Current Limitations of NFTs

The first problem we'll discuss is the storage of an NFT's metadata and image. Due to the blockchain's storage limitations, an NFT's metadata and image are mostly stored outside the blockchain - in storage systems like IPFS, Arweave, or even Google Drive.

The risk of hosting off-chain is that the validity and lifetime of metadata and images are not guaranteed compared to when they are stored on the blockchain. When stored off-chain, bad actors can tamper, edit, or even remove metadata for their personal gain. Project administrators can even make mistakes that will risk the NFT's integrity.

For example, if someone stores their NFT image on Google Drive, a bad actor can easily compromise it. The same risk may apply to other non-blockchain decentralized storage systems.

All this proves why it's essential to check the inner structure of an NFT you're buying, specifically, where the NFT metadata and image are stored.

The second and more pressing limitation is the legalities around NFTs. As of writing, there is no universal legal definition of a "non-fungible token." Not having a proper legal definition makes classifying NFTs from other similar technologies and digital assets difficult, considering how fast the space moves. As a result, this makes it harder for proper regulation to come into the NFT space.

Intellectual Property (IP)

Alongside legal limitations, intellectual property (IP) rights also fall under a gray area as they can only be applied to the art the NFT represents and not the token itself. In other words, owning the NFT does not always equate to gaining the right to use the underlying asset in any way you want unless stated by the creator.

However, there are cases where full IP rights are also granted to the owners of the NFT, such as in the case of Bored Ape Yacht Club, where various holders have started to use the commercial rights to their apes in different industries such as film, music, and clothing. 

Lastly, other people are concerned with the environmental impact of NFTs. Several studies suggest that the carbon footprints of NFTs are excessive compared to other industries' energy consumption. For example, other people claim that the energy consumption of one NFT transaction is enough to power a refrigerator for a month.

It is, however, important to note two things. The first is that blockchains work like a train, and NFTs are one of its passengers. Whether or not the passengers (NFTs) ride the train (blockchains), the train itself will keep on running 24/7. The carbon footprint it produces will be just as "excessive" with or without the presence of NFTs. The existence of NFTs bears no change to the blockchain’s energy consumption. 

This, however, does not mean that NFTs are completely off the hook. It just means that we should refocus the discussion of energy consumption on the blockchains themselves and support innovations striving for greener solutions - which leads to our next point: Ethereum 2.0.

Most of the NFT energy consumption comes from the Ethereum blockchain, which uses a Proof-of-Work consensus mechanism like Bitcoin. However, Ethereum will shift to a Proof-of-Stake consensus mechanism under Ethereum 2.0, improving its carbon footprint by 99.95%. This directly addresses the concern of an NFT's environmental impact.

Other blockchains that offer NFTs, such as Solana, Tezos, Cardano, and Binance Smart Chain, have a tiny carbon footprint, given they use different consensus mechanisms. We’ll discuss these other consensus mechanisms in a different course.

Aside from limitations in the current technology of NFTs, there are also threats to the space where bad actors seek to take advantage of investors and traders. Make sure to avoid these!

Rug-pulls

A "rug-pull" comes from the expression "pulling the rug out." This is where developers of an NFT collection hype up their project and make several fake promises to the community. Once the minting of the NFTs finishes, they run away with the funds and leave disappointed investors behind.

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Another variation of a rug pull is a “slow rug pull,” where NFT developers pretend to continue their project after minting, only to disappear and leave the community behind slowly. This often happens when the developers want to make more money from NFT royalties.

Phishing links

A phishing link is a malicious link designed to fool a user into downloading a virus, giving up control of their crypto wallet, or providing sensitive data about their identity or holdings. With the rise of NFTs, phishing links have become a common tactic of scammers, mostly passed around on Twitter, Discord, and Facebook communities.

The usual practice of scammers is to initiate a conversation with you through enticing messages, with a link attached like:

“MINT IS LIVE: bitskw3la.com”

“You have been selected to mint a free Bored Ape, connect your wallet in bitskwellaaa.com to claim”

“Claim your whitelist for Bored Ape Yacht Club, connect your wallet at bitschool.com”

Remember to be vigilant and triple-check any links before clicking on them. If an investor falls into the trap and interacts with the link with their cryptocurrency/NFT wallet open, they might be in grave danger of losing their crypto assets and private information. 

Fraud

Since we are on the internet, fraud is something to be constantly aware of while navigating the NFT space. Scammers can create fake profiles of celebrities or personalities selling "fake" NFTs, posing with fake followers. Another example of fraud is creating malicious sites that look like famous NFT marketplaces like OpenSea and MagicEden. Always remember to check the website URL before interacting with any marketplace site.

Since digital images on the internet can easily be copy-pasted, other bad actors take advantage of this, steal artists' work online, and sell them as NFTs. Bad actors can also duplicate an entire NFT collection by copy-pasting each image manually and selling them as their own in hopes of scamming beginners.

Due diligence is the answer to this problem. Checking recent activity, double-checking the artists behind the project, and verifying official website links will help you stay away from fake collections.