- NFT stands for ‘Non-fungible token’ and is a tradeable, digital ownership certificate representing the ownership of a unique asset.
- Blockchain (which collects information together in groups or ‘blocks’) means that virtual art can become collectible.
- However, most NFT art is stored in blockchain of the Ethereum cryptocurrency, which has a heavy carbon footprint.
How much would you pay to own a piece of art that doesn’t exist in the real world? For some people, the answer is millions.
A virtual work by cult artist Beeple sold for more than $69 million dollars recently in a timed Christie’s auction that set a new record for such digital works.
It is a fast-growing market with high risks and rewards. Creators – from musician Grimes to meme-makers – are cashing in on booming demand for crypto-art with ownership certified by blockchain data known as a non-fungible token (NFT).
Here is how prosaically named NFTs are driving stratospheric price rises for art that only exists online – and why legal grey areas and hefty emissions might lead buyers to think twice.
WHAT IS AN NFT?
An NFT is a digital asset that exists on a blockchain. The blockchain serves as a public ledger, allowing anyone to verify the asset’s authenticity and ownership.
So unlike most digital items which can be endlessly reproduced, each NFT has a unique digital signature, meaning it is one of a kind.
NFTs are usually bought with the cryptocurrency Ether or in dollars and the blockchain keeps a record of transactions. While anyone can view the NFTs, the buyer has the status of being the official owner – a kind of digital bragging rights.
Why are prices skyrocketing?
Blockchain – essentially a digital ledger – means virtual art can be authenticated as one-of-a kind or limited edition and so become collectible, despite the fact it can also be downloaded and reproduced with ease.
“An original painting or a limited edition print are valuable, in large part, because not everyone who wants one can own one,”
“That’s not true for digital assets. They can be replicated infinitely. But NFTs hold out the promise of actually owning something unique.”
Some works command huge prices.
Another work by Beeple – real name Mike Winkelmann – sold for $6.6 million this year, while Canadian musician Grimes made $5.8 million with a collection of her NFT artworks, and a gif of the rainbow Nyan Cat meme sold for more than $500,000.
The online Beeple sale marks the first time a purely digital, NFT-based artwork has been offered by a major auction house, with Christie’s experts expecting more to follow.
“Digital art continues to gain momentum as a direct result of NFTs and blockchain technology,” said Noah Davis, a Christie’s specialist in post-war and contemporary art.
“We believe that there will be significant growth of the market for NFTs, both within the digital collectible community and the wider art market,” he told the Thomson Reuters Foundation in emailed comments.
What about ownership?
You might think buying a NFT-based artwork gives you the exclusive right to own a copy and make use of it, but not so.
NFTs are easily viewable online – and there’s nothing to stop anyone from making a copy. Indeed, in the case of a meme, the fact is it so widely shared might be part of the appeal.
So what are owners getting?
Generally, it’s nothing more than the ability to claim and sell the right of ownership to the work, with artists typically retaining the copyright to the underlying art.
“With traditional artworks if you buy then, you typically get to hang them in your house. With digital artwork you get to save a copy of the artwork but so can everybody else,”
There is little to stop the creator of a limited-run NFT from making and selling more copies, which could reduce the value if you are the original buyer.
Future disputes over terms could quickly spill into legal wrangling in a fast-developing new sphere. “NFTs are ahead of their time, and as is often the case, the law hasn’t caught up yet.
WHAT KIND OF NFTS EXIST
All kinds of digital objects – images, videos, music, text and even tweets – can be turned into an NFT.
Digital art has seen some high-profile sales, while in sports, fans can collect and trade NFTs relating to a particular player or team.
For instance, on the National Basketball Association’s Top Shot platform, enthusiasts can buy collectible NFTs in the form of video highlights of moments from games.
While these highlights can be seen for free on other platforms such as YouTube, people are buying the status as the owner of a particular NFT, which is unique due to the digital signature.
NFTs can also be patches of land in virtual world environments, or exclusive use of a cryptocurrency wallet name.
An auction for the first ever tweet from Twitter boss Jack Dorsey – “just setting up my twttr” – was an NFT.
HOW HAS THE MARKET GROWN?
Traded since around 2017, NFTs have surged in 2021. Monthly sales on NFT marketplace OpenSea hit $95.2 million in February, up from $8 million in January.
Total NFT trading volumes on the Ethereum blockchain amount to over $400 million, nearly half of which were in the last 30 days, according to NonFungible.com, which aggregates data from NFT marketplaces.
NBA Top Shot, which is not included in NonFungible.com data, has 683,000 users and has seen $396 million in sales, $232 million of which were in February.
Some attribute it to lockdowns forcing people to spend more time at home on the internet. But NFTs are also a way to have possessions that can be viewed by owners’ online friends.
For others, the lure lies in rapidly rising prices and the prospect of big returns. Recent years have also created a lot of crypto millionaires with Ethereum to spend.
WHY ARE THEY IMPORTANT?
Enthusiasts see NFTs as the future of ownership. All kinds of property – from event tickets to houses – will eventually have their ownership status tokenised in this way, they believe.
For artists, NFTs could solve the problem of how they can monetise digital artworks. They can receive more income from NFTs, as they can get a royalty each time the NFT changes hands after the initial sale.
NFTs could also transform music. Kings of Leon’s NFT allows buyers access to limited-edition vinyl or seats at future concerts.
WHAT ARE THE RISKS?
Given that anybody can create NFTs, the scarcity of each piece does not guarantee value. Losses can stack up if the hype dies down.
In a market where many participants use pseudonyms, fraud is also a risk.
Why such controversy over their energy cost?
NFT art has a dirty secret: most is stored in blockchain of the Ethereum cryptocurrency, which has a heavy carbon footprint. Its annual energy use is on a par with Ireland’s, said de Vries of Digiconomist, a hidden cost for many buyers.