Many brands are eager to launch their collection of NFTs (Non-Fungible Tokens). However, they often dive in headfirst—partly to keep up with trends and partly to engage with what promises to be the future: crypto-assets. Yet, poorly advised, they expose themselves to significant risks because they don't exactly understand what they're putting up for sale. The topic is complex and, thanks to Web3, constantly evolving. But the stakes are high. Let's break it down.
Let's start from the beginning...
An NFT is an immutable association between a digital asset (image, 3D object, video, sound file...) and its certificate of authenticity. This association, executed on a Blockchain, makes it non-fungible, meaning irreplaceable. On Ethereum, which is the go-to blockchain for NFT collections, they use Smart Contracts as agreements to describe the underlying parts of this digital asset: owner, description (metadata), price, Gas fees (commissions), and most importantly, location. This refers to where the asset is physically stored.
The issue is, currently, about 95% of NFTs in circulation are not mined (integrated onto the blockchain). Only their Smart Contract is. When you look at the contract for the location of the asset, it usually points to a web address external to the blockchain. Thus, the asset is stored in a traditional web environment (centralized server) or most frequently within the decentralized IPFS network (InterPlanetary File System), a peer-to-peer storage network that's more secure and less risky than a traditional web server, but it's not a Blockchain. And the implications are significant!
↳ You aren't the owner of the asset
When you own an NFT that's physically hosted on IPFS or worse, on a typical Cloud (sometimes Google Drive), you are actually only the owner of the asset's location address—not the asset itself. Because only the address is mined on the blockchain and thus truly belongs to you. To sum up, you don't own the asset, but rather its GPS coordinates.
If you decide to buy an NFT from the Bored Ape collection on Opensea (the leading marketplace for NFT sales) today, you'll have to shell out over $100,000, and the sad ape image you purchase won't belong to you.
You will possess, in an immutable and intangible manner, the IPFS link indicating where the image is hosted.
↳ Your asset can temporarily vanish
Since the digital asset isn't encrypted on the blockchain, it can eventually be replaced by another file, or worse, disappear entirely. The NFT developer could replace the image with one from their vacation or even delete the image, leading to a 404 error where nothing is displayed. This is completely impossible if the digital object is truly physically on the Blockchain.
In March 2022, CoolCat, a famous NFT collection, vanished for a week because the (external) servers hosting the collection went down. Worse, Opensea continued selling (and clients continued buying) this collection (because the images are cached on the platform) while the NFTs were essentially dead!
↳ Your asset can die
The promise of NFTs, underpinned by Blockchain, is the longevity of the object over time. However, it's clear that this method of coding NFTs provides no guarantee of its durability. From the moment the developer team, brand, or creator hosts the asset outside of the Blockchain, there's a risk. If they stop paying server hosting fees, for example, the NFT dies. Hence, it's crucial for investors interested in a Web3 project to inquire about the intrinsic quality of the NFT, examine the Smart Contract describing it, and above all, assess the quality of the team, the project's roadmap, and its viability over time.
So, how can we avoid these serious mistakes?
Firstly, it's important to impose a duty to inform about the reality of the contract and its underlying elements, enabling the buyer to invest with full awareness.
Moreover, making the "On-Chain" functionality for NFTs a standard by directly encapsulating the digital object onto the Blockchain should be prioritized. This way, the object and certificate will be definitively linked and etched forever. This implies a higher cost and requires more advanced coding expertise. An On-Chain NFT should be significantly more valued than an Off-Chain NFT because the ownership title is incomparable!
Brands launching their own should seriously consider the nature of the Smart Contracts they issue: best practices, source code, On or Off Chain, Gas optimization.
In conclusion, creating high-quality NFTs capable of offering true security and real ownership of digital assets is possible. However, the belief that this can be achieved by creating these NFTs on free marketplaces must be dispelled. It requires a precise technical, economic, and legal skill and guidance that must be considered!
