This article titled “How non-fungible tokens became the latest tech speculation bubble” was written by James Ball, for The Observer on Saturday 13th March 2021 17.00 UTC
If you go by the headlines, there’s a trading boom in something called non-fungible tokens (NFTs). Grimes has sold $6m of art via NFTs; Kings of Leon will be releasing their new album as two types of NFT, and a 10-second digital artwork bought via an NFT for $67,000 in October last year has just sold for $6.6m. Twitter boss Jack Dorsey’s first tweet is up for auction as an NFT and may fetch as much as $2.5m.
To their advocates, NFTs track the ownership and guarantee the authenticity of art – and allow creators to monetise digital artefacts. To sceptics, they’re a bubble within a bubble, a speculative frenzy that shows how far from sanity investors have gone.
But to most of us, the burning question is surely: what is an NFT? And why are we suddenly hearing so much about them?
What is an NFT?
Non-fungible token is unlikely to win points for the catchiest of names. The “token” signals it is a blockchain-related product – a token is essentially a catch-all term for units on a blockchain, code which identifies the unique NFT and also the history of its trading. So a bitcoin would be a token, as would a dogecoin, and so on.
The “non-fungible” bit comes down to the difference between, say, pound coins and Panini stickers. One pound coin is pretty much the same as any other pound coin – it can be traded for exactly the same amount, and there’s no material difference between any two of them. Things that follow these rules are known as “fungible”. If units are “non-fungible”, it means that we see differences between each of them. If someone collected Panini stickers of Premier League footballers, they might all be the same size and dimensions and clearly all belong to the same set – but people will value one of a player they don’t have much more highly than one they do.
Cryptocurrencies are fungible – each bitcoin is worth the same as every other and is functionally identical to them too. What NFTs do, then, is allow something unique to be registered on to a blockchain.
Their advocates say that this allows you to do something new when it comes to the digital world: mark something as the “original”. While every copy of a particular gif or jpeg is identical, there would only be one (or a limited number) of NFT versions of it, creating a concept similar to the real-world one of artists selling an original versus hundreds of prints of it for much less.
So the owner of an NFT is definitely the person who owns the artwork?
The point and promise of an NFT would seem to be just this – but the reality is quite different. The idea of a blockchain is it’s an unfalsifiable public ledger of ownership. The bitcoin blockchain tracks which wallets own which bitcoins, and tracks the transactions between the two.
An NFT does identify what artwork, code, audio or video it links to, and the history of its trading. So, where there is an NFT artefact that’s been created by the artist (for example, Azealia Banks’s new audio sex tape, sold last week for $17,000), owning the NFT is the same as owning the art.
But it’s not always that simple. One anonymous digital artist has been creating NFTs in the style of Banksy. The NFT does nothing to identify that artist, or settle the debate over whether or not the artworks are actually by Banksy. Similarly, you could create an NFT of the Observer logo right now, but it wouldn’t give you any rights to the trademark, or any copyright. Stating that you own the NFT to a particular work on its own means nothing if someone else can demonstrate they own the copyright. That means, in what should be the simplest-use case for NFTs – a digital artist using them to sell his or her own work – when auction houses have stepped in to manage the trade they have brought in traditional certifying bodies to verify that the person making the NFT is the original artist.
A system that supposedly outsources the need for intermediaries to verify trust, then, ends up reliant on those intermediaries.
If they don’t prove unique ownership of an artwork, why is everyone suddenly so interested in NFTs?
NFTs have been around for a few years, and fuelled a mini-online craze in 2017-18 – CryptoKitties. This centred around algorithmically generated pictures of fantastical (but usually cute) cats which could be bought and traded as NFTs – with the automated system also ensuring some would be rarer than others. The combination of elements of gaming, collection and trading were well suited to the tech.
The newest surge is seeing people pay tens of thousands for the NFT of something you would typically expect to see circulate on social media for free – animated gifs taking mere minutes of work, such as an animated cat altered to include dogecoin selling for $69,000.
It should not be hard to see why digital artists are jumping on to the NFT movement: it is a chance for them to make tens or hundreds of thousands of dollars for artwork that many people class as mediocre at best.
Similarly, the motivation for the buyers and traders is surely grounded in getting rich quickly. Most cryptocurrencies have little to base their values on: bitcoin is barely used as a real-world currency – it is bought by people hoping it will be worth more in the future. Its value lies solely in the fact that other people value it.
NFTs at least have some kind of scarcity and real-world link – however tenuous. So, in the middle of a blockchain boom, it’s a new and exciting outlet for speculative money.
Does that mean NFTs are useless – or just some niche art thing?
Not necessarily. It might be the case in the future that they could be used to prove ownership (or to watermark) source code or something similar, for example – or, with appropriate frameworks, to track digital rights ownership properly, if their reputation can survive the initial land grab.
That is not a given, though: blockchain is notoriously energy intensive, and so, at the moment, NFT risks being an environmentally damaging way to pay tens of thousands (or millions) of dollars for a gif that is different from all the other copies of that same gif solely because of the certificate you paid for. If that sounds like a good transaction to you, then please do get in touch – I have a digital bridge to sell you.
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