Our Vision of the NFT Ecosystem


<p>There are several ways to qualify the versions that the internet has experienced. The simplest way to do so comes down to two major qualifications:</p>



<ul><li>The ‘Web1’ corresponds to the period when it was only possible for the user to consult a website without actually being able to interact with it.</li><li>The ‘Web2’ allows the user to create content and publish it online. Social networks are the best examples of Web2.</li><li><a href="https://en.wikipedia.org/wiki/Semantic_Web" target="_blank" rel="noreferrer noopener">The term ‘Web3’ was first used in 1999 by Tim Berners-Lee</a> who imagined a Semantic Web. This semantic web would be a web of data (or data web) that can be processed by machines.</li></ul>



<p>Is it a coincidence if 10 years later, Bitcoin transactions have started exchanging data while being validated by machines? The semantic web having been very little adopted, the Web3 today concerns everything related to the cryptocurrency industry, including NFTs.</p>



<h2><strong>The Web3 Allows a Digital ‘Real Ownership’</strong></h2>



<p>One of the primary goals of Bitcoin is to be able to carry out a monetary transaction without a trusted third party. Instead of entrusting their money to a central agency like a bank to manage the bank account, everyone can &#8220;become their own bank&#8221;. Rather than printing notes endlessly, there would only be 21 million Bitcoin in circulation.</p>



<p>Bitcoin has made it possible to actually own a digital asset that cannot be controlled or censored by a trusted third party. In addition, the transactions are public. Anyone can verify and validate network transactions mathematically without trusting a third party.</p>



<p>With its limited supply and its uncensorable and public transactions, Bitcoin has made it possible to quantify the unquantifiable in a digital space. Since blockchain doesn&#8217;t lie, this notion of digital scarcity has induced a Real Ownership sentiment for digital assets.&nbsp;</p>



<p>Since it was now possible to have real ownership of its financial assets, the next step was to extend this possibility to all other types of digital assets. But a question arises: With actions that will exist as long as blockchain exists, do all our interactions with the internet deserve to exist forever?</p>



<h2><strong>Decentralization is a Spectrum</strong></h2>



<p>Thanks to the large number of miners on Bitcoin, it is the most decentralized and secure cryptocurrency. By design, Bitcoin is not made to process a high number of transactions. When the idea of increasing the size of blocks to support more transactions was proposed, the majority of Bitcoin miners refused.</p>



<p>One of the reasons given for this refusal was simple: by increasing the size of the blocks, the number of gigabytes needed to install a full Bitcoin node would also increase. If accessing transaction validation required too expensive hardware, this would have the direct consequence of centralizing this role to a small number of actors.</p>



<p>By making this choice, the Bitcoin community assumed its identity:</p>



<ul><li>Accessible</li><li>Transparent</li><li>Decentralized</li><li>Secure</li><li>Slow</li></ul>



<p>And confirm that Bitcoin alone would not be suitable for all uses. It is for this reason that other crypto-currencies exist, faster, less secure, and more centralized&#8230; Each has its specificity adapted to a particular use.&nbsp;</p>



<p>According to the blockchain, the ease of access to its governance process will determine its level of decentralization. When a critical update of a blockchain needs to be made, would you prefer a quick decision made by a small group of decision-makers or a slower decision decided by consensus by many actors?</p>



<h2><strong>Owning and Governing the Web3</strong></h2>



<p>If one of the promises of Web3 is to have control and ownership of their data, how much investment does a user need to be in a governance process for their data to really belong to them?&nbsp;</p>



<p>Understanding the governance of crypto-currencies makes it possible to determine its mechanics and define its identity. This identity is very important because depending on the governance choices adopted, validating and verifying transactions as well as updating the blockchain will be up to a more or less important group of people.&nbsp;</p>



<p>The more governance decisions are centralized within a small group of decision-makers, the more information that flows through the blockchain can be censored easily and quickly.</p>



<p>On one hand, an open and uncensorable internet where everyone can take part in governance. On the other hand, one minority decides for the others. In between, billions of possibilities are being experienced every day in the current Web3. Depending on the values advocated by one community or another, ethical questions will arise&#8230;</p>


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<p class="has-text-align-center">This work is licensed under a <a href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noreferrer noopener">Creative Commons Attribution 4.0 International License</a>.</p>


If one of the promises of Web3 is to have control and ownership of their data, how much investment does a user need to be in a governance process for their data to really belong to them? 

