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Non-fungible token

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A non-fungible token (NFT) is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable.[1] NFTs can be used to represent items such as photos, videos, audio and other types of digital files. Access to any copy of the original file, however, is not restricted to the buyer of the NFT. While copies of these digital items are available for anyone to obtain, NFTs are tracked on blockchains to provide the owner with a proof of ownership that is separate from copyright.

In 2021 there has been increased interest in using NFTs. Blockchains like Ethereum, Flow, and Tezos have their own standards when it comes to supporting NFTs but each works to ensure that the digital item represented is authentically one-of-a-kind. NFTs are now being used to commodify digital assets in art, music, sports, and other popular entertainment.

The NFT market value tripled in 2020, reaching more than $250 million.[2] The rise of NFT transactions has also led to increased environmental criticism. The computation-heavy processes associated with proof-of-work blockchains, the type primarily used for NFTs, require high energy inputs that are contributing to global warming. The carbon emissions produced by the energy needed to maintain these blockchains has forced some in the NFT market to rethink their carbon footprint.

Description

A non-fungible token (NFT) is a unit of data stored on a digital ledger, called a blockchain, that certifies any digital file to be unique.[3] An NFT functions like a cryptographic token, but unlike cryptocurrencies such as Bitcoin, are not mutually interchangeable, in other words, not fungible.[4] NFTs are created when blockchains string records of cryptographic hash, a set of characters that verifies a set of data to be unique, onto previous records therefore creating a chain of identifiable data blocks.[5] This cryptographic transaction process ensures the authentication of each digital file by providing a digital signature that is used to track NFT ownership.[5] However, data links that point to details like where the art is stored can die.[6] Also, ownership of an NFT does not inherently grant copyright to whatever digital asset the token represents.[7] While someone may sell an NFT representing their work, the buyer will not necessarily receive copyright privileges when ownership of the NFT is changed and so the original owner is allowed to create more NFTs of the same work.[8][9] In that sense, an NFT is merely a proof of ownership that is separate from a copyright.[10][11]

Uses

File:Hashmask 15753.jpg
This image, Hashmask 15753 (1 of 16,384) by "Suum Cuique Labs GmbH", sold with an NFT on the Ethereum blockchain.

NFTs of artworks are similar to autographed items.[12] The unique identity and ownership of an NFT is verifiable via the blockchain ledger. NFTs have metadata that is processed through a cryptographic hash function.[13]

Digital art

Digital art was an early use case for NFTs, because of the ability of blockchain technology to assure the unique signature and ownership of NFTs.[14] Digital artwork by Beeple sold for US$69.3 million in 2021.[15]

Collectibles

NFTs can represent collectibles like card collections but in a digital format. In February 2021, a LeBron James slam dunk NFT card on the NBA Top Shot platform sold for $208,000.[16]

Games

NFTs can also be used to represent in-game assets, such as digital plots of land, which are controlled by the user instead of the game developer. NFTs allow assets to be traded on third-party marketplaces without permission from the game developer. In February 2021, Axie Infinity recorded a sale of $1.5 million for digital land titles in a single sale.[17]

Music

Musicians can tokenize their work on blockchains using non-fungible tokens. For example in March 2021, American rapper Lil Pump did a partnership with the NFT platform Sweet to release a special NFT collection.[18][19][20]

Sports

Athletes are starting to take advantage of the NFT boom in various ways. In September 2019, NBA player Spencer Dinwiddie tokenized his contract so that others can invest into it.[21][22][23] In March 2021, pro tennis player Oleksandra Oliynykova offered prospective NFT buyers the lifetime rights to part of her right arm.[24][25][26]

Pornography

Some sex workers have also tokenized their pornographic work, allowing for the sale of unique content for their customers, though hostility from NFT marketplaces towards pornographic material has presented significant drawbacks for creators.[27][28]

Market value

The NFT market has seen rapid growth recently with its value tripling to $250 million in 2020.[29] In the first three months of 2021 alone, more than $200 million were spent on NFTs.[30] The economic momentum NFTs have in the cryptomarket has exploded because of a trend towards digital collectibles.[5] NFTs are also accelerating a larger trend of digital economic innovation as the public is increasingly favoring a crypto-economy.[5]

Standards in blockchains

Specific token standards have been created to support various blockchain use-cases. These include the Ethereum ERC-721 standard of CryptoKitties, and the more recent ERC-1155 standard.[31] The FLOW and Bitcoin Cash blockchains support NFTs.[32][33]

Ethereum

ERC-721[31] was the first standard for representing non-fungible digital assets on the Ethereum blockchain. ERC-721 is an inheritable Solidity smart contract standard, meaning that developers can easily create new ERC-721-compliant contracts by importing it from the OpenZeppelin library. ERC-721 provides core methods that allow tracking the owner of a unique identifier, as well as a permissioned way for the owner to transfer the asset to others.[34]

The ERC-1155 standard[31] offers "semi-fungibility", as well as providing a superset of ERC-721 functionality (meaning that an ERC-721 asset could be built using ERC-1155). Unlike ERC-721 where a unique ID represents a single asset, the unique ID of an ERC-1155 token represent a class of assets, and there is an additional quantity field to represent the amount of the class that a particular wallet has.[35] The assets under the same class are interchangeable, and user can transfer any amount of assets to others.[35]

FLOW

The FLOW blockchain which uses proof-of-stake consensus model supports NFTs, for example NBA Top Shot is run on the FLOW blockchain. Cryptokitties plans to switch from Ethereum to FLOW in the future.[32]

