A non-fungible token (NFT) is a non-interchangeable unit of data stored on a blockchain, a form of digital ledger, that can be sold and traded. Types of NFT data units may be associated with digital files such as photos, videos, and audio. Because each token is uniquely identifiable, NFTs differ from blockchain cryptocurrencies, such as Bitcoin.
NFT ledgers claim to provide a public certificate of authenticity or proof of ownership, but the legal rights conveyed by an NFT can be uncertain. NFTs do not restrict the sharing or copying of the underlying digital files, do not necessarily convey the copyright of the digital files, and do not prevent the creation of NFTs with identical associated files.
NFTs have been used as a speculative asset, and they have drawn increasing criticism for the energy cost and carbon footprint associated with validating blockchain transactions as well as their frequent use in art scams and claimed structure of the NFT market to be a ponzi scheme.
An NFT is a unit of data stored on a digital ledger, called a blockchain, which can be sold and traded. The NFT can be associated with a particular digital or physical asset (such as a file or a physical object) and a license to use the asset for a specified purpose. An NFT (and, if applicable, the associated license to use, copy or display the underlying asset) can be traded and sold on digital markets. The extralegal nature of NFT trading usually results in an informal exchange of ownership over the asset that has no legal basis for enforcement, often conferring little more than use as a status symbol.
NFTs function like cryptographic tokens, but, unlike cryptocurrencies such as Bitcoin or Ethereum, NFTs are not mutually interchangeable, hence not fungible. While all bitcoins are equal, each NFT may represent a different underlying asset and thus may have a different value. NFTs are created when blockchains string records of cryptographic hash, a set of characters identifying a set of data, onto previous records therefore creating a chain of identifiable data blocks. This cryptographic transaction process ensures the authentication of each digital file by providing a digital signature that is used to track NFT ownership. However, data links that point to details such as where the art is stored can be affected by link rot.
Ownership of an NFT does not inherently grant copyright or intellectual property rights to the digital asset a token represents. 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. In that sense, an NFT is merely a proof of ownership that is separate from a copyright. According to legal scholar Rebecca Tushnet, “In one sense, the purchaser acquires whatever the art world thinks they have acquired. They definitely do not own the copyright to the underlying work unless it is explicitly transferred.”
Early history (2014–2017)
The first known “NFT”, Quantum, was created by Kevin McCoy and Anil Dash in May 2014, consisting of a video clip made by McCoy’s wife, Jennifer. McCoy registered the video on the Namecoin blockchain and sold it to Dash for $4, during a live presentation for the Seven on Seven conference at the New Museum in New York City. McCoy and Dash referred to the technology as “monetized graphics”. A non-fungible, tradable blockchain marker was explicitly linked to a work of art, via on-chain metadata (enabled by Namecoin). This is in contrast to the multi-unit, fungible, metadata-less “colored coins” of other blockchains and Counterparty.
In October 2015, the first NFT project, Etheria, was launched and demonstrated at DEVCON 1 in London, Ethereum’s first developer conference, three months after the launch of the Ethereum blockchain. Most of Etheria’s 457 purchasable and tradable hexagonal tiles went unsold for more than five years until March 13, 2021, when renewed interest in NFTs sparked a buying frenzy. Within 24 hours, all tiles of the current version and a prior version, each hardcoded to 1 ETH ($0.43 at the time of launch), were sold for a total of $1.4 million.
The term “NFT” only gained currency with the ERC-721 standard, first proposed in 2017 via the Ethereum GitHub, following the launch of various NFT projects that year. The standard coincided with the launch of several NFT projects, including Curio Cards, CryptoPunks (a project to trade unique cartoon characters, released by the American studio Larva Labs on the Ethereum blockchain) and rare Pepe trading cards.
Increased public awareness (2017–present)
The 2017 online game CryptoKitties was monetized by selling tradable cat NFTs, and its success brought some public attention to NFTs.