Web3, Decentralization and Governance


<p>What is Ethics? ‘A system of accepted beliefs that control behavior, especially such a system based on morals’ according to the <a href="https://dictionary.cambridge.org/fr/dictionnaire/anglais/ethic" target="_blank" rel="noreferrer noopener">Cambridge Dictionary</a>.</p>



<p>Ethics is a concept that continually evolves according to morals, usages, and regulations. In the absence of state regulation surrounding NFTs, only individual or community choices remain to define our conduct.&nbsp;</p>



<h2><strong>Why Speak about Ethics and NFTs?</strong></h2>



<p>The NFT community is fragmented into several small communities and each of them has its own rules of &#8216;savoir-vivre&#8217;. So far, the moral principles that seem to be the consensus within the entire NFT community are openness and inclusiveness. But what if a community doesn’t agree with another community&#8217;s rules?&nbsp;</p>



<p>Since mid-2020, the NFT ecosystem has seen the arrival of many new institutional players like Christie&#8217;s, brands like Adidas or Nike, and superstars like Snoop Dogg. Soon, attention was focused solely on them, what they bought and in which projects they invested. To the detriment of the players who have built the ecosystem in the middle of the bear market for two years.&nbsp;</p>



<p>Certainly, the exposure to the general public brought by these different actors has allowed unprecedented visibility to such a young ecosystem. But it was fast, too fast perhaps. The education time necessary for this new generation of users has been lacking for OGs to pass on their knowledge.</p>



<p>The blockchain only secures its perimeter: the durability of the data it hosts. All the risks related to the Web2 still exist and new users, who can be poorly informed, have suffered undesirable consequences:</p>



<ul><li>Scams</li><li>Theft</li><li>Phishing</li><li>Hacks</li></ul>



<p>Moreover, in the face of these unethical behaviors, there is no one to ask for reparation for the harm that has been done. Having been abused of their trust, a large part of these new users have accused the ecosystem of being a vast scam and turned away from it. In addition, critics have multiplied against the fundamentals of NFTs and blockchain.&nbsp;</p>



<h2><strong>Web3, a Magnified Mirror of Web2 Problems</strong></h2>



<p>While some of these criticisms are justified, it would seem that NFTs have served as a magnified mirror on a trend that has accelerated sharply since the global lockdowns of 2020: the digitization of our society.</p>



<p>With social networks mainly using the cloud, today many aspects of our society depend on digital. In many countries, it has become normal to keep a copy of identity documents, permits, or property deeds in a centralized database. This notion of &#8216;digital identity&#8217; is becoming increasingly important and requires sufficiently secure tools to prevent fraud.</p>



<p>At the same time, attention and influence economies have developed on social networks, making it possible to monetize content. To better target the consumer, data on users&#8217; online habits are collected and the algorithms display news feeds according to the user&#8217;s preferences.&nbsp;</p>



<p>Two consequences follow from this preferential system:</p>



<ul><li>Do not show content contrary to preferences, radicalizing the user&#8217;s opinion</li><li>Censor low-exposure content</li></ul>



<p>NFTs address all these issues, but their transparent and censorship-resistant nature forces us to rethink the way we see the internet of tomorrow.&nbsp; But to what extent can we tokenize the internet?</p>


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<p class="has-text-align-center">This work is licensed under a <a href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noreferrer noopener">Creative Commons Attribution 4.0 International License</a>.</p>


Every autonomous organization has its own rules and moral principles. But is there a common code of ethics in the NFT ecosystem?

Ethics and NFTs


<p>In traditional finance, ‘wash trading’ is the term used to describe a form of market manipulation where an investor immediately sells and buys the same financial assets to create fake or misleading activity in a marketplace. So a trader will sell an asset, only to immediately buy it back at a reduced price, therefore artificially inflating market volume.</p>



<h2><strong>Cryptocurrencies Wash Trading</strong></h2>



<p>Wash trading in the cryptocurrency world is similar in that it creates a false impression of market volume and liquidity. Notably, some cryptocurrency exchanges have been caught wash trading from multiple ‘ghost accounts’ to manipulate markets.</p>



<p>The more liquidity an exchange has, the more attractive the platform will be to investors. High trading volumes are associated with trust and popularity which benefit projects and exchanges alike. The world of crypto is relatively unregulated and wash trading and manipulation are not illegal nor restricted.</p>



<p>Saying that, it is not respected behavior by crypto communities. For exchanges, projects, and individuals to keep a legitimate name in the space, they can’t be seen to involve themselves in such behaviors.&nbsp;</p>



<p>Within the NFT space, wash trading and general insider trading are just as prevalent as with any other sector in the crypto space but trust within the relatively tight-knit communities is paramount, and maintaining a good reputation is of importance and value.&nbsp;</p>



