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A non-fungible token (NFT) is a financial security consisting of digital data stored in a blockchain, a form of distributed ledger. The ownership of an NFT is recorded in the blockchain, and can be transferred by the owner, allowing NFTs to be sold and traded. NFTs can be created by anybody, and require few or no coding skills to create. NFTs typically contain references to digital files such as photos, videos, and audio. Because NFTs are uniquely identifiable, they differ from cryptocurrencies, which are fungible. The market value of an NFT is associated with the digital file it references.

Proponents of NFTs claim that NFTs provide a public certificate of authenticity or proof of ownership, but the legal rights conveyed by an NFT can be uncertain. The ownership of an NFT as defined by the blockchain has no inherent legal meaning, and does not necessarily grant copyright, intellectual property rights, or other legal rights over its associated digital file. An NFT does not restrict the sharing or copying of its associated digital file, and does not prevent the creation of NFTs that reference identical files.

The NFT market grew dramatically from 2020–2021: the trading of NFTs in 2021 increased to more than $17 billion, up by 21,000% over 2020's total of $82 million. NFTs have been used as speculative investments, and they have drawn increasing criticism for the energy cost and carbon footprint associated with validating blockchain transactions as well as their frequent use in art scams. The NFT market has also been compared to an economic bubble or a Ponzi scheme. By May 2022, the NFT market was seen as beginning to collapse.

Characteristics

An NFT is a unit of data, stored on a type of digital ledger called a blockchain, which can be sold and traded. The NFT can be associated with a particular digital or physical asset including but not limited to, art, songs, and sport highlights and a license to use the asset for a specified purpose. An NFT (and, if applicable, the associated license to use, copy, or display the underlying asset) can be traded and sold on digital markets. The extralegal nature of NFT trading usually results in an informal exchange of ownership over the asset that has no legal basis for enforcement, and so often confers little more than use as a status symbol.

NFTs function like cryptographic tokens, but unlike cryptocurrencies such as Bitcoin or Ethereum, NFTs are not mutually interchangeable, and so are not fungible. (While all bitcoins are equal, each NFT may represent a different underlying asset and thus may have a different value.) NFTs are created when blockchains concatenate records containing cryptographic hashes—sets of characters that identify a set of data—onto previous records, creating a chain of identifiable data blocks. This cryptographic transaction process ensures the authentication of each digital file by providing a digital signature that tracks NFT ownership. Data links that are part of NFT records, that for example may point to details about where the associated art is stored, can be affected by link rot.

Copyright

Ownership of an NFT does not inherently grant copyright or intellectual property rights to the digital asset the NFT purports to represent. Someone may sell an NFT that represents their work, but the buyer will not necessarily receive copyright to that work, so the seller may create additional NFTs of the same work. So an NFT is merely proof of ownership separate from copyright. According to legal scholar Rebecca Tushnet, "In one sense, the purchaser acquires whatever the art world thinks they have acquired. They definitely do not own the copyright to the underlying work unless it is explicitly transferred."

History

The first known "NFT", Quantum, was created by Kevin McCoy and Anil Dash in May 2014. It consists of a video clip made by McCoy's wife, Jennifer. McCoy registered the video on the Namecoin blockchain and sold it to Dash for $4, during a live presentation for the Seven on Seven conference at the New Museum in New York City. McCoy and Dash referred to the technology as "monetized graphics". This explicitly linked a non-fungible, tradable blockchain marker to a work of art, via on-chain metadata (enabled by Namecoin). This is in contrast to the multi-unit, fungible, metadata-less "colored coins" of other blockchains and Counterparty.

In October 2015, the first NFT project, Etheria, was launched and demonstrated at DEVCON 1 in London, Ethereum's first developer conference, three months after the launch of the Ethereum blockchain. Most of Etheria's 457 purchasable and tradable hexagonal tiles went unsold for more than five years until March 13, 2021, when renewed interest in NFTs sparked a buying frenzy. Within 24 hours, all tiles of the current version and a prior version, each hardcoded to 1 ETH (US$0.43 at the time of launch), were sold for a total of US$1.4 million.

The term "NFT" only achieved wider usage with the ERC-721 standard, first proposed in 2017 via the Ethereum GitHub, following the launch of various NFT projects that year. The standard coincided with the launch of several NFT projects, including Curio Cards, CryptoPunks (a project to trade unique cartoon characters, released by the American studio Larva Labs on the Ethereum blockchain), and rare Pepe trading cards.

