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The world of cryptocurrency is full of acronyms and abbreviations, and NFTs are no exception. NFTs, or non-fungible tokens, have been making waves in the crypto world recently as a new way to invest in digital assets.

With over $5 billion in sales in 2022, some people think NFTs are the greatest invention since Bitcoin, while others are more cynical, dubbing them a pyramid scheme. So, what exactly are NFTs and are they a pyramid scheme?

What is an NFT?

NFTs are digital assets that are stored on a blockchain. Unlike fiat currency or cryptocurrencies like Bitcoin, which are each interchangeable with one another, NFTs are unique and cannot be exchanged for other NFTs. This makes them valuable as collector’s items or as a way to invest in digital art, games, or other assets.

Are NFTs a pyramid scheme? 1

Average current cost for a Bored Ape NFT is around 100 ETH (approximately $300,000 USD)

How NFT’s work

The system generally relies on the Ethereum blockchain, which ensures a few things: it maintains an unchangeable record of everyone who has owned the NFT, and it prevents the item from ever changing. That means someone who purchases an NFT and then sells it can’t deceive the public about what they’ve got. All of it is there in the NFT, just as it was when they acquired it. You can think of them as the papers that authenticate a purebred dog: they aren’t the puppy, but they authenticate the history and pedigree of one.

However, most data is stored off-chain. The NFT carries information on where you may discover a description of the artist’s name and work title, but this data isn’t generally found on the blockchain. NFTs include information on how to locate the artwork they represent, but the actual artwork is still only accessible with a link.

It’s crucial to remember that an NFT with a picture does not represent your actual ownership of the image. You can’t print it or commercially exploit it. Instead, you are gaining title to the record of your purchase on the blockchain. Another individual may buy the record of the transaction linked with the image.

Some people believe that NFTs are simply a way to speculate on the future value of these assets without actually owning them. In other words, they argue that NFTs are nothing more than a pyramid scheme.

But are they just another pyramid scheme?

To understand what an NFT is, it’s important to first understand the difference between fungible and non-fungible assets. A fungible asset is one that can be easily exchanged for another identical asset. For example, two dollars are fungible because they can be exchanged for each other with no difference in value. Gold is also a fungible asset because each gold nugget is worth the same as any other nugget, no matter its size or purity.

In contrast, a non-fungible asset is one that cannot be exchanged for another identical asset. For example, a house is a non-fungible asset because each house is unique and has a different value. The same is true for NFTs – each NFT is unique and has a different value.

So, what makes NFTs valuable?

The value of an NFT comes from the fact that it represents something that is scarce and unique. For example, an NFT could represent a digital art piece that can only be owned by one person. Or it could represent a virtual game item that can only be used by one player. It can also authenticate legitimacy and ownership of a valuable watch, or watch collection. 

Not everyone is convinced that NFTs are a good investment, however. Some people argue that the value of an NFT is only based on speculation and that there is no guarantee that the asset will retain its value over time. Others argue that the lack of regulation around NFTs makes them a risky investment.

Only time will tell whether NFTs are here to stay or if they’re just another passing fad. In the meantime, it’s important to do your research before investing in any digital asset, including NFTs.

What is a pyramid scheme?

A pyramid scheme is an illegal investment scheme where people are promised returns based on the investments of new people who join the scheme. The problem with these schemes is that they eventually collapse because there are not enough new investors to keep them going.

So, are NFTs a pyramid scheme?

No, NFTs are not a pyramid scheme. While it is true that you can make money by investing in NFTs, the returns are not based on the investments of new people. Instead, they are based on the value of the NFT itself.

What you need to know about NFTs

The majority of people think that NFTs are safely kept on the blockchain, but this is not the case. They’re merely image files stored on a server, similar to a web hosting firm.

NFTs employ links to take you to another location where the art and any information about it are being kept. And, as anyone who has ever used the internet before knows, URLs can and do cease to function. So what happens if your NFT goes down when it points to nothing?

What’s worse, what will happen if your server is compromised and an attacker replaces the file with something offensive or obscene?

This means you can spend money on an NFT, only for it to be lost or taken away from you without your knowledge or consent.

This is largely due to the minting and operational costs of NFTs but there are workarounds.

Using IPFS (InterPlanetary File System) has been a temporary solution but it doesn’t come without it’s own set of hurdles. Rather than identifying a specific file at a specific domain, IPFS addresses let you find a piece of content so long as someone somewhere on the IPFS network is hosting it.

Check My NFT’s developers have been researching inside of NFTs to see if their IPFS addresses are working, and in several cases, they’ve discovered files that won’t load. The team discovered works by Grimes, deadmau5, and Steve Aoki that had vanished from the internet temporarily. Only after the team drew attention to their absence did the files reappear. The files must be actively available on the network for the system to operate; unlike with a domain owner, no host has a single duty to maintain this for files on IPFS.

In conclusion,

NFTs are a new and innovative way to invest in digital assets. However, there are some risks associated with them. These risks include the fact that they are stored on a server and not on a blockchain, and that the code used to create them is not yet perfect. Despite these risks, NFTs have the potential to revolutionize the way we invest in digital assets and could change the way we interact with the internet forever.

CryptoWhat was created in 2015 and has become one of the most trusted and well-respected sources of information on all things crypto. The blog's authors are dedicated to providing clear, concise, and jargon-free explanations of this complex technology, so that everyone can understand it.