Non-fungible token (NFT)

A non-fungible token (NFT) is a unique digital asset that serves as a certificate of ownership for a real-world investment, such as artwork, music, videos, or digital images. NFTs are recorded as data on a digital ledger known as a blockchain. They serve as proof that an object is an original or a one-of-a-kind work. The concept of non-fungible tokens was first developed in the mid-2010s, but they increased in popularity in the early 2020s as more people began investing in digital artwork. In 2020 the NFT market was estimated to be worth about $250 million, with the most expensive sale a December 2021 transaction that netted a digital artist $91.8 million. By the end of 2021 the value of the NFT market had surged to an estimated $15.7 billion. Over subsequent years, as with other markets, analysts noted fluctuations in the value of the NFT market, but many continued to note their innovative impact, particularly on the concept of proof of ownership, regardless.

Background

In economics, the word fungible refers to a commodity or an asset that can be exchanged for another commodity or asset of equal value. The term has been used since the seventeenth century and has it origins in the Latin word fungi, meaning “to perform.” A prime example of a fungible asset is currency. A one-dollar bill can be exchanged for another one-dollar bill or broken down into a combination of coins, such as four quarters, ten dimes, etc. A non-fungible asset is unique in that it cannot be exchanged for a different asset. For example, one house cannot be exchanged for another, because each house would have distinct qualities that separate it, even if the two houses have a relatively equal monetary value.

A blockchain is a digital database that stores electronic information on a computer or a network of computers. The information is stored in digital chunks known as “blocks.” When a block is filled with data, it is attached or “chained” to another block. As more blocks are filled, they are, in turn, chained to the previous block of data. This creates a chronological chain of digital information that is easily identified and cannot be broken. Each block is marked by a timestamp and a mathematical algorithm that defines it as unique.

Blockchains are typically stored on a decentralized network of many computers. Once information has been authenticated and stored on a chain, each computer can access that information, but changing it is impossible without the cooperation of a majority of users. An attempt to alter a specific block would be immediately detected and corrected by cross-referencing the previous data stored on other computers in the network.

Overview

The concept of the non-fungible token was invented in 2014 by digital artist Kevin McCoy and tech entrepreneur Anil Dash. McCoy’s artwork was often copied and shared online without attribution or compensation, and Dash was doing consulting for media companies looking to find new ways to copyright artwork. Together, they used then-new blockchain technology to develop digital ownership of a video clip made by McCoy’s wife. They called their idea monetized graphics.

The first widespread use of NFTs occurred in 2015 when the Ethereum blockchain developed standards to record and store digital tokens. Two years later, Ethereum hosted a video game called Cryptokitties, in which users could buy and collect their own virtual cats. The ownership of the cats was authenticated by unique NFTs stored on the blockchain. The effort proved wildly successful, generating $20 million just weeks after launch. Some users spent up to $100,000 for digital ownership of their own cat. From 2017 to 2020, users spent about $175 million on NFTs; in 2020 alone, that figure had skyrocketed to $250 million. The NFT market saw even bigger growth throughout 2021, reaching an estimated value of $15.7 billion by the end of that year. At that time, most NFTs were stored on Ethereum, but several other blockchain technologies had been making inroads in the market.

Non-fungible tokens act as a unique “signature,” designating that an object is authentic. The NFT does not assign a specific value to an object; it only designates authenticity. The object’s value, especially in the case of artwork, is still determined by scarcity, market value, or interest by collectors. Buying an NFT is similar to an art collector purchasing a painting and hanging it in their home. It assures the buyer of the status of owning the original artwork or object but does not entitle them to royalties. The creator of an artwork can still receive royalties for copies of their work. In the case of digital art, people can still find a copy of a work online and download that image as often as they want. However, they are only in possession of a copy; the holder of the NFT has the “bragging rights” of owning the real thing.

NFTs have been sold for objects as diverse as real estate, sports memorabilia, video clips of famous NBA highlights, and even sneakers. In March 2021, Canadian singer Grimes sold a collection of artwork and music videos for a total of $6 million. Later that month, Jack Dorsey, the CEO of Twitter, sold an NFT of the first-ever tweet on the social media site for $2.9 million. The tweet, which read “just setting up my twttr,” was first posted in March 2006.

Digital artwork remained the most popular objects to be bought and sold via non-fungible tokens throughout the early 2020s. In 2017 a pair of software engineers created a program that generated ten thousand pixelated images of unique characters they called CryptoPunks. The characters were inspired by England’s punk rock scene and numerous futuristic cyberpunk films. In 2021, nine of the CryptoPunk images were sold as NFTs at the famed auction house Christie’s in New York City. Two of the images sold for more than $7 million, while two others went for more than $1 million. 2021 saw the release of other collections of digital artwork, including the Bored Ape Yacht Club series.

By far the largest NFT sale at that time was a collection of thirteen years of work by digital artist Mike Winkelmann, known in the art world as Beeple. Winkelmann began designing digital art in 2007, and since that time, created an image a day as a way to improve his skill. In March 2021, he sold that collection, titled Everydays: The First 5000 Days, as an NFT at Christie’s for $69.3 million. The sale was not only the largest sale of digital art in history up to that point but the fourth highest amount ever for the work of a living artist. In December 2021 this record was broken with a transaction that netted a digital artist $91.8 million, the highest amount paid for an NFT up to that point.

Donald Trump's entry into the NFT market in 2022, a time when the market had seen decreases, proved notable for its high-profile introduction of politics. His series of digital trading cards continued to make headlines and draw both sales and criticism, particularly in the lead-up to the 2024 election, in which he ultimately won the presidency once more.

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