for NFTs, burns nearly 100 terawatt hours each year, which is comparable to the energy consumption of Ghana, emitting over 54 million tonnes of CO2e.

This is because blockchains like Bitcoin and Ethereum use vast amounts of computing power, distributed over countless individual computers around the world, in order to continually validate and cross-validate each new transaction. The cost is not only in terms of energy prices but also their impact on the planet.

While many other products label their carbon emissions, and many offer consumers low carbon options or carbon offsets, no such options are available for NFTs. In fact, if you were to offset the emissions of a single transaction at current Australian carbon credit prices of around $30 per tonne of CO2e, it would cost you about $4. And if you tried to offset the total emissions of the entire Ethereum network, it would cost $1.6 billion dollars – not that there’d likely be enough offsets to cover that carbon debt.

Is it ethical to buy NFTs?

Even if you care about artists deriving an income from their work and you want to open up new markets to smaller and emerging artists, then it’s difficult to justify NFTs on these grounds alone.

If you believe that an ethical marketplace ought to have basic consumer protections to prevent scams and fraud, then it’s difficult to endorse NFTs given their deregulated nature, complexity and the many loopholes that are vulnerable to abuse.

And if you consider yourself ethically responsible for the emissions that you produce, particularly those related to discretionary expenses, then it is difficult to justify the emissions required to make even a single NFT transaction.

All of this is entirely separate to considerations of whether NFTs are a good financial investment, whether they’re a virtual asset bubble, or even if NFTs represent something that carries meaningful property rights.

If you want to support artists, buy their art. Thankfully, there are many ways of doing so that don’t involve the blockchain, cryptocurrencies, DeFi or NFTs.

Artwork by Yuga Labs, Bored Ape Yacht Club, 2021