NFT – what are Non-Fungible Tokens?

As a ‘non-substitutable digitally protected object’, an NFT is the title deed of a unique digital object. Images and videos in particular, i.e., digital art, can be sold using a Non-Fungible Token. Blockchain technology is used to this end: information on the work, owner, usage rights, etc. is stored and passed on in a tamper-proof manner.

To get a better understanding of what a Non-Fungible Token is, it helps to take a look at the real world. A unique, irreplaceable token is, for example, a painting or a handmade piece of jewellery. The counterpart, a Fungible Token, would be a £10 bill, for example. A painting or piece of jewellery is unique and cannot be replaced or exchanged for an equivalent object; a £10 bill, on the other hand, has many equivalent counterparts, namely all other £10 bills in circulation.

Back to the digital world: Fungible Tokens are Bitcoins, for example, which can be exchanged for other Bitcoins of the same value. But what about memes, videos, pieces of music, and actual works of art in the virtual space? In theory, anyone could duplicate them in just a few clicks. The Non-Fungible Token evolved as a way to identify and trade the original.

The token consists of various blocks of information that are strung together to form a chain: the blockchain. The blocks store various information about the work, such as its creator, buyer, seller, etc. In addition, a unique digital fingerprint (the hash value) is stored in each block, along with the hash value of the previous block –creating the chain mentioned above. What makes the technology almost tamper-proof is that it is stored in a decentralised manner on a peer-to-peer network. All connected computers retain a copy of the blockchain and determine the conclusiveness of new blocks and the specified hash values – errors or forgeries are immediately detected this way.

The technology is not only used for Non-Fungible Tokens, but should be familiar to most forms of cryptocurrency like Bitcoin and Ethereum. If you wish to purchase an NFT, you would pay for it using Ethereum – the most commonly used blockchain for NFTs.

Non-Fungible Tokens are used widely in the art world either to protect video and image files or more elaborate digital works. In principle, any virtual good can be linked or protected using a token. For example, valuable individual items in computer games are tagged with an NFT, which can only be applied by the owner of the token. Virtual properties or events can also be traded as tokens.

The following usage scenarios are conceivable:

• Art NFT = NFTART: for artwork, collectibles, GIFs, music, etc.
• Gaming NFT: for unique objects in games
• Certification NFT: for titles, certificates, identities, but also patents, property rights, proofs of original
• Reward NFT: for actions and events

Similar to cryptocurrencies, Non-Fungible Tokens are traded via special online marketplaces. Today, even some crypto exchanges offer NFTs. The best-known, being the oldest and now the largest NFT exchange in the world, is OpenSea. Since 2017, NFTs from various sectors have been traded there.

Trades on OpenSea or other platforms like Binance or SuperRare occur in two ways: at a fixed price or via auction to the highest bidder. To get involved, you need a corresponding wallet and the necessary crypto change – in most cases Ethereum.

The currency forms the basis for being able to mint or ‘mine’ NFTs yourself. Simply, you upload the corresponding image, video, or piece of music and a corresponding token is created, which you can use for trading.

The best-known example of the hype surrounding Non-Fungible Tokens (which many find difficult to understand) is the sale of a work of art by the artist ‘Beeple’. Beeple posted a photo on Tumblr every day since 2007 and eventually assembled a mosaic image from 5,000 individual shots. Beeple subsequently auctioned off the associated NFT at Christie’s for $69 million (around £51 million) – despite the fact that the image itself could theoretically be reproduced by anyone.

However, Beeple is far from alone in attracting huge sums for NFTs. The NFT of the source code of the World Wide Web was sold for around $5.4 million (around £4 million) via Sotheby’s. The first tweet on Twitter from 2006 went for $2.9 million (around £2.2 million) and basketball player LeBron James gold-plated a video of a throw with a purchase price of around $200,000 (around £149,000).

Buyers hope that their Non-Fungible Tokens will increase in value over time, similar to real works of art and collectibles.

For many people the fundamental question is how useful NFTs are in the first place. Associated works are, after all, easy to copy, and the virtual property remains abstract and of unclear value. Developer Geoffrey Huntley demonstrated this absurdity when he stole or copied all available NFT images and uploaded them to The NFT Bay. This resulted in 17.96 terabytes of image material. The actual Non-Fungible Tokens remained unaffected, of course, but the images could still easily be shared.

Concrete criticism comes in regard to the carbon footprint of NFTs. Namely, the electricity consumption required to generate blockchains is huge. A British artist and technologist calculated that the electricity consumption to generate a total 18,000 Non-Fungible Tokens was 340 kWh – around a 30^th of the average annual electricity consumption of a US household. Converted, this means CO2 emissions of 211 kilograms per NFT – as much as a two-hour flight.