Non-fungible tokens (NFTs)

In the ‘real world’ the term fungible good is used by economists to describe goods that are essentially interchangeable: one barrel of crude oil is the same as another, as is a one Euro coin and another. However, the digital world has seen a rapid rise in the demand for non-fungible tokens (NFTs).

An NFT is a cryptographic record of ownership for a unique item that is encoded into a blockchain. It records who owns something, but is not itself the same thing as that item. Think of it like the deed to a house.

At the moment most NFTs are being created on the blockchain of a cryptocurrency similar to bitcoin called Ethereum.

When NFTs were first suggested for inclusion in the Ethereum blockchain the authors imagined they would be used for physical property, digital collectibles or even to keep track of “negative value” assets like loans.

How do you buy an NFT?

Any digital asset can, in theory, be sold as an NFT. At the moment it tends to be art, whether that is images, video or music. The digital artwork itself can be reproduced over and over again for free, and shared widely across the internet, but the NFT records who owns the piece.

These tokens are similar to trading cards that you may have collected at school, except that the cards don’t exist anywhere outside of a computer and can be copied, emailed, tweeted or deleted by third parties with impunity without affecting the NFT itself.

The technology allows for some interesting possibilities. Artists have sold multiple copies of their work like traditional prints, except each one is as much the original as the other. They can also choose to sell ownership of an artwork to one individual.

Some computer games are using NFTs to regulate digital items in games. Owning a certain NFT may give you ownership of a virtual plot of land, or a faster car in a driving game.

Just as the inventors intended, you can also tie NFTs to physical objects, such as collectible trainers. Others are selling virtual trainers that you can’t even wear.

The NBA is using NFTs in its Top Shot collectable cards game. Just like traditional trading cards, these can be bought in packets, but the packets are digital and ownership is recorded in an NFT. And rather than huddling together in the schoolyard to trade cards, NBA nftsa cards are exchanged on a peer-to-peer marketplace. So far more than $230 million has been spent on cards.

When did selling NFT start?

In 2017 a project called CryptoPunks was launched. An algorithm designed 10,000 different characters as a 24 by 24 pixel square. As of March 2021 there had been over 6,000 trades in the previous year, totalling more than $108 million in sales.

Artist Mike Winkelmann, aka Beeple, is one of the pioneering sellers of digital art via NFTs. In October 2020 he sold a piece of digital artwork called Crossroads, which would morph into one of two forms depending on the outcome of the US Presidential election, as an NFT for $66,666.66. That piece sold four months later for $6.6 million.

Since then the market has expanded rapidly. Canadian singer and artist Grimes sold over $6 million worth of digital artworks in less than 20 minutes, while headline rock band Kings of Leon released the album When YouSee Yourself as an NFT, which included a number of exclusive perks for the owner.

Other sales have included the NFT to a video clip of a Banksy artwork being burned, while the NFT for the first tweet from Twitter CEO Jack Dorsey brought in millions of dollars.

What’s the catch?

Whether NFTs will prove to be anything more than a get-rich quick scheme for artists is hard to say, but the technology allows for innovative contracts and sales to be made in a way that is cryptographically protected. In theory, ownership of everything from homes, cars, company shares, art and copyright could be tracked and exchanged using blockchain technology.