The NFT market experienced rapid growth during 2020, with its value tripling to $250 million. In the first three months of 2021, more than $200 million were spent on NFTs.
In the early months of 2021, interest in NFTs increased after a number of high-profile sales and art auctions.
Commonly associated files
NFTs have been used as a means of exchanging digital tokens that link to a digital file. Ownership of an NFT is often associated with a license to use the underlying digital asset, but generally does not confer copyright to the buyer. Some agreements only grant a license for personal, non-commercial use, while other licenses also allow commercial use of the underlying digital asset.
Digital art is a common use case for NFTs. High-profile auctions of NFTs linked to digital art have received considerable public attention, with the work “Merge” by artist Pak being the most expensive NFT with a price of $91.8 million and Everydays: the First 5000 Days, by artist Mike Winkelmann (known professionally as Beeple), the second most expensive auction at US$69.3 million in 2021.
Some NFT collections, including EtherRocks and CryptoPunks are examples of generative art, where many different images can be created by assembling a selection of simple picture components in different combinations.
In March 2021, the blockchain company Injective Protocol bought a $95,000 original screen print entitled Morons (White) from English graffiti artist Banksy, and filmed somebody burning it with a cigarette lighter, with the video being minted and sold as an NFT. The person who destroyed the artwork, who called themselves “Burnt Banksy”, described the act as a way to transfer a physical work of art to the NFT space.
American curator and art historian Tina Rivers Ryan, who specializes in digital works, has said that art museums are widely not convinced that NFTs represent “lasting cultural relevance.” Ryan has compared NFTs to the net art fad before the dot-com bubble. There is also the issue with counterfeiting NFTs since there is no central authority to certify a certain NFT is the original, unique or able to be moved cross platform.
Main article: Blockchain game
NFTs can be used to represent in-game assets, such as digital plots of land, which some commentators describe as being controlled “by the user” instead of the game develope by allowing assets to be traded on third-party marketplaces without permission from the game developer.
CryptoKitties was an early successful blockchain online game where players adopt and trade virtual cats. The monetization of NFTs within the game raised a $12.5 million investment, with some kitties selling for over $100,000 each. Following its success, CryptoKitties was added to the ERC-721 standard, which was created in January 2018 (and finalized in June). A similar NFT-based online game, Axie Infinity, was launched in March 2018.
In October 2021, developer Valve banned applications that use blockchain technology or NFTs to exchange value or game artifacts from their Steam platform.
In December 2021, Ubisoft announced Ubisoft Quartz, “an NFT initiative which allows people to buy artificially scarce digital items using cryptocurrency”. The announcement has raised significant criticism, with a dislike ratio of 96% over the YouTube announcement video, which has since been unlisted. Some Ubisoft developers have also raised their concern over the announcement. The Game Developers Conference’s 2022 annual report stated that 70 percent of developers surveyed said their studios had no interest in integrating NFTs or cryptocurrency into their games.
Some luxury brands have minted NFTs for online video game cosmetics. In November 2021, Morgan Stanley published a note suggesting that this use could become a multi-billion dollar market by 2030.
In February 2021, NFTs reportedly generated around $25 million within the music industry, with artists selling artwork and music as NFT tokens. On February 28, 2021, electronic dance musician 3LAU sold a collection of 33 NFTs for a total of $11.7 million to commemorate the three-year anniversary of his Ultraviolet album. On March 3, 2021, an NFT was made to promote the Kings of Leon album When You See Yourself. Other musicians that have used NFTs include American rapper Lil Pump, Grimes, visual artist Shepard Fairey in collaboration with record producer Mike Dean, and rapper Eminem.
In May 2018, 20th Century Fox partnered with Atom Tickets and released limited-edition Deadpool 2 digital posters to promote the film. They were available from OpenSea and the GFT exchange. In March 2021 Adam Benzine’s 2015 documentary Claude Lanzmann: Spectres of the Shoah became the first motion picture and documentary film to be auctioned as an NFT.