<h2><strong>Market Manipulation in the NFT Space</strong></h2>



<p>In this world, there are many blurred lines as to what exactly is acceptable. An individual&#8217;s standards also come into play. This is a frontier, and boundaries are being tested in many ways.</p>



<p>Here are some examples of market manipulation in the NFT Space:</p>



<ul><li>manipulated pre-sales (buying your own assets)</li><li>wash trading as a marketplace&nbsp;</li><li>wash trading as a project (the goal isn&#8217;t exactly the same as a market)</li><li>pre-organized pre-sales (all big buyers pre-identified and targeted)</li><li>wash trading for attention: purchasing your own assets (as a user) for a higher price to build fake hype</li></ul>



<p>Unfair and manipulative market behaviors are something that we, at NonFungible.com, are specifically keen to expose within the NFT ecosystem and we have often been among the first ones to alert the community about projects or individuals that are participating in such negative activities.</p>



<p>One of the most exceptional elements of the blockchain is having transactions permanently recorded on a distributed public ledger, and so ultimately most bad players&#8217; actions are traceable. Being held accountable on the other hand is a different matter!</p>



<p>Manipulation of markets is likely as old as trading itself, the enduring classic ‘pump and dump’ schemes are an inevitable part of the process of exploration. As is true with any investment, putting money into a project requires you to do your due diligence, do in-depth research, and focus on managing your risk.&nbsp;</p>


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Wash trading is the term used to describe a form of market manipulation where an investor immediately sells and buys the same financial assets to create fake or misleading activity. 

Wash Trading and Other Bad Behaviors


<p>This is a question that has come up regularly since the end of 2020 when Memo Akten published the<a href="https://memoakten.medium.com/the-unreasonable-ecological-cost-of-cryptoart-2221d3eb2053" target="_blank" rel="noreferrer noopener"> first research on the carbon emissions of NFTs</a>. Yes, NFTs consume electricity to exist. On blockchains like Ethereum or Bitcoin, this consumption is higher than on others by design.</p>



<p>In December 2021, if all actions are carried out on-chain, here is an estimate of the carbon emissions of NFTs:</p>



<ul><li>100 KgCO2 to mint (1–2 hour flight, e.g. London-Frankfurt)</li><li>200+ KgCO2 for a sale with a few bids (3-hour flight, e.g. London-Rome)</li><li>500+ KgCO2 for more bids and more sales (5+ hour flight, NYC-LA)</li></ul>



<p>Although some platforms are updating their smart contracts to reduce the need for gas, this methodology would be adapted if blocks were generated for each transaction sent on the blockchain. This is not the case, blocks are generated automatically every 13 seconds or so, whether they contain transactions or not. This calculation method, therefore, makes it possible to make users aware of their carbon footprint but many questions remain unanswered.</p>



<h2><strong>Cheap Energy and Old Hardware</strong></h2>



<p>The goal for a crypto miner is to be profitable. To achieve this, he will have to look for a source of electricity that is inexpensive as well as mining equipment that consumes less and is more efficient.&nbsp; It is regularly Bitcoin that is singled out for the ecological impact of its ‘Proof of Work’ model.</p>



<p>&nbsp;In March 2022, <a href="https://www.coindesk.com/layer2/miningweek/2022/03/21/what-does-a-crypto-mining-farm-look-like-striking-photos-from-siberia-to-spain/" target="_blank" rel="noreferrer noopener">Coindesk went to meet with the world&#8217;s largest crypto mining farms</a> to find out what responses they have given to the climate emergency. The conclusion is clear: all farms seek to use as much renewable energy as possible, regularly renew their machine park, and reuse as much as possible of the heat released by mining.&nbsp;&nbsp;</p>



<p>For Ethereum, all it takes is a graphics card to participate in block mining. This allows more people to participate in securing the network but it also makes locator identification more complicated.</p>



<p>The most important question about electricity consumption &amp; digital pollution is to know where energy production comes from. If miners use a VPN, they will be mistakenly counted in another country on the globe. If they use a clean energy source but are located in a country that mainly uses electricity created from fossil fuels, they will be included in the country&#8217;s statistics without taking into account its particularity.</p>



<p>Other blockchains and layer 2 solutions exist and are less energy intensive, but are more centralized and therefore more vulnerable to censorship or ledger changes.</p>



<p>Faced with this problem of information trust, blockchain and NFTs have a role to play in the transmission of data relating to the various miners. But for that, it requires an incensurable blockchain.</p>



