Twitter CEO Jack Dorsey sold a digital version of his first tweet for more than $2.9 million US. A digital collage by the graphic designer Beeple sold for $69.3 million US—the third-highest price ever paid for a work by a living artist. Both were sold as non-fungible tokens (NFTs), a digital certificate of authenticity that confirms an item is genuine and one of a kind by recording the details on a blockchain digital ledger. NFTs have made a splash in the media recently with multi-million-dollar transactions like these, yet they remain poorly understood. Join us for a deep dive into NFTs, their uses, how they interact with blockchain technology, and what promise NFTs hold for collectors, consumers, and investors in the future.
What is an NFT?
An NFT is a non-fungible token, a unique digital asset that isn’t replaceable with something else. An NFT can either be a one-of-a-kind item (like a real-life painting) or one copy of many (think baseball cards, of which there are many copies but each with its own unique value). While the underlying digital asset can still be copied, shared, and used widely, with an NFT only one person can be said to “own” the underlying file. A good analogy is to think of the situation in terms of physical art collecting: anyone can buy a print of a painting, but only one person can own the original.
Are NFTs just for digital art?
Much of the early hype around NFTs has been because of blockbuster sales for digital art, as discussed, so the initial conversation has been primarily about NFTs as an evolution of fine art collecting. Many early adopters have been artists looking to leverage NFTs for income in the face of a precarious pandemic economy. However, NFTs apply to any digital asset—artwork, e-books, music, or even GIFs and memes. In addition to the examples cited above, such notable memes as the “deal with it” sunglasses and Nyan Cat have recently been put up for auction as one-of-a-kind pieces of crypto art via NFTs, selling for tens of thousands or hundreds of thousands of dollars. A 50-second video by the artist Grimes sold as an NFT for almost $390,000.
The DJ and music producer deadmau5 has sold limited edition NFT digital collectibles and concert clips. Rock band Kings of Leon released their most recent album as an NFT. And actor William Shatner has even sold Shatner-themed trading cards as NFTs. With tokenization, NFT assets can be sold outright to a single individual or split up into multiple tokens so that many people can own a small piece of the digital item.
Source: The Art Newspaper
How is the blockchain involved?
NFTs run on the same technology behind cryptocurrencies—the blockchain. Every NFT is a unique token on the blockchain, providing a certificate of ownership over a specific digital file that is public and can’t be copied or forged. Though the digital file undergirding the NFT can be copied as many times as desired, and while an artist or creator can still retain the copyright and reproduction rights (as with physical artwork), a buyer of the NFT can be known as the owner of the original digital file via the blockchain.
To date, most NFTs function as part of the Ethereum blockchain. While Ethereum supports the cryptocurrency Ether, its blockchain was also designed as a general-purpose distributed ledger to enable innovative technologies like NFTs and to function as a broader marketplace for direct financial services, games, and apps. NFTs on Ethereum contain additional levels of information that provide a history of the asset, like the provenance documents that accompany artwork. For more information on Ethereum, see our recent post on what you need to know about this blockchain. One potential downside for NFTs is the power consumption needs of blockchain technology. The good news, however, is that the Ethereum standard is already working on mitigating this issue as a cost-saving and efficiency initiative. A CoinShares study estimated that up to 73% of bitcoin miners use at least some renewable energy as part of their power supply, including hydroelectric power.
What are some future applications for NFTs?
While to date, the use case for NFTs has focused on digital products, the flexibility of the Ethereum blockchain, and its openness to disruptive innovation, which means that plans are already underway for new uses for NFTs.
For example, one potential use for NFTs is as a kind of verification method for real-world objects. Nike has already patented a method to verify sneakers’ authenticity using an NFT system called CryptoKicks. There may come a time when big-ticket items like real estate can be transferred, and ownership attested to through NFTs. NFTs also include functionality useful to resale markets. Creators can enable NFTs that will pay them a percentage every time the NFT is sold or changes hands, making sure that if their work appreciates in value, they will see some of that benefit rather than just collectors or speculators.
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