March 25, 2021

Fees for NFT auctions mean you can lose money.

Non-fungible tokens, or NFTs, are having their $69 million moment as a way to create…

Non-fungible tokens, or NFTs, are having their $69 million moment as a way to create value out of what would traditionally be considered valueless. A form of cryptocurrency that acts as a digital certificate of ownership that can be bought and sold NFTs are a useful tool for selling things that have no physical presence—whether it’s a collage of digital artworks like the one Beeple sold at Christie’s, or a recording of farts. Now that everyone has seen what they can do, there’s an a NFT gold rush.

Because pretty much anything can be an NFT and making one usually only takes a few easy steps, everyone from professional studio artists to gonzo journalists to everyday hustlers trying to make a buck in crypto are trying their hands at selling a token. Generally, NFT creators can sell their works to their highest bidder on virtual marketplaces like Rarible or Opensea. Given the wildly varying fees associated with NFTs, though, some are finding that actually making a profit isn’t as straightforward as it might seem.

The process of creating (or “minting” as it’s known in crypto-speak) and then selling an NFT can cost anywhere from less than a dollar to more than $1,000. In a piece for OneZero, Allen Gannett walked readers through how he paid $1,300 to make four NFTs featuring an image of famous paintings that he’d downloaded for free from the Metropolitan Museum of Art. Gannett put the works up on Rarible and received a $76 bid for one of them—a long way from a profit, and he still had to pay another $88 fee to accept it. The other three don’t appear to have sold, meaning Gannett lost over $1,000.

While Rarible pushes up-front fees on sellers, other platforms simply take a cut of the sale proceeds. George Mason University economics professors Alex Tabarrok and Tyler Cowen conducted a similar experiment on their blog Marginal Revolution, creating an NFT of their first blog post on the site, which they sold on Mintable. They had to pay 2.5 percent of the final $2,300 bidding price. “That’s not cheap, but quite a bit less than an art gallery!” Tabarrok told me.

Other platforms have one-time fees that are relatively reasonable. Alex Ramírez-Mallis, a film director who is selling recordings of farts on Opensea, said he only had to pay about $150 to set up an account on Opensea that allows him to mint unlimited NFTs for free. His “master collection” of farts recently sold for about $430—not a bad final haul. And Tom McKay, a staff writer at Gizmodo, sold an NFT of a tweet featuring pictures of his cat Larry using the platform Valuables by Cent and didn’t have to pay any fees. He netted $50. Business Insider recently reported that confusion about fees for converting cryptocurrencies and minting has led some newbies to lose hundreds of dollars on NFTs.

What exactly are these fees for, and why do they vary so much?

NFTs exist on a blockchain, the digital ledger technology that underlies cryptocurrency and keeps track of who owns what assets. Performing actions like trading assets or minting tokens often requires huge amounts of electricity, which is why the environmental impact of NFTs has been a constant criticism of the trend. This is because the most popular blockchain networks where NFTs can be found usually use what’s known as a “proof-of-work” model. Under this model, participants who want to execute some sort of action on a blockchain like transferring an NFT have to expend a ton of computing power to perform complex equations. The energy requirement acts as a sort of buy-in to ensure that people aren’t overloading the system with frivolous actions; there’s a fear, for instance, that NFT marketplaces would be flooded with spam without some sort of upfront payment. The NFT fees are paying for that expended energy.

Doing business on a marketplace often entails a fee to mint the NFT, which is essentially the process of registering the artwork or tweet or whatever as a token on the blockchain. There are also fees for making bids and transfers. Different platforms have different models for how they charge those fees. Some platforms won’t actually go through the process of minting a token for a piece of art unless there’s been a sale so that energy won’t be wasted on making something that no one wants to buy. Others mint NFTs in batches, which brings costs down compared to making tokens one by one.

Cameron Hejazi, CEO of Valuables by Cent (where McKay sold his cat tweet), told me that the biggest cost saver for his platform has been using what’s known as a sidechain. Sidechains allow users to transfer NFTs and other assets between different blockchains. “In terms of enabling three main things—buying, selling, and showcasing NFTs—there’s no need to do that on the same platform,” said Hejazi. Valuables by Cent conducts most of its transactions on a separate sidechain that runs parallel to the Ethereum blockchain. (Most NFTs are sold in Ethereum.) At the end of the process, the NFTs are then uploaded to the main Ethereum blockchain. On its sidechain, minting costs are so negligible that Valuables by Cent ends up covering it for customers. There is a small transaction fee, but that ends up getting paid by the buyers, since Valuables by Cent figures that these people are already willing to spend money on this technology. This method also has the added benefit of using less energy. “There’s no way that the network we are running is using more computation resources than an IT department at a university,” said Hejazi. When asked whether he was concerned about the elimination of fees possibly leading to a flood of spam NFTs, Hejazi said, “At the end of the day, creators’ reputations are being underwritten by what they put on the blockchain. If a creator wants to keep spamming, that’ll look accordingly upon them.”

There are downsides to using a sidechain like Valuables by Cent; it takes more steps to complete a transaction and thus can involve more friction. Yet, Hejazi sees the elimination of fees as integral to getting more people interested in the NFT space without the headaches. “I’ve been free from thinking about NFT fees, and I’ve been enjoying that freedom,” he said. “I hope that others can join me in this oasis of low-cost NFTs, because it is an unnecessary cost in my mind.”

Future Tense is a partnership of SlateNew America, and Arizona State University that examines emerging technologies, public policy, and society.