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.