• Eirini Efstathiou

The NFT craze: A quest to define the substance behind the world’s “new art form”

The world has slowly been swept over by a “non-fungible token mania”. From brands like Gucci rolling out digital-only sneakers, to emerging artists like Beeple and Pak, the crypto art craze is only growing stronger. With the recent £50m digital artwork sale of Beeple through Christie’s Auction House making headlines for becoming the world’s third most expensive artwork to be sold by a living artist, many find themselves asking: What are NFTs? They soon discover that NFTs, despite their growing popularity, do not exist in the physical realm. Is crypto art just another crypto bubble?


Via dezeen (An example of 'furniture' NFTs by artist Andrés Reisinger)


What are NFTs?


Non-fungible tokens (NFTs) are blockchain-based tokens linked with digital assets. They are unique cryptographic assets which use blockchain technology, similar to that of Bitcoin as discussed here, to record ownership and validate authenticity. Put simply, NFTs allow owners to tokenise things such as art, collectibles, or even real estate, and they are all secured by the Ethereum blockchain. They can be used to represent ownership of any unique Ethereum-based asset, and the average NFT is estimated to be sold for around $975 (£708).


Although blockchain technology initially gained traction by supporting transactions of 'fungible' assets, such as Bitcoin and Ether, it has evolved to enable users to create and store other unique crypto assets, such as NFTs. In economics, fungible assets are interchangeable assets e.g., money. NFTs are “non-fungible” in that they are not interchangeable for other items; one NFT cannot be copy/pasted into existence, and it holds unique properties. As an example, an NFT ticket for an event could be traded on Ethereum marketplaces in exchange for another NFT, for example an art piece. Essentially, NFTs are unique digital assets which can be bought and sold like property, but do not have a tangible form.


NFTs first gained popularity back in 2017 through the game 'CryptoKitties', which allowed users to buy, collect, and 'breed' virtual cats. The game developers then moved to introduce NFTs as a way to allow gamers to win in-game items; tokenising them meant that gamers could transfer the tokens between different games, or even between themselves, through NFT blockchain marketplaces. The NFT market has reportedly grown to $250 million (£182m) since then.


Moving to NFT artwork, the artwork is tokenised by creating a digital certificate of ownership, which is what is bought and sold, and the token is then used as a certificate of originality. The reason why NFTs use Ethereum blockchain, which is different from that of Bitcoin, is because the Ethereum blockchain supports the ERC-721 token standard. The standard allows for the tokens to be transferred, shared through a public key, and also tracked on the chain.


Taking over the world


But what do NFTs look like? Here are some examples. Recent popular examples include the world’s first tweet, for which Twitter’s founder Jack Dorsey amassed bids worth $2.5m (£1.8m), the album of music group Kings of Leon, as well as artist Grimes selling videos for $6m (£4.4m). In February 2021, an animated gif of Nyan Cat sold for more than $500,000 (£363,000), as an NFT.


Summing up NFTs in practice, Packy McCormick, founder of business strategy newsletter Not Boring, stated: “Imagine buying an NFT skin from Prada, wearing it to a concert in Fortnite”. Drawing similarities with the current consumer market, assets which can be considered akin to NFTs and currently widely in use, are “filters” on Instagram or Snapchat. The futuristic aspect of NFTs is this idea of buying such a digital asset, and owning rights to it; a non-fungible intangible asset.


When placing value on NFTs, ambiguities arise as to where that value comes from. Similar to how the value of other crypto has been described, the value of NFTs is largely speculative. Value is determined by demand and how much an individual is willing to pay for it; how much is someone willing to pay for ownership of the animated gif of Nyan Cat? Paying for an NFT means the buyer pays for the right to transfer the token to their digital wallet and having the right to the original version of the digital file – similar to owning an original artwork, such as a painting or a sculpture.


And similar to paintings and sculptures, dupes can be created and sold as inexpensive copies. The ERC-721 token standard mentioned above allows for smart contracts to be created specific to NFTs, which can also in turn allow the content creators of the NFTs to earn a percentage from subsequent sales of their NFTs. Artist Beeple, who sold an NFT through Christies for a staggering £50m, described the NFT market as having “some froth”, mentioning that “some people are putting money into things that … are going to be worthless”. A lot of people, however, are signifying the bloom of the NFT market as similar to that of the Internet, and although the dot-com bubble did burst at some point, it did not deter people from continuing to use the Internet to this day.


The ‘green’ backlash


Along with the question of value, the major backlash of not just NFTs, but any kind of cryptocurrency, is the environmental impact. According to Forbes, the annual power consumption for Bitcoin mining alone equates to that of the whole of the Netherlands. In the case of NFTs, the Ethereum blockchain is used to store, track and maintain them, and even more alarmingly, one NFT transaction on the Ethereum blockchain can consume the equivalent of the daily energy consumed by two American households.


When selling NFTs, they go through a long process from being “minted” onto the blockchain, submitted to miners, mined, added onto the blockchain, and transferred to the buyer. When looking at numbers, every bid creates 23kg of CO2, every sale 51kg, and every transfer 30kg. That equates to a gasoline-powered car driving for 825km, and this is only for one NFT. There have been efforts to transform the Ethereum blockchain into an eco-friendlier one, while other emerging blockchains have launched in the crypto market and are advertised as a hedge against a continuous increase in the carbon footprint of the crypto community.


Regulation


As NFTs currently stand, they are still considered cryptocurrencies despite their unique features. Can NFTs therefore be protected by intellectual property laws? While the buyer of the NFT holds the digital certificate, which authenticates their claim of ownership to the asset and allows them to transfer or sell it, they are not entitled to all the rights that the content creator maintains. A distinction must therefore be drawn between ownership of an NFT as a unique token, and ownership of the content that such NFT may be associated with.


When it comes to art, as explained by Latham & Watkins partner Ghaith Mahmood, “the purchase of a piece of art does not transfer all copyright in such work to the buyer. [The buyer does not acquire] the underlying rights to reproduce, make derivative works of, or distribute copies of such painting”. This also applies to NFTs, with the caveat that when it comes to the digital tokens, it is easier to reproduce and sell copies of the same piece as a result of their digital nature. This, thus, makes it essential for buyers to set conditions to their NFT purchases and licences.


Turning to the rights of the content creators, a recent dispute over ownership of a ‘real estate NFT’ raised the questions of what rights creators have in cases where their work is tokenised without permission, and how rights and remedies can be enforced against NFT owners in violation of license terms and contractual restrictions. This points further to the growing adoption of ‘smart contracts’, while the lack of any ensuing dispute over NFTs, as of today, has further built anticipation as to how the courts will deal with them.


Conclusions


There is a clear trend and rise of the ‘cyberpunk culture’, with the continuing popularity of the crypto-economy, whether that is a large number of institutional investors recently making moves into Bitcoin, or NFTs selling for £50m. Similar to cryptocurrencies growing away from governmental ‘oversight’, crypto-art is seen as a permissionless medium for artists to plug their work, and freely express sensitive topics such as power, regulation, subculture, individualism and collective vulnerability.

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