Interest in non-fungible tokens, or NFTs as they are more commonly known, has soared in recent years. Notably, the art world has embraced them as a means of signifying ownership of a digital property. NFTs are, if you like, a stamp of authenticity that is akin to having a painting that has been undeniably signed by the artist who created the image. However, NFTs are much more besides.
Famously, an NFT of a digital artwork by a South Carolinian artist, known as Beeple, sold in early 2021 for an astonishing sum. The London auction house, Christie’s, put the gavel down on a JPEG file created by Beeple at a record sum for a digital piece of art. Fetching a little under the equivalent of £50 million, 5,000 Days was so-called because it took that long to produce, a verifiable length of time thanks to the auditing trail the artist had left behind the artwork’s digital production. To put that in some kind of context, only two artists have ever seen greater sums paid for their work while they were still alive. One was Jeff Koons, for his stainless steel sculpture, Rabbit. The other was David Hockney for his painting, Portrait of an Artist (Pool with Two Figures).
Importantly, both of these traditional artworks have a simple provenance that means anyone attempting to copy them would, in all probability, be found out. However, digital artworks can be copied easily. You can create a screenshot of anything with ease. Alternatively, you could copy the original file. Who, then, would be able to say whether their version was the original or not. Would it matter if they did?
In the art world, of course, originality and uniqueness is everything. Even insofar as limited edition prints are concerned, there will always be minor differences. Copies of digital artworks are truly identical, however. Unless, that is, NFTs are used to determine which file was created by the artist and which came later. Consequently, many people are now asking – what exactly are non-fungible tokens?
How Are Non-Fungible Tokens Defined?
Essentially, an NFT is a digital certification of authenticity. To understand what this means, it is perhaps easier to first start with what a fungible token might be. In commerce, an example of a fungible token might be a £20 note. This item has exchange value, like an NFT, but it can also be broken down, for example, into ten £2 coins or four £5 notes. It is this ability to break it down that makes it fungible. An NFT, on the other hand, is not fungible. This means that the NFT associated with 5,000 Days, for example, will only ever be able to represent that piece of art and no other. Of course, it is possible to sell shares in an NFT but this makes use of the fungible nature of money, not the token itself. You can think of an NFT as a serial number or barcode that cannot be copied. Many people see them this way.
That said, the truth is that an NFT could be copied – it is just that doing so would be pointless. Why? Well, an NFT will have an open-source blockchain associated with it. Rather like an audit trail that is in the public domain, anyone who copies or tampers with a digital asset that has a blockchain can be found out. Blockchains utilise the same technology that is behind cryptocurrencies. After all, a crypto coin is nothing more than a line of digital code. Crucially, however, when they are minted or sold, they are date stamped so you cannot backwards engineer them. Each transaction of such a coin is recorded within the blockchain so fraud can be determined with ease.
Blockchains are now used widely in logistics and other areas of commerce, not just the digital realm. However, it is the virtual world where they are still best known and NFTs have made use of them to ensure that digital ownership can be assessed freely and fairly. In short, if you were to buy a digital asset without an NFT or the blockchain that goes behind it, you could come unstuck if someone else were to claim ownership of the same property.
Understanding How Non-Fungible Tokens Operate
When a digital asset is created, such as an artwork that does not exist in the physical realm, an NFT will be minted for it. When the art or other asset is sold, it is not the file that is really being passed on but the NFT itself that proves ownership. By being registered on open blockchain ledgers, which anyone can view if they wish to, tracking ownership of the NFT becomes possible. If you were to sell a digital asset, you’d add to the blockchain with the change in ownership of the NFT and so it would continue with every subsequent transaction. If someone were to try and sell an NFT they did not own, then they would not appear in the blockchain. The idea may sound simple but the art world has nothing like it for physical works, relying on auction house records and gallery-held information instead.
How Long Have NFTs Been Around?
For many, the idea of NFTs is entirely new. However, it is important to note that blockchains have been around for some time. The principles behind them date back to 1982 when a cryptographer named David Chaum first proposed protocols for them. The date stamping element of them came later, in the early 1990s when the world was first getting used to the idea of digitised visions of the future. In 2008, the first public blockchain – which means it was independently verifiable by anyone with an internet connection – came about.
This was put together by the mysterious Satoshi Nakamoto, supposedly a Japanese mathematician, but who, in reality, was probably a pseudonym used by one of the founders of the world’s first cryptocurrency, BitCoin. Nakamoto’s innovation was to use an automated time-stamping process for each block in the chain, something which did away with the need for them to be independently verified by a trusted body. Initially, NFTs used cryptocurrencies in small denominations. By associating digital art or collectables with a small amount of cryptocurrency, so it would enter its blockchain. This had certain limitations until around 2014, when NFTs, as we know them today, came into existence with decentralised blockchains that were more suited to the purposes of tracking the ownership of digital assets other than cryptocurrencies.
