NFTs are a blockchain based technology that have garnered a lot of hype and news coverage in recent months by technology enthusiasts and investors alike. The NBA is using them to sell highlight videos. Artists are using them to sell digital works. Musicians are using them to retain royalties. Twitter’s CEO is even using them to sell tweets.
But what actually is an NFT, and what does it do? NFT stands for non-fungible token, and is, in short, a unit of data stored on a blockchain that certifies a digital asset to be authentic or unique and thus not interchangeable. This is as opposed to a fungible token, such as US dollars or Bitcoin, where, for example, there is no way to distinguish one specific dollar from another in your bank account – they are all grouped together. Simply, a blockchain is a digital ledger that allows transfers of ownership to be recorded in a way that is irreversible, such as when you transfer money to someone else – most NFTs use the Ethereum blockchain. NFTs can be used to represent many different types of digital files, such as photos, audio, or even videos. However, access to a copy of the original file is not restricted to just the owner of the NFT – anyone can easily obtain a copy, as the NFT just provides proof of ownership.
This might sound very strange, but consider the following: the original copy of a famous artists’ work, such as Guernica by Picasso, is worth hundreds of millions of dollars. This is despite the fact that there are many extremely accurate replica paintings of it available for a few hundred dollars (a tiny fraction of the original price). Proponents of NFTs argue that this shows that the vast majority of the value of an original piece of art is derived from the artists’ so-called “signature” on the work, rather than the work itself. For example, recently Christie’s auction house sold its first piece of NFT-linked digital art, which was by the digital artist Beeple. It ended up commanding a staggering winning bid of $69 million! While this may sound ludicrous as you can download an exact copy of the image on your computer for free, NFT fans maintain this is no surprise.
A key advantage of NFTs is that its extremely easy for anyone to create one. All you have to do is create an account on an NFT marketplace website such as OpenSea or Rarible (which are kind of like eBays for NFTs), upload a picture or other digital item, and put it up for auction. An artist can even create storefronts and collections of their art on the website to mimic a traditional art gallery or museum. You can also choose whether to “mint” just a single unique piece, or multiple copies. Moreover, an artist can choose to set a commission for subsequent future sales. This means that if the original buyer resells the NFT to a second buyer, or the second to a third, the original artist still continues to be paid (for example, 10% of every sale price). This means if a piece of art significantly increases in value over coming years, the original artist will still be able to benefit from this.
All of this has predictably led to a gold-rush style frenzy in recent months. New wannabe artists are emerging and churning out new NFTs at record pace, and wealthy investors are snapping them up in the hopes they explode in value in the future. The overall NFT market tripled in 2020, reaching more than $250 million. Sceptics argue there is a massive crash imminent, as NFTs are still a very niche market and thus do not warrant the very lofty valuations some of them currently hold. Furthermore, NFT transactions have attracted increased environmental criticism. Like cryptocurrencies such as Bitcoin, the computation-heavy processes required to mine and run proof-of-work blockchains require massive amounts of energy that are contributing to global warming and pollution. It should be noted, however, that solutions such as switching to a proof-of-stake blockchain (e.g. Ethereum 2.0), which do not require these computational processes, are currently in the works and aim to solve many of these carbon emissions concerns. While we may not see NFTs in the National Art Gallery any time soon, they are an exciting innovation in the world of art and collectibles, and open up that world to all sorts of previously unexplored talent.
Image credit: Marco Verch via Flickr (CC BY 2.0)