What is an NFT?
“Non-fungible tokens” use cryptocurrencies’ blockchains to sell original versions of digital artefacts
“NON-FUNGIBLE TOKENS” (NFTs) leapt from the more obscure corners of the internet into the mainstream in March 2021 when Christies, a British auction house, sold a digital work of art for $69m. What it actually flogged was an NFT, a cryptocurrency chit that proves a buyer owns an intangible marker connected to a unique piece of digital art, music or other item. Much like René Magritte’s painting of a pipe that proclaims “this is not a pipe” an NFT is not the thing it represents. Tweets, videos of basketball dunks and even the source code to the world wide web have been sold as NFTs in recent months. From June to September they generated almost $11bn in sales, an eight-fold increase on the previous four months, according to DappRadar, a market tracker. What exactly is an NFT? And why are people spending tens of millions of dollars on them?
An NFT is a record on a cryptocurrency’s blockchain (an immutable ledger that can record more than just virtual coins) that represents pieces of digital media. Invented a few years ago, it can link not only to art but also to text, videos or bits of code. Promoters of NFTs claim that they solve a thorny problem with digital art: how to own an original. For creators who freely upload their work or sell it as identical copies, the concept of an original is difficult to pin down. Exclusivity is impossible to enforce when digital files can be shared freely on the internet. But collectors want the cachet that comes with having an exclusive claim on an artwork. This is where NFTs fit in.
To mint an NFT, the creator establishes a unique record of the artwork, generally on a website. Then the creator places the record on a blockchain, usually Ethereum’s, which requires a transaction fee known as gas. Possession of a private encryption key associated with the transaction proves ownership. This gives an artist or collector something to sell. An NFT may link to a version of the work, but rarely includes the rights to reproduce or distribute it. That differentiates it from a commercial licensing arrangement, too.
NFTs have myriad problems. They often change hands using cryptocurrencies, many of which currently have sky-high valuations, leading to fears of a bubble. Anyone can mint an NFT, since the systems involved are decentralised, although doing so with someone else’s work could be infringe their copyright. Some artists have already claimed misappropriation of their work. Most NFTs are simply links to images. Unless they have been issued in a certain way to ensure they are tamper-proof these can in theory be meddled with after the sale. The high electricity usage of blockchains—Bitcoin’s is greater than that of Chile—has prompted arguments over whether artists are contributing to climate change by embracing NFTs. And ownership may be difficult to prove in the long term, as web-based records may not last for ever.
Yet NFTs have some value beyond the cryptocurrency hype: artists struggle to make a living when their works can be easily replicated and pirated. NFTs will create new problems in an attempt to solve old ones, but for now many creators and collectors are too busy cashing in to care.■
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