A non-fungible token, better known by the abbreviation NFT, is a unique and non-interchangeable unit of data stored on a digital ledger. When we speak about digital ledgers, we are implying the concept of blockchain, a distributed database that is shared among the nodes of a computer network that stores information electronically in digital format. NFTs on blockchains have recently emerged as a means of certifying the originality of digital properties.
NFTs can be used to represent easily reproducible items such as photos, videos, audio, artworks and other types of digital files as unique items. Exploiting the analogous process to a certificate of authenticity, NFTs use blockchain technology to establish a verified and public proof of ownership. Copies of the original file are not restricted to the owner of the NFT and can be copied and shared like any file. The lack of interchangeability, the so-called fungibility, distinguishes NFTs from blockchain cryptocurrencies, such as Bitcoin. NFTs are "minted," then sold, just like Bitcoin. The difference, though, is that Bitcoin is "fungible." If you swap Bitcoin with someone, you both still have the same asset: some amount of Bitcoin.
Although NFTs represent little more than code, the codes to a buyer have ascribed value when considering its comparative scarcity as a digital object. It well secures selling prices of these IP-related products that may have seemed unthinkable for non-fungible virtual assets. Full-history tradability, deep liquidity, and convenient interoperability enable NFT to become a promising intellectual property IP-protection solution.
This dynamic creates a simple, but powerful, change in how digital artworks: it makes digital art exclusive, or better, the ownership of digital art pieces exclusive. Once minted on the Ethereum blockchain, the NFT is represented on a public ledger that can't be changed. By owning the token, you are proven the owner of the art piece. There is nothing stopping someone online from viewing, copying, and sharing a digital art file, but thanks to NFTs, they cannot fake possession of the art. NFTs make it possible to have exclusive ownership of digital art, something that was previously impossible. In some cases, artists may structure the NFTs tied to their work in unique ways. They may retain rights to reproduce the image. Furthermore, the creator can also earn royalties each time of a successful trade on any NFT market or by peer-to-peer exchanging.
Think of an NFT like the documents that come with owning an original Van Gogh. Art experts verify your painting is original: they verify your ownership and provide documentation. As a result, the world accepts that you own an original Van Gogh. The only big difference here is that NFTs make it possible to verify ownership of digital assets. There exist plenty of fraudulent Van Gogh, but given the limited supply of his works, and the multitude of experts evaluating paintings, it is possible to prove that an individual owns a legitimate painting. It used to be impossible to do this for digital art. You could create digital art, and everyone would know you made it, but anyone could reproduce it and share it with the entire world. In a scenario in which you can duplicate art with perfect fidelity indefinitely, the artist has some legal recourse to protect against how reproductions are used in commercial ventures. Before NFTs, there was no widely accepted way to determine the "original" piece of digital artwork. There was also no widely accepted way to prove or transfer its ownership. NFTs have changed that, and with it, they're changing the world of art.
As a mechanism, the potential that NFTs have to shift the way that we establish ownership has no bounds. With this ability to mint ownership of digital assets, NFTs have transformed how artists and creators make a living while changing how we buy, sell, and relate to art. For professional artists, NFTs have opened the opportunity to be engaged in a new digital environment from which they can greatly benefit. They enable creators to earn more than they would outside the restrictions of the fine art world. Today, creators typically only get paid when they initially sell a piece of artwork; should the artwork's new owner sell it to someone else, they pocket any gains made and the artist gets nothing. However, NFTs use smart contracts to verify ownership and terms. Those terms can include paying the original artist royalties every time the artwork changes hands. Any artist can mint an NFT for a piece of work. They set their prices on easy-to-use online NFT marketplaces. They control the promotion of their work through social media, and they keep all the earnings outside of basic transaction fees for selling an NFT. For NFTs that pay royalties, the functionality is hard-coded into the smart contract on the blockchain. Once you set up the smart contract on the backend, the process is done automatically and the artwork creator can now benefit and earn royalties whenever a transaction with their artwork is completed. There are no complicated payment platforms, invoicing, or logistics that artists need to manage.