Other projects in the film industry using NFTs include the announcement that an exclusive NFT artwork collection will be released for Godzilla vs. Kong and director Kevin Smith announcing in April 2021 that his forthcoming horror movie Killroy Was Here would be released as an NFT. The 2021 film Zero Contact, directed by Rick Dugdale and starring Anthony Hopkins, was also released as an NFT.
In April 2021, an NFT associated with the score of the movie Triumph, composed by Gregg Leonard, was minted as the first NFT for a feature film score.
In November 2021, film director Quentin Tarantino released seven NFTs based on uncut scenes of Pulp Fiction. Miramax subsequently filed a lawsuit claiming that their film rights were violated.
Other associated files
A number of internet memes have been associated with NFTs, which were minted and sold by their creators or by their subjects. Examples include Doge, an image of a Shiba Inu dog, as well as Charlie Bit My Finger, Nyan Cat and Disaster Girl.
Some virtual worlds, often marketed as metaverses, have incorporated NFTs as a means of trading virtual items and virtual real estate.
Some pornographic works have been sold as NFTs, though hostility from NFT marketplaces towards pornographic material has presented significant drawbacks for creators.
In May 2021, UC Berkeley announced that it would be auctioning NFTs for the patent disclosures for two Nobel Prize-winning inventions: CRISPR-Cas9 gene editing and cancer immunotherapy. The university will continue to own the patents for these inventions, as the NFTs relate only to the university patent disclosure form, an internal form used by the university for researchers to disclose inventions.
The first credited political protest NFT (“Destruction of Nazi Monument Symbolizing Contemporary Lithuania”) was a video filmed by Professor Stanislovas Tomas on April 8, 2019, and minted on March 29, 2021. In the video, Tomas uses a sledgehammer to destroy a state-sponsored Lithuanian plaque located on the Lithuanian Academy of Sciences honoring Nazi war criminal Jonas Noreika.
In 2020, there was a release of the NBA TopShot project which allowed for purchasing NFTs that linked to basketball highlights. The project was built on top of the Flow blockchain.
NFTs representing certain digital collectables and artworks have seen considerable use as a speculative asset. The NFT buying surge was called an economic bubble by experts, who also compared it to the Dot-com bubble. In March 2021 Mike Winkelmann called NFTs an “irrational exuberance bubble”. By mid-April 2021, demand appeared to have substantially subsided, causing prices to fall significantly.
NFTs, as with other blockchain securities and traditional art sales, can potentially be utilized for money laundering. Auction platforms for NFT sales may potentially face regulatory pressure for compliance with existing anti-money laundering legislation. Gou Wenjun, the director of the Anti-Money Laundering Monitoring and Analysis Centre for the People’s Bank of China, has expressed that NFTs could “easily become money-laundering tools.” Gou elaborated that there is an increasing unlawful exploitation of various new cryptographic technologies, and that illicit actors often self-identify as innovators of the financial technology sector.
A February 2022 study from the United States Treasury assessed that there was “some evidence of money laundering risk in the high-value art market,” including through “the emerging digital art market, such as the use of non-fungible tokens (NFTs).”The study considered how NFT transactions may be a simpler option for laundering money through art by avoiding the transportation or insurance complications in trading physical art. Several NFT exchanges were labeled as possible virtual asset service providers that may be subject to Financial Crimes Enforcement Network regulations.
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.
Tickets, for any type of event, have been suggested for sale as NFTs. Such proposals would enable event organizers or performers to garner royalties on resales.
Some private online communities have been formed around the confirmed ownership of certain NFT releases.
In February 2022 a woman bought a five-bedroom, three-and-half-bath house near Tampa Bay, Florida for 210 Ether, the equivalent of $653,000 at the time of the sale in an auction. The sale transferred ownership of the house from the seller to a limited liability company, after the auction finished ownership of the LLC was automatically transferred to the winner and the seller received the crypto payment in her digital wallet.