The 2017 online game CryptoKitties was made profitable by selling tradable cat NFTs, and its success brought public attention to NFTs.

The NFT market experienced rapid growth during 2020, with its value tripling to US$250 million. In the first three months of 2021, more than US$200 million were spent on NFTs.

In 2020, the U.S Patent and Trademark Office received three trademark applications for NFTs. In 2021, the number of trademark applications jumped to more than 1200. In January 2022, the U.S. Patent and Trademark Office received 450 NFT-related trademark applications. The growing list of brands being trademarked for NFTs includes the NYSE, Star Trek, Panera, Walmart, Elvis Presley, Sports Illustrated, Ticketmaster, and Yahoo. In the early months of 2021, interest in NFTs increased after a number of high-profile sales and art auctions.

In May 2022, The Wall Street Journal reported that the NFT market was "collapsing". Daily sales of NFT tokens had declined 92% from September 2021, and the number of active wallets in the NFT market fell 88% from November 2021. While rising interest rates had impacted risky bets across the financial markets, the Journal said "NFTs are among the most speculative."

Uses

Commonly associated files

NFTs have been used to exchange digital tokens that link to a digital file asset. Ownership of an NFT is often associated with a license to use such a linked digital asset, but generally does not confer copyright to the buyer. Some agreements only grant a license for personal, non-commercial use, while other licenses also allow commercial use of the underlying digital asset.

Digital art

Digital art is a common use case for NFTs. High-profile auctions of NFTs linked to digital art have received considerable public attention. The work entitled Merge by artist Pak was the most expensive NFT, with an auction price of US$91.8 million and Everydays: the First 5000 Days, by artist Mike Winkelmann (known professionally as Beeple) the second most expensive at US$69.3 million in 2021.

Some NFT collections, including Bored Apes, EtherRocks and CryptoPunks are examples of generative art, where many different images are created by assembling a selection of simple picture components in different combinations.

In March 2021, the blockchain company Injective Protocol bought a $95,000 original screen print entitled Morons (White) from English graffiti artist Banksy, and filmed somebody burning it with a cigarette lighter. They minted and sold the video as an NFT. The person who destroyed the artwork, who called themselves "Burnt Banksy", described the act as a way to transfer a physical work of art to the NFT space.

American curator and art historian Tina Rivers Ryan, who specializes in digital works, said that art museums are widely not convinced that NFTs have "lasting cultural relevance." Ryan compares NFTs to the net art fad before the dot-com bubble. No centralized means of authentication exists to prevent stolen and counterfeit digital works from being sold as NFTs, although auction houses like Sotheby's, Christie's, and various museums and galleries worldwide started collaborations and partnerships with digital artists such as Refik Anadol, Dangiuz and Sarah Zucker, selling NFTs associated with digital artworks (via NFT platforms) and showcasing those artworks (associated with the respective NFTs) both in virtual galleries and real life screens, monitors, and TVs.

Mars House, an architectural NFT created in May 2020 by artist Krista Kim, sold in 2021 for 288 Ether (ETH) — at that time equivalent to $524,557.79 in US dollars.

Games

NFTs can represent in-game assets, such as digital plots of land. Some commentators describe these as being controlled "by the user" instead of the game developer if they can be traded on third-party marketplaces without permission from the game developer.

• CryptoKitties was an early successful blockchain online game in which players adopt and trade virtual cats. The monetization of NFTs within the game raised a $12.5 million investment, with some kitties selling for over $100,000 each. Following its success, CryptoKitties was added to the ERC-721 standard, which was created in January 2018 (and finalized in June). A similar NFT-based online game, Axie Infinity, was launched in March 2018.
• In October 2021, Valve Corporation banned applications from their Steam platform if those applications use blockchain technology or NFTs to exchange value or game artifacts.
• In December 2021, Ubisoft announced Ubisoft Quartz, "an NFT initiative which allows people to buy artificially scarce digital items using cryptocurrency". The announcement prompted criticism, with a dislike ratio of 96% over the YouTube announcement video, which has since been unlisted. Some Ubisoft developers also raised their concern over the announcement. The Game Developers Conference's 2022 annual report stated that 70 percent of developers surveyed said their studios had no interest in integrating NFTs or cryptocurrency into their games.
• Some luxury brands minted NFTs for online video game cosmetics. In November 2021, Morgan Stanley published a note suggesting that this use could become a multi-billion dollar market by 2030.

