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NFTs: Behind the Hype

GM by Marc Simonetti

What is an NFT? That is the $69 million question of the moment. An NFT is a ‘non-fungible token, a non-interchangeable unit of data stored on a blockchain, a form of digital ledger, that can be sold and traded. Types of NFTs include digital files such as digital images, photos, videos, and audio.’

But this Wikipedia definition doesn’t help us simple folk make any more sense of the question, so let’s break it down.

First, the blockchain: essentially, it is a technology that records transactions but is not controlled by a single person or body. In a blockchain, transactions are recorded simultaneously by many computers who are connected in a network - so the information is logged on many computers at the same time. To hack a blockchain, all computers would need to be hacked simultaneously. As a result, many deem blockchain technology to be a safer way to carry out transactions. It is a decentralised way of recording information, distributed across a peer-to-peer network.

One of the first units of data to be traded via blockchain technology has been cryptocurrency, such as Bitcoin or Ethereum. And now, just as people can trade cryptocurrency through this technology, they can also trade images, videos and audio according to the same process.

Next, let’s talk about fungible and non-fungible: fungible items are interchangeable and not unique: think about any currency, like a dollar. One dollar is equivalent to the next - there is nothing special about one dollar versus the next. By contrast, a non-fungible item is unique and indivisible, like an original work of art. And in this context, a ‘token’ is a unit of data. This is why digital artworks are being referred to as non-fungible tokens or NFTs: it emphasises their uniqueness in the digital context.

However, rather than thinking that artworks sold as NFTs exist on a blockchain, it’s helpful to think of them as specific digital images, music or videos that have a specific code attached to them (imagine lines of code behind an image like in the Matrix). It is this code which exists on the blockchain, not the actual image.

Finally, an NFT is created, or ‘minted’, when it becomes part of a blockchain.

So what’s all the hype about? Why does this matter? Well, there are two important changes brought about by NFTs in the context of art: ownership and royalties. Ownership can now be attributed to a person (the buyer) via the code on the blockchain, and therefore provenance can be established: someone possessing an NFT possesses a one-of-a-kind item that no one else has. The second change is that within the lines of code embedded in the artwork, there can be an express requirement made that each time the artwork is sold, a percentage of this sale will be automatically sent to the creator of the artwork.

Your next questions might be: can’t someone just take a screenshot, or download an NFT and own it too? Doesn’t this negate the whole point of buying NFTs? This is known as the ‘alt + right click’ argument. But just as you can go to a gallery and take a photo of a painting or view sports on your television, it doesn’t mean that you actually own that painting or broadcast. The same goes for NFTs. Think of NFTs as the code which unlocks the path to the actual digital art; the owner of an NFT is the person who actually possesses the code, and therefore has the ability to sell the art.

Yet, the status of ownership can be difficult to police and there have been some abuses with people passing as owners of an NFT when they are not. Artists have to be constantly on their guard against such theft. What has also happened, and is definitely illegal, is the sale of an artist’s NFTs by unconnected individuals for their own profit. It’s fair to say that because this technology is relatively new, the copyright provisions surrounding the use of NFTs by non-owners is a bit murky.

2021 saw a massive surge in the popularity of NFTs, the first headline-grabbing news about NFT came when Beeple’s NFT “Everydays - the first 5000 days” was sold for $69 million at Christie’s first NFT auction, breaking all records and making him one of the richest living artists instantly. The shockwave of the pandemic and its unpredictability contributed significantly to the rise of NFTs over the last two years, launching them as a new class of digital asset, with much appeal for a new breed of tech investors.

Everydays: the First 5000 Days, by Beeple

Another fascinating phenomenon has been the development of AI generated NFTs as collections. Two of the best known examples of this are