Standards in blockchains
Specific token standards have been created to support various blockchain use-cases. Ethereum was the first blockchain to support NFTs with its ERC-721 standard and is currently the most widely used. Many other blockchains have added or plan to add support for NFTs with their growing popularity.
ERC-721 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 create new ERC-721-compliant contracts by copying from a reference implementation. 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.
The ERC-1155 standard offers “semi-fungibility”, as well as providing an analogue to 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. The assets under the same class are interchangeable, and the user can transfer any amount of assets to others.
Because Ethereum currently has high transaction fees (known as gas fees), layer 2 solutions for Ethereum have emerged which also supports NFTs:
Immutable X – Immutable X is a layer 2 protocol for Ethereum designed specifically for NFTs, utilizing ZK rollups to eliminate gas fees for transactions.
Polygon – Formerly known as the Matic Network, Polygon is a proof-of-stake blockchain which is supported by major NFT marketplaces such as OpenSea.
Bitcoin Cash – Bitcoin Cash supports NFTs and powers the Juungle NFT marketplace.
Cardano – Cardano introduced native tokens that enable the creation of NFTs without smart contracts with its March 2021 update. Cardano NFT marketplaces include CNFT and Theos.
Flow – The Flow blockchain, which uses a proof of stake consensus model, supports NFTs. CryptoKitties plans to switch from Ethereum to Flow in the future.
GoChain – GoChain, a blockchain which bills itself as ‘eco-friendly’, powers the Zeromint NFT marketplace and the VeVe app.
Solana – The Solana blockchain also supports non-fungible tokens.
Tezos – Tezos is a blockchain network that operates on proof of stake and supports the sale of NFT art.
Issues and criticisms
NFTs involving digital art generally do not store the associated artwork file on the blockchain due to its size. The token functions in a way more similar to a certificate of ownership, with a web address pointing to the piece of art in question, making the art still subject to link rot. Because NFTs are functionally separate from the underlying artworks, anybody can easily save a copy of an NFT’s image, popularly through a right click. NFT supporters disparage this duplication of NFT artwork as a “right-clicker mentality”, with one collector quoted by Vice comparing the value of a purchased NFT to that of a status symbol “to show off that they can afford to pay that much”.
The “right-clicker mentality” phrase spread virally after its introduction, particularly among those that were critical of the NFT marketplace who used the term to flaunt the ability to capture digital art backed by NFT with ease. This criticism was promoted by Australian programmer Geoffrey Huntley who created “The NFT Bay”, modeled after The Pirate Bay. The NFT Bay advertised a torrent file purported to contain 19 terabytes of digital art NFT images. Huntley compared his work to an art project from Pauline Pantsdown, and hoped the site would help educate users on what NFTs are and are not.
NFT purchases and sales are enmeshed in a controversy regarding the high energy usage, and consequent greenhouse gas emissions, associated with blockchain transactions. A major aspect of this is the proof-of-work protocol required to regulate and verify blockchain transactions on networks such as Ethereum, which consumes a large amount of electricity; estimating the carbon footprint of a given NFT transaction involves a variety of assumptions about the manner in which that transaction is set up on the blockchain, the economic behavior of blockchain miners (and the energy demands of their mining equipment), as well as the amount of renewable energy being used on these networks. There are also conceptual questions, such as whether the carbon footprint estimate for an NFT purchase should incorporate some portion of the ongoing energy demand of the underlying network, or just the marginal impact of that particular purchase. An analogy that’s been described for this is the footprint associated with an additional passenger on a given airline flight.
Some more recent NFT technologies use alternative validation protocols, such as proof of stake, that have much less energy usage for a given validation cycle. Other approaches to reducing electricity include the use of off-chain transactions as part of minting an NFT. A number of NFT art sites are also looking to address these concerns, and some are moving to using technologies and protocols with lower associated footprints. Others now allow the option of buying carbon offsets when making NFT purchases, although the environmental benefits of this have been questioned. In some instances, NFT artists have decided against selling some of their own work to limit carbon emission contributions.
