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What is a Non-Fungible Token?

If you’re confused about what a non-fungible token (NFT) is, you’re not alone. In March this year, Twitter founder Jack Dorsey decided to sell one of his iconic tweets from the past as a non-fungible token.

After bidding was finished it finally sold for nearly $3 million. It’s an area that has created considerable global interest among those who create digital assets of all kinds, particularly artwork, and has given rise to online sites where items can be auctioned.

Non-Fungible Token, A Definition

Fungibility is a pretty standard economic term, and it refers to the ability to interchange a good or asset for another of a like-kind. Money is a key example of something fungible because you can exchange a pound coin for 50p, a couple of twenties and a 10 pence piece.

Non-fungible means you have an asset or product that is not interchangeable. For example, you can exchange one car for another but most likely you will pay money for your vehicle, which is a non-fungible exchange. Fuel, on the other hand, is fungible as long as the car can run on it.

A non-fungible token is designed to be able to sell digital products. A unit of data is stored on a blockchain ledger and demonstrates ownership of the digital product. Tokens can be used, for example, to sell unique digital assets such as artworks or, as in the case of the Jack Dorsey tweet, a simple online quote.

Why Are Non-Fungible Tokens Becoming So Popular?

If you have an original painting such as Van Gough’s Sunflowers, it is one of a kind. Yes, it can be reproduced but the original is the asset that has all the substantial value. If you own the painting you have something worth millions. If you own a print, it can only ever be worth a few pounds.

Digital artworks and other products (everything from videos and memes to software and, yes, even a famous Tweet) have a problem in that they can easily be reproduced by other parties. If you put your painting online or want to offer exclusivity for a piece of software you developed, someone can come along and copy it, print it out, use it and even sell it to other people.

With NFTs, specific online works can essentially be given a digital certificate to show that they are the original. Theoretically, the owner can then buy and sell with complete confidence to the full value. Similar to cryptocurrency, this record is stored purely online and is maintained by thousands of computers around the world called the blockchain which is supposed to be highly secure.

If It Can Still Be Copied, Why Are People Spending Millions?

NFTs have been compared to online trading cards. The digital asset can still be copied and shared, people can still find it if they look hard enough and use it as if they alone owned it. So what’s the point of buying the original?

Firstly, the original is legally owned by the buyer. There may be certain stipulations in the contract for the token such as the artist retaining some or all of the copyright and earning a cut if the token is sold on for a profit, but the new owner generally can sell their investment and make a profit.

The truth is that there are some mixed views on NFTs. There have been some high profile sales over the last couple of years but there are still plenty of detractors who believe this is a bubble that will soon burst.
Mike Winkelmann, better known as digital artist Beeple, had been selling prints for years but most went on sale for no more than $100. In March 2021, he put his digital artwork, Everydays – The First 500 Days, up for sale at Christie’s as an NFT and it went for a staggering $69 million.

For those thinking about creating artworks (as many now are) and offering NFTs, it should be noted that Winkelmann had several advantages, not least that he is very well-known and has some 2.5 million followers online.

Since the furore over some mind-boggling sales earlier in the year, everyone from small artists to major investors and brands has been trying to get into NFTs. Old memes and images that have gone viral on the internet over the years have suddenly become highly prized.

One example, quoted by The Guardian recently, was the iconic image of Disaster Girl, an image of a child called Zoe Roth pictured smiling in front of a burning home, one of the earliest internet memes. This year, Roth, now in her 20s, sold the NFT for the image for £341,000.

Should I Invest in NFTs?

The explosion at the beginning of the year is beginning to wane according to some. There are experts on both sides of the divide who alternately believe that NFTs are here to stay and those that think it’s a fad that will be done and dusted over the next few years. As with any investment, of course, the key is in how the NFT you buy is going to rise in value over time. We don’t yet know if these assets will retain their value in 5, 10 or 15 years time.

Can I Sell My Artwork as NFTs?

The main concern for many struggling digital artists, of course, is whether they can make a living out of NFTs. For the vast majority, the answer is probably no but it all depends on what you want to earn. The heady heights of a Christie’s auction and a multi-million-pound sale are beyond most of us.

As you might expect, there is an increasing number of NFT auction sites appearing on the internet. These include OpenSea and SuperRare, sites that offer unique digital artworks and bring buyers and sellers together.

The provision can vary from platform to platform and the quality is not always what one would expect for the asking price that the artist wants. In most cases NFTs are bought using a cryptocurrency called Ethereum (1 ether equates to about $2,500) and, in many instances, artists are asking for way over the odds and having difficulty making sales.

The Future of NFTs

British artist, Damien Hurst hit the news in July this year when he produced NFT artworks and also created his own cryptocurrency called simply ‘Currency’. There seems to be a real wild-west feel about this new approach to digital art and other assets and Hurst has come under some criticism for cynically exploiting the market.

While it’s volatile, there do seem to be some changes taking place that show NFTs could be here to stay and may even have a positive impact on the digital world. FinExtra reported in March how conservationist organisation Nature Seychelles was selling images through NFTs of endangered penguins to help raise money for the conservation. Tracking rhino habitats and preventing poaching has also been supported by raising money through NFTs.

There are certainly lots of questions to be answered about non-fungible tokens, not least legal ownership issues and the potential for scams. Their success or failure, however, will ultimately depend on whether they retain their value over time.

 

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