<h2><strong>The Long-Term Vision of Blockchains</strong></h2>



<p>So the answer to the question &#8220;Are NFT bad for the environment?&#8221; is: it depends on the blockchain used. We would have liked to give a more precise answer, but this requires more scientific research on the subject. Bitcoin&#8217;s power consumption is getting better and better documented and its consensus system will not change.</p>



<p>Regarding Ethereum, a transition to ‘Proof of Stake’ has been initiated in 2020 with &#8220;<a href="https://ethereum.org/en/upgrades/beacon-chain/" target="_blank" rel="noreferrer noopener">The Beacon Chain</a>&#8220;. This was the first step toward ETH2 which will no longer use ‘Proof of Work’ to work. Any ‘Proof of Stake’ blockchain uses 99% less energy. It will be a few more years before this update ends (announced for 2023).</p>



<p>In the meantime, there are other blockchains and Layer 2 solutions that support more transactions and don&#8217;t require energy-intensive mining machines to operate.</p>



<p>Memo Akten is right on one point: it is time to think about the use we make of the blockchain, even more for those who use the ‘Proof of Work’ because they allow the best decentralization and security of the information hosted on it. The more centralized a blockchain is, the more it looks like a centralized database. The questions to be decided for the future are therefore:</p>



<ul><li>What data must be incensurable?</li><li>What data must live forever online?</li><li>Who takes care of content moderation?</li><li>What place does the user occupy in decision-making?</li></ul>



<p>Ecological change requires first and foremost social change. These issues must be discussed by as many people as possible so that a common solution can be found&#8230; and make consensus!</p>



<p>More data on the Ethereum traffic &amp; emissions:&nbsp;</p>



<ul><li><a href="https://kylemcdonald.github.io/ethereum-emissions/" target="_blank" rel="noreferrer noopener">Ethereum Emissions: A Bottom-up Estimate</a> </li><li><a href="https://kylemcdonald.github.io/ethereum-nft-activity/" target="_blank" rel="noreferrer noopener">Ethereum NFT Activity</a></li></ul>


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NFTs are regularly criticized for their carbon footprint. But where do these data come from and how are these data calculated?

Are NFTs Bad for the Environment?


<p>Today, <strong>the state of health of the digital creation market</strong> can be summed up by a massive production of content controlled by central entities that devalue what they do not like. This raises several questions:</p>



<ul><li>What are the criteria to be met to exist online?</li><li>How are these criteria decided?</li><li>What is and how is personal data collected?&nbsp;</li></ul>



<p>With algorithms that can make it rain, make the sun shine, and even influence the results of presidential elections, the use of our personal data has become a major issue in our digital lives.</p>



<h2><strong>Maintain Control Over Data</strong></h2>



<p>To maintain control over the data that a user consents to give to a third party, cryptography and the world of open source have many tools. NFTs and more generally blockchain are part of it but they are not miracle solutions.</p>



<p>At the same time, digital life is taking up more and more space and has more and more consequences on our physical life.</p>



<ul><li>For example, how do I verify the authenticity of a deepfake video?</li><li>How can we prove our identity with digital tools?</li><li>Are artists and digital professions valued at their true value?</li></ul>



<p>In parallel with the information economy, the attention economy has developed on social networks. Here again, it is mainly the platforms which host the content that emerges as winners of this economy.&nbsp;</p>



<h2>NFTs are a Double-Edge Sword</h2>



<p>The promise of Web3 is to enable a better economic balance between content creators and the platforms that enable their content to be distributed. And NFTs perfectly represent this notion of ‘digital scarcity’.</p>



<p>Having the ability to ‘set in stone’ digital information is a double-edged sword. On one hand, no one will be able to alter the information but on the other hand, it will be necessary for the information to be consensus with all the actors concerned before being registered on a blockchain. In addition, the transparency induced by NFTs requires first defining what will be made public or not.</p>


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<p class="has-text-align-center">This work is licensed under a <a href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noreferrer noopener">Creative Commons Attribution 4.0 International License</a>.</p>


Before talking about the future, it is important to clarify some elements of the present to contextualize why NFTs represent a logical continuation of our information economy as well as a technological response to the need for digital scarcity.

Are NFTs the Future?

Navigating through the NFT ecosystem requires separating signals from noise. Established in 2018, NonFungible.com has been a key stakeholder in the NFT industry since its infancy. Over time, we have developed a solid understanding of the way the NFT community works, backed by our trusted data &amp; experience.

Our Vision of the NFT Ecosystem

Wash Trading and Other Bad Behaviors

Cryptocurrencies Wash Trading

Market Manipulation in the NFT Space

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