Artist and buyer fees
Sales platforms charge artists and buyers fees for minting, listing, claiming and secondary sales. Analysis of NFT markets in March 2021, in the immediate aftermath of Beeple’s “Everydays: the First 5000 Days” selling for US$69.3 million, found that most NFT artworks were selling for less than $200, with a third selling for less than $100. Those selling below $100 were paying network usage fees between 72.5 and 157.5 per cent of that amount, meaning that such artists were on average paying more money in fees than they were making in sales.
Plagiarism and fraud
There have been cases of artists having their work sold by others as an NFT, without permission. After the artist Qing Han died in 2020, her identity was assumed by a fraudster and a number of her works became available for purchase as NFTs. Similarly, a seller posing as Banksy succeeded in selling an NFT supposedly made by the artist for $336,000 in 2021; with the seller in this case refunding the money after the case drew media attention.
The general ease of creating plagiarized NFT works, along with the anonymity of minting NFTs, has made it harder to pursue legal action against NFT plagiarists.
A process known as “sleepminting” can also allow a fraudster to mint an NFT in an artist’s wallet and transfer it back to their own account without the artist becoming aware. This allowed a white hat hacker to mint a fraudulent NFT that had seemingly originated from the wallet of the artist Beeple.
Plagiarism concerns have led the art website DeviantArt to create a bot that searches and compares user art to art on popular NFT marketplaces. If the bot finds art that is similar, it warns the user and instructs the user how they can contact NFT marketplaces to request that they take down their plagiarized work.
Some NFT marketplaces have responded to cases of plagiarism by creating “takedown teams” to respond to artist complaints. The NFT marketplace OpenSea has rules against plagiarism and deepfakes (which it labels as non-consensual intimate imagery). Some artists have criticized OpenSea’s current efforts to deal to plagiarism saying they are slow to respond to takedown requests and are subject to support scams from users who claim to be representatives from the platform. Other argue that there is currently a lack of market incentive for NFT marketplaces to crack down on plagiarism.
The BBC reported a case of insider trading when an employee of the NFT marketplace OpenSea bought specific NFTs before they were launched, with the prior knowledge they would be promoted on the company’s home page. NFT trading is an unregulated market that has no legal recourse for such abuses.
In their announcement of developing NFT support for the graphics editor Photoshop, Adobe proposed creating an InterPlanetary File System database as an alternative means of establishing authenticity for digital works.
The price paid for specific NFTs and sales volume of a particular author may be artificially inflated due to wash trading, which is prevalent due to a lack of government regulation on NFTs.
On 13 February, 2022 the tax authority in the United Kingdom seized three non-fungible tokens (NFTs) for the first time as part of an investigation into an attempt to defraud it of £1.4 Million ($1.89 million).
In January 2022, it was reported that some NFTs were being used to mine user IP addresses by the seller.
Pyramid/Ponzi scheme claims
The structure of the NFT market has been seen by some as being similar to a pyramid or ponzi scheme, where early adopters profit at the expense of those buying in later. Financial theorist William J. Bernstein has compared the NFT market to 17th century tulip mania, saying how any speculative bubble requires a technological advance for people to “get excited about”, with part of that enthusiasm coming from the extreme predictions being made about the product.
In popular culture
A comedy skit on the March 27, 2021 episode of Saturday Night Live featured characters explaining NFTs through rap to US Treasury Secretary Janet Yellen, as played by Kate McKinnon.
The 2021 Paramount+ television film South Park: Post Covid: The Return of Covid featured an adult version of Butters Stotch in his Professor Chaos persona tricking people into purchasing NFTs in 2061. Although the film portrays them as a poor investment, he has grown so adept at selling them that he is locked in a mental institution.
“Non-fungible_token” Wikipedia, Wikimedia Foundation, n.d.