NFTs contain highly trustworthy documentation of their history and origin and, one important feature coded within the metadata via smart contract ensures that the original creator receives royalties from the secondary sale of the artwork. A new creator economy is rising and taking advantage of the fact that creators have to possibility to restrict ownership of their content to the platforms they use to publish or get exposure. This mindset is getting a lot of traction, as ownership rights can now be embedded into the content itself. This new digital system of royalties is very powerful and it guarantees an automatic process of funds distribution for every new sale transaction. A percentage fee of that transaction will be remitted instantaneous to the creator’s address which is coded in the token’s metadata and this process cannot be modified.
There are benefits for collectors, too. Unlike physical art, it is easy to store and protect NFTs, since ownership is verified and secured on the blockchain. It also is simple to transfer an asset electronically between platforms and devices.
There is no doubt NFTs are having a moment, but their long-term value is still unclear. While NFTs enable digital art ownership on the blockchain, digital art itself has not changed. Looking at a print of a physical painting is different from the experience of seeing the original. The main difference is that before the introduction of NFTs and blockchain technology, it was impossible to assign value to works of purely digital means.
The first NFT project was launched in 2015 on the Ethereum blockchain, and interest grew with the rise of interest in cryptocurrencies. Interest and the total monetary value of NFTs grew significantly in 2021, with sales of NFTs exceeding $2 billion during the first quarter of the year. A niche artistic movement until early 2020, the crypto art market went parabolic in late 2020, also because of the COVID pandemic and the consequent digitalization of our lives, attracting the attention of major mass media and major auction houses. The market for non-fungible tokens (NFTs), transferrable and unique digital assets on public blockchains, has received widespread attention and experienced strong growth since early 2021.
Besides the common technological infrastructure, NFT marketplaces use cryptocurrency, most commonly Ether (ETH), as a payment and trading option, evidencing a close relationship between the cryptocurrency market and the NFT market. If users typically require cryptocurrency to buy NFTs, it is reasonable to assume that the cryptocurrency market has an impact on the smaller NFT market. Anyone active in the NFT market recognizes the strong overlap between participants in these two markets.
To recall some notable examples of NFTs transactions of the last period:
Everydays: The First 5000 Days, by digital artist Beeple, was the first NFT sold at Christie’s on March 2021 for the record-breaking amount of 69M$ through the crypto art gallery MakersPlace;
The Fungible, by digital artist Pak, is an NFT collection sold in April 2021 at Sotheby’s in collaboration with crypto art gallery Nifty Gateway for almost 17M$;
Nine CryptoPunks from Larva Labs’ collection sold in May 2021 at Christie’s for 16.9M$;
Twitter CEO Jack Dorsey auctioned off his first-ever tweet for $2.9 million (Valuables, 2021).
To sum up, the concept of Non-Fungible Tokens is empowering artists and content creators, giving them the most needed tools to have control over their artworks in a digital era. Only by implementing this innovation model they can control scarcity, avoid counterfeiting, enjoy copyright protection and create new revenue streams. The benefits provided by this innovation architecture within the sphere of digital assets is enabling and allowing all artists across the industry, to be introduced to a global audience, where they can sell their artwork without the need of any other intermediaries. Like most of the assets, supply and demand are the key market drivers for price discovery. Due to the scarce nature of NFTs and the high demand from collectors and investors, people are often prepared to pay a lot of money for them. It remains to be seen how fast NFTs can get beyond the hype that we are experiencing today. NFTs are still in an early stage of development and acknowledgement, but the evolution and adoption of this concept may be the fastest cycle we have encountered so far, for any digital asset. Their utility will increase as digital experiences are built around them, including marketplaces, social networks, showcases, games, and virtual worlds. It’s also likely that new consumer-facing crypto products will emerge that can pair with NFTs building new viable business models. Accelerated by the COVID-19 pandemic, digital transformation is turning to be one of the biggest opportunities for digital assets adoption. It is an open field for innovation and this environment keeps on surprising by breaking new boundaries with an evolution speed rarely seen in any other industry.
Writer: Giacomo Ferri