Historically, artists have been deprived of capturing value by a sea of intermediaries like corporations and centralized platforms that have a monopoly on creative ownership. But now, NFTs (non-fungible tokens) are fundamentally altering many industries by creating a new paradigm for creative ownership directly between artists and their communities, detached from centralized companies. However, ownership of an NFT does not necessarily guarantee true ownership of the asset it represents. The reality isn’t as black and white as many make it out to be and many NFT platforms are more centralized than users realize, meaning you may not really "own" the NFTs you are creating and/or collecting.
What is a Centralized NFT Platform?
A centralized system operates with a central authority in control of the data and functions of a platform. For example, if you are using a social media platform such as Facebook, they have complete control over most aspects, including who can and cannot join the platform, what can be posted, and who controls that data. Essentially, centralized systems govern the platform and store user data and information from a central point. When you combine this type of centralization with a NFT marketplace, you introduce many major risks including the potential loss of NFTs you have created or collected, deplatforming, censoring, data tampering, and lack of NFT portability.
Risks of Centralized Data Storage
Some NFT marketplaces have centralized elements comparable to any other "Web 2.0" website. When you buy NFT on many of these sites, the token itself is represented in a decentralized way on the blockchain, but because on-chain storage of large files is very expensive, the art, metadata, or media that the token correlates to is usually stored off-chain. This means that if a NFT platform relies on a centralized server that stops operating the art, metadata, or media associated with that NFT may be lost forever.
In March, Jonty Wareing wrote a Twitter thread on Twitter delving into where the media referenced by NFTs actually lives. He discovered that typically, the token will point off-chain to either an HTTP URL metadata file or an IPFS hash.
Looking into Beeple’s record-breaking NFT sale at a Christie’s auction earlier this year, the NFT references metadata reachable through a public IPFS gateway, but the image reference is stored through MakersPlace’s private gateway. If Makersplace was to ever shut down, the individual who purchased Beeple’s “Everydays: The First 5000 Days” bought for 69 million dollars would be left with an image that no longer can be reached.
Another example is NFT platforms that are hosted on entirely different blockchains, such as NBA Top Shot which lives on the Flow Blockchain, run by Dapper Labs. Asset withdrawals are centrally managed and there are no alternative marketplaces for those NFTs on the Flow blockchain. This means that when NBA Top Shot shuts their market down for maintenance, it effectively puts a halt on all NBA Top Shot trading. All of this puts into question whether or not NBA Top Shot are actually “ownable.”
With centralization also comes risks of deplatforming. We have seen this in the way Apple, Google, Twitter, Facebook, Amazon and others have acted to combat online discussion perceived as encouraging right-wing anti-government violence or in the Parler de-platforming conflict. What was once known as a conservative-friendly social networking platform, has now been abolished from Apple, Google, and Amazon Web Services. This problem isn’t about the app itself, it's the concern that deplatforming is a possibility entirely determined by centralized parties.
Censorship, Data Mining, Vulnerability
Another major modus operandi of centralized Web 2.0 companies is offering a service in exchange for users’ personal information and attention. These companies plumb and data mine our personal information, linking the data they get directly from us and our devices with information that was otherwise acquired via various other databases. Our information, of course, is their product. And their goal is to sell our information and our attention at as high a price as possible.
The risks of censorship and data tampering are heightened with the presence of central authorities. Many platforms censor accounts that post anything that goes against their policies and objectives as they see fit. In addition, tampered data has become a huge issue online and in the real world. For instance, voting systems have been a controversial topic among many due to transparency issues and people believing that the votes are manipulated internally. When you hand your information over to centralized platforms, you also open yourself up to the risk of having your personal information and/or assets stolen (your credit cards, your NFT assets, your funds, etc.).
With singular points of failure, centralized platforms are consequently much more susceptible to hacking and system failure. A popular non-fungible token marketplace has already experienced these types of issues. In March 2021, NFT news broke out in what appeared to have been the first digital NFT art theft. A platform user claimed to have lost over 150K worth of their collectible tokens from the hack. Another case involved a stolen credit card on file that was used to purchase over 10K in NFTs. The company proceeded to blame the victims by posting a statement, “Our analysis is ongoing, but our initial assessment indicates that the impact was limited, none of the impacted accounts had 2FA enabled, and access was obtained via valid account credentials.” “Make sure you have Authy 2fa turned on, it would have prevented this!!” Nevertheless, 2FA will not solve everything. Any centralized system is likely vulnerable.
Not Your Keys, Not Your Art
The chosen data storage method, decentralized or centralized, from NFT companies, will determine the degree of severity if the platform is hacked or misused for other purposes. This points to a problem for collectors who want to be certain that they will continue as the owner of the NFT even if the centralized company that minted it ceases operation.