Why Is There an Explosion of Interest in NFTs?
More people know about NFTs today than ever before. This is largely down to the huge sum that 5,000 Days sold for, of course. By capturing headlines across the globe for something that was seen as entirely new by many people, so interest in what an NFT is and how it might impact on the digital art world peaked. Firstly, the buyer of the piece has shown extreme confidence in the NFT he has bought and the blockchain that supports its authenticity. By forking out a multi-million sum, so other art buyers have started to consider whether an investment in the often intangible world of digital art may be for them. Like anything new, it is of interest to art lovers, dealers and collectors. Whether this interest continues in the longer term or dwindles like so many fads have done before remains an open question, however.
Why Are Artists Making Use of NFTs?
Artists who created digital pieces have always had something of a problem when it comes to offering their buyers complete confidence in the unique nature of their digital files. What was to stop Beeple, for example, selling 5,000 Days through Christie’s one week and then another digital file containing the same image to a private buyer the next? The answer was minting an NFT, of course. By offering their buyers something digitally and verifiably unique, so more confidence can come about in the digital marketplace. The benefits for artists, in this regard, are clear.
However, there is more to it than mere verification. NFTs can, in certain circumstances, have so-called smart contracts written into them. This would mean that if an NFT were to change hands, the original creator of it could take a commission. In other words, the secondary market will also be financially rewarding for the artist concerned. Some NFTs have smart contracts up to the value of a tenth of any resale price that is agreed, again verifiable through its blockchain.
How Do Buyers of NFTs Benefit From Them?
When you buy a digital asset with an associated NFT, it is necessarily better than one which lacks it. Without the verification of ownership that it is possible to maintain with the NFT’s blockchain, anyone could claim to be the true owner of your digital asset even if they only have a copy of the original. Equally, the creator of the artwork could not reasonably claim to still be the owner because the blockchain would show that ownership had passed from him or her to you. Given that the value of NFTs can rise, like any other class of asset, they can be just as rewarding investment vehicles as real-world items.
NFTs Outside of the Art World
Although NFTs have gathered a great deal of attention of late – largely because of their increasing use by digital artists – they have many other uses. As previously mentioned, NFTs and blockchains are used in logistics. The US retailer, Walmart, uses them to verify the supply chains behind its food so that any post-sale issues can be tracked backwards to work out how they originated. Some video game developers also use them within their titles to operate as in-game assets which players can genuinely trade with one another. Multiple cryptocurrencies also use this technology. Some ticket issuers for large sporting events and so on also now use NFTs to verify the true ownership of ticket holders to cut down on counterfeiting.
The Drawbacks Associated With NFTs
So far, everything associated with NFTs appears to be positive. The technology has seemingly dealt with some of the worries people have had about their digital assets being ripped off or their ownership of them questioned. They have also promoted great interest in a still relatively new part of the art world in the form of digital art. In short, they offer buyer confidence which, in turn, makes it easier for creators of unique or collectable digital assets to sell their works. However, not everyone agrees that NFTs are as good as they are hyped up to be.
Firstly, NFTs are not the digital asset they represent in their own right. Consider the unlikely opportunity of Van Gogh selling you a piece of paper which he has signed saying you own Starry Night or some other masterpiece. So long as that piece of paper – or token – is accepted as being associated with the painting, you could potentially claim ownership of it. However, the bottom line is that it is merely the piece of paper you own. In other words, confidence in the link between an NFT and the digital asset is associated with needs to be maintained. What if were to fall away? Besides, looking at one of Van Gogh’s paintings is likely to be a more enjoyable experience than having a hypothetical token of ownership written by him in your possession.
Secondly, there are vast amounts of digital resources that go into maintaining blockchains. The servers they run on are decentralised. This means they are all over the world – a network of computers interacting with one another. This is an essential part of the way they operate. Because they are always in public view, they cannot be tampered with. And yet, this means huge amounts of electrical energy are used to keep them running. Some estimates suggest that, in the cryptocurrency world, the power consumption of blockchains is as great as that needed to run all of the world’s major social media channels combined. In other words, there is an environmental impact here that needs to be taken into account. Of course, NFTs associated with digital artworks only make up a proportion of this environmental cost. Nevertheless, this fact alone puts some people off.