Many brands are launching their NFT collection. But through technical and legal ignorance, they take significant risks on what they actually put up for sale. Decryption.
Let’s go back to the beginning: an NFT (Non Fungible Token) is the immutable connection between a digital asset (image, 3D object, video, audio file, etc.) and its certificate of authenticity. This attachment made on a Blockchain makes it non-fungible. So not replaceable. At Ethereum, the reference blockchain for NFT collections, we talk about SmartContract as contracts that describe the underlying of this digital asset: owner, description (metadata), price, gas cost (commission) and especially location. That is, the place where the asset in question is physically stored.
The problem is that today, 95% of the NTFs in circulation are not extracted (integrated on the blockchain). Only their SmartContract is. And when we look in the contract for the location of the asset, it most often refers to a URL external to the blockchain. The asset is therefore stored in a classic web environment (centralized server) or more mainly in the decentralized network IPFS (InterPlanetay File System), a peer-to-peer storage network that is more secure and less risky than a web server. classic, certainly, but which is not a Blockchain either. And the consequences are many!
1 / You do not own the asset
Owner of an NFT that is physically hosted on IPFS or worse on a classic Cloud (sometimes Google Drive), you are in fact only the owner of the asset’s location address. And not of that asset. For it is only the address that is mined on the blockchain and therefore really belongs to you. To summarize, you do not own the asset, but the GPS coordinates of its location.
If you decide to buy an NFT from the Bored Ape collection today at Opensea (market leader in NFT sales), you will have to pay more than $ 100,000 and the image of the sad monkey you will buy will not belong you do not.
You will in an unchanging and intangible way possess the location of the IPFS link where the image is hosted.
2 / Your asset may temporarily disappear
The digital asset that is not encrypted on the blockchain can eventually be replaced by another file or even worse disappear. The developer of NFT can post a picture of his vacation or even delete the picture. And there is error 404. Nothing is displayed. Which is totally impossible if the digital object is actually physical on the Blockchain.
In March 2022, CoolCat disappeared a famous collection of NFTs for a week because the (external) servers hosting the collection were down. Worse, Opensea continued to sell (and customers to buy) this collection (because the images are cached on this platform) while NFTs were dead!
3 / Your asset may die
The promise of NFT, supported by Blockchain, is the durability of the object over time. But as we can guess, this way of coding NFTs gives no guarantee of its durability. From the moment the developer team, brand or creator hosts the asset outside of Blockchain, there is a risk. For example, if he stops paying for server hosting, NFT will die. Therefore, it is necessary for the investor who is interested in a Web3 project to find out the inherent quality of NFT, to be interested in SmartContract, which describes it and above all to assess the quality of the team, the project roadmap and its viability over time.
So how do you avoid these serious mistakes?
First of all, it is necessary to impose a duty to provide information on the reality of the contract and the underlying conditions. This will allow the buyer to invest consciously.
Additionally, it will be a matter of making the “On-Chain” functionality of NFTs a standard by encapsulating the digital object directly on the Blockchain. Thus, object and certificate will be permanently connected and engraved for life. That means you pay the price and have a much more advanced coding know-how. An NFT On-Chain should be much more valued than an NFT Off-Chain because the title of ownership is unmanageable!
The brands that launch must therefore really consider the nature of the SmartContracts they issue: best practice, source code, On or Off Chain, gas optimization.
Finally, it is possible to create qualitative NFTs and provide a real guarantee of security and real ownership of the digital asset. But we must stop believing that we can achieve this result by setting up these NFTs in free marketplaces. It is a know-how and a precise support (technical, financial, legal) that needs to be considered!
Otherwise watch out for the bad buzz!