Crypto and NFT enthusiast Amir (Mondoir) recently exposed some centralized practices by Nifty Gateway:
"To put the risk of keeping NFTs in NG [Nifty Gateway] in perspective, take a look at the custodial wallet of NG where they keep ALL NFTs. This means each and every NFT in NG is held in this single address...Now this means within their internal database, they keep track of who holds which NFT. And again, this means if either their website or wallet is compromised, ALL NFTs are gone forever and based on their terms, they don't owe you nothing!"
To make it even worse...
“Terms [say] they can basically terminate your account whenever they want and get hold of your NFTs while they’re inside [Nifty Gateway’s] wallet in your account. Even when you’ve paid for them!!”
Eventually, centralized NFT markets will experience major setbacks in sustainability and permanence. Their NFTs linking to centralized URLs, such as the ones on popular NFT marketplaces, are already ticking time bombs leading to massive breaches of security and unsafe storage of information, funds and private keys. All in all, understand that trading comes with risks, but traders should not have to endure any other threats than those they are already willing to take.
So what is the solution? Decentralization.
What is a Decentralized System
A greater number of Web 3.0 applications, including NFT marketplaces, are emerging as completely decentralized platforms, living entirely on-chain. They are more secure and less likely to be manipulated or altered. If you as a user were to send a token to another user it would not go through a centralized authority and you would have full control over these assets. This transaction would be verified by a secure blockchain in an open and transparent way. By precluding the brokering of user data and maintaining maximally decentralized infrastructure, Web 3.0 platforms can implement more ethical standards for user behavior and connectivity, as well as significantly improving security and trust.
Perks of A Decentralized System
Data Cannot Be Deleted, Altered, or Lost
The data structure of blockchain technology is the property of computer data storage such that new data can be added, but existing data is immutable. No one can alter or modify this data once it is stored in blockchain technology. They are meant to last forever as their data will always remain as is.
Full Control and Secure
Users looking to make a transaction are in full control. The verification process is not dependent on third parties, meaning they can start a transaction without authorization from a centralized authority. Cryptography will validate the data, ensuring the data ledgers are secure when handling transactions and allow NFT creators to interact directly with their collectors. It has been proven helpful in protecting critical transactions such as trading cryptocurrency assets and NFTs. This is one of the most significant advantages of a decentralized system.
Agnostic Platform and Portability
There are NFT platforms and projects that maintain values of decentralization and are designed to live entirely on-chain, enabling full NFT portability. Portion’s decentralized NFT marketplace, for example, has been designed to live entirely on-chain, meaning that storage of both metadata and media is completely decentralized and happening on IPFS. You can rest assured that if a meteor ever hit planet Earth and Portion had to stop operating, the NFTs you created or collected would still live on.
Portion also follows proper ERC standards so that creators and collectors are able to mint their non-fungible tokens and port them over to another NFT marketplace, such as Opensea, if desired. This provides additional freedom to the seller which would not be feasible on a centralized system.
Current Day Centralization
People need to trust one another in order to do even the most basic things together. Historically, all of the base trust layers in our societies have been founded on subjective trust: trust in single individuals, in social networks, in platforms like businesses and institutions, or in large centralized authorities like governments.
Centralized trust and intermediation can work reasonably well in many situations, but it often breaks down when there is a misunderstanding, information asymmetry, or an imbalance of power. Many aspects of intermediation are valuable -- and even creative. The curator function on many NFT platforms adds value that we rely on in discovery of new artists and works. Intermediation can add new information and reduce costs and frictions in a transaction flow. Yet, it is far too often the intermediaries, not the value creators, that are able to monetize and extract most of the value created. Now, intermediaries no longer need be relied upon to imbue transactions and relationships with trust, as this is now handled by the trustless platforms themselves. Thus, they are no longer in a position to act in a way that is fundamentally exploitative.
Decentralization: A Turning Point
With the advent of decentralized and distributed technology, we began witnessing a movement to redefine trust and value in our society and in our economy. In 2001, a technology-driven movement based on peer-to-peer computer networks emerged and enabled file sharing, most notably BitTorrent and the Kademlia technology. In 2009, with Bitcoin, trust became embeddable in some P2P networks, as we bridged cryptoeconomics with blockchain database technology and realized that maximally decentralized infrastructure and applications were the key to building a new trust foundation for the planet. This was based on the simple principle that if everyone had their own provably accurate version of what is going on in the system, nobody could cheat the system. Then came Ethereum in 2014, a technological movement that soon blossomed into an economic, social, political, and creative revolution -- and perhaps the most profoundly positive transformation of digital trust. As we look back at all these events, it is clear that decentralization represents a major turning point in our relationship to the internet and value. It has forced us to reconsider how value is created, how it moves across networks and borders, and who benefits from the rails by which it moves.
As we work to pioneer a better internet – Web 3.0 – decentralized data networks and applications are the key to improving security and creating new models around ownership. By understanding the risks of centralization and how they can be mitigated through increased decentralization, we can make the internet safer and more secure.