Tezos

Tezos is a blockchain network that operates on proof of stake and supports the sale of NFT art.[36]

History

In 2014, Counterparty, a peer-to-peer financial platform, was founded and built on top of the Bitcoin blockchain and attracted various projects including trading card games and meme trading in the following years[37][38]

In 2017, Ethereum started to gain prominence and American studio Larva Labs released CryptoPunks, a project to trade unique cartoon characters, on the Ethereum blockchain.[39][40][41] In late 2017, another project called CryptoKitties where players adopt and trade virtual cats was released and quickly went viral, raising a $12.5 million investment and some kitties were selling for over $100,000.[42][43][44]

In 2018, Decentraland, a blockchain-based virtual world, raised $26 million in an initial coin offering, and had a $20 million internal economy as of September 2018.[45][46]

In 2019, Nike patented a system called CryptoKicks that would use NFTs to verify the authenticity of physical sneakers and give a virtual version of the shoe to the customer.[47]

In early 2020, the developer of CryptoKitties, Dapper Labs, released the beta version of NBA TopShot, a project to sell tokenized collectibles of NBA highlights.[48] The project was built on top of Flow, a newer and more efficient blockchain compared to Ethereum.[32] Later that year, the project was released to the public and reported over $230 million in gross sales as of February 28, 2021.[49]

In 2021 interest in NFT continued to spike, and a number of high-profile sales were made just in the first few months.[50] In February 2021, the musician Grimes sold around $6 million worth of tokens representing digital art on Nifty Gateway.[51] Later that month, an NFT representing the meme animation Nyan Cat was sold in an Internet marketplace for just under $600,000.[52] On March 11, 2021, American digital artist Beeple's work Everydays: The First 5000 Days became the first NFT artwork to be listed at prominent auction house Christie's and sold for $69.3 million.[53][54] In March 2021, Jack Dorsey, founder of Twitter and Square, sold an NFT representing his first tweet for over $2.5 million.[9][55] The speculative market for NFTs has led more investors to trade at greater volumes and rates.[54]

Popularity

In 2017, NFTs circulated by CryptoKitties, a project developed by Dapper Labs to sell ownership of unique cat avatars, jumped so much in popularity that a surge in demand took up significant transaction space on the Ethereum blockchain and slowed the entire Ethereum network in December of that year.[56][57]

NFTs have become increasingly popular in the early months of 2021 because of recent high-profile sales.[50] Some notable NFT sales in 2021 like NBA Top Shot’s video clip of LeBron James selling for $208,000 on February 22, 3LAU’s album bringing in $11.6 million in sales as of February 28, and digital artist Beeple’s piece selling for $69.3 million on March 11, have made NFTs an especially current topic in popular culture.[50][58][59][60] In March 2021 alone, NFT sales exceeded $220 million making up nearly half of all-time NFT sales ever at the time.[61] This renewed interest in NFTs, particularly those in art, music, and sports, have made way into mainstream consciousness, especially amongst the younger generation[62][63]. In a March 27, 2021 Saturday Night Live episode, cast members even poked fun at this growing niche with a comedy skit on NFTs.[64]

As the NFT market expands, demand for these unique digital assets have exploded and is expected to grow throughout 2021.[65] Many investors are willing to pay high rates to secure and promote NFTs and continue to do so because they anticipate NFTs to be the biggest and most profitable collectibles in the future.[66][67] Venture capitalist David Pakman has claimed that the growing value of NFTs is redefining the major entertainment industry as of early 2021.[68] Investors like Mark Cuban have already begun to propose new ways of implementing NFT technology to monetize sports tickets and merchandise sales.[69]

Contemporary art

The growing use of NFTs is opening up new possibilities in contemporary art.[7] There is a lot of potential in cryptoart in the art industry for artists, buyers, and collectors.[9] NFT marketplaces exist as sites that facilitate the transactions between all those interested in cryptoart.[70] These online communities give artists the chance to create and sell digital artwork that there might not have been much of a market for otherwise.[9] The blockchain technology used in NFTs also provide artists with proof of historical provenance which validates the creation of one-of-a-kind cryptoart that cannot be forged.[71] This digital ledger system even allows artists to attach royalty agreements to their NFTs that entitle them to a percentage of the profits made every time ownership of the asset is transferred.[72] NFTs are consequently changing the way modern artists can earn a living.[73] The value of tokenized cryptoart then is found in the exclusivity of ownership.[66] While buyers may not hold the copyright of the cryptoart they purchase, they do receive the guarantee of authenticity that comes with owning it.[73] So, collectors must rely on the value of rarity when investing into speculative assets like NFTs.[74] As such, NFTs challenge the norms of contemporary art with an approach to creative expression that is entirely digital and certifiably unique thereby pushing the art world into new territory.[30][75]

Environmental concerns

The proof-of-work required to regulate and verify blockchain transactions, which include NFT sales and purchases, consumes a large amount of electricity which releases a heavy amount of greenhouse gas.[76] Some NFT marketplaces have announced commitments to sustainable practices and in some instances now give buyers the option of contributing to carbon emission offset programs at checkout.[77][78][79] One NFT marketplace was scrapped entirely before launch in response to widespread environmental criticism online.[80] In some instances, NFT artists have decided against selling some of their own work to limit carbon emission contributions.[81] To help combat climate change related to blockchain transactions, CryptoKitties created Flow as a new type of blockchain validation to mitigate carbon emissions with a less machine heavy proof-of-stake model that requires less energy consumption than Ethereum’s blockchain model.[77][82]

See also

References

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