Music

In February 2021, NFTs reportedly generated around US$25 million in the music industry, with artists selling artwork and music as NFT tokens. On February 28, 2021, electronic dance musician 3LAU sold a collection of 33 NFTs for a total of US$11.7 million to commemorate the three-year anniversary of his Ultraviolet album. On March 3, 2021, an NFT was made to promote the Kings of Leon album When You See Yourself. Other musicians who have used NFTs include American rapper Lil Pump, Grimes, visual artist Shepard Fairey in collaboration with record producer Mike Dean, and rapper Eminem.

Film

• In May 2018, 20th Century Fox partnered with Atom Tickets and released limited-edition Deadpool 2 digital posters to promote the film. They were available from OpenSea and the GFT exchange. In March 2021 Adam Benzine's 2015 documentary Claude Lanzmann: Spectres of the Shoah became the first motion picture and documentary film to be auctioned as an NFT.
• Other projects in the film industry using NFTs include the announcement that an exclusive NFT artwork collection will be released for Godzilla vs. Kong and director Kevin Smith announcing in April 2021 that his forthcoming horror movie Killroy Was Here would be released as an NFT. The 2021 film Zero Contact, directed by Rick Dugdale and starring Anthony Hopkins, was also released as an NFT.
• In April 2021, an NFT associated with the score of the movie Triumph, composed by Gregg Leonard, was the first NFT minted for a feature film score.
• In November 2021, film director Quentin Tarantino released seven NFTs based on uncut scenes of Pulp Fiction. Miramax subsequently filed a lawsuit claiming that their film rights were violated and that the original 1993 contract with Tarantino gave them the right to mint NFTs in relation to Pulp Fiction.

Other associated files

• A number of internet memes have been associated with NFTs, which were minted and sold by their creators or by their subjects. Examples include Doge, an image of a Shiba Inu dog, as well as Charlie Bit My Finger, Nyan Cat and Disaster Girl.
• Some virtual worlds, often marketed as metaverses, have incorporated NFTs as a means of trading virtual items and virtual real estate.
• Some pornographic works have been sold as NFTs, though hostility from NFT marketplaces towards pornographic material has presented significant drawbacks for creators.
• In May 2021, UC Berkeley announced that it would be auctioning NFTs for the patent disclosures for two Nobel Prize-winning inventions: CRISPR-Cas9 gene editing and cancer immunotherapy. The university will continue to own the patents for these inventions; the NFTs relate only to the university patent disclosure form, an internal form used by the university for researchers to disclose inventions.
• The first credited political protest NFT ("Destruction of Nazi Monument Symbolizing Contemporary Lithuania") was a video filmed by Professor Stanislovas Tomas on April 8, 2019, and minted on March 29, 2021. In the video, Tomas uses a sledgehammer to destroy a state-sponsored Lithuanian plaque located on the Lithuanian Academy of Sciences honoring Nazi war criminal Jonas Noreika.
• In 2020, CryptoKitties developer Dapper Labs released the NBA TopShot project, which allowed the purchase of NFTs linked to basketball highlights. The project was built on top of the Flow blockchain.
• In March 2021 an NFT of Twitter founder Jack Dorsey's first-ever tweet sold for $2.9 million. The same NFT was listed for sale in 2022 at $48 million, but only achieved a top bid of $280.

Speculation

NFTs representing digital collectables and artworks are a speculative asset. The NFT buying surge was called an economic bubble by experts, who also compared it to the Dot-com bubble. In March 2021 Mike Winkelmann called NFTs an "irrational exuberance bubble". By mid-April 2021, demand subsided, causing prices to fall significantly. Financial theorist William J. Bernstein compared the NFT market to 17th-century tulip mania, saying any speculative bubble requires a technological advance for people to "get excited about", with part of that enthusiasm coming from the extreme predictions being made about the product.

Money laundering

NFTs, as with other blockchain securities and with traditional art sales, can potentially be used for money laundering. Auction platforms for NFT sales may face regulatory pressure to comply with anti-money laundering legislation. Gou Wenjun, the director of the Anti-Money Laundering Monitoring and Analysis Centre for the People's Bank of China, expressed that NFTs could "easily become money-laundering tools." Gou elaborated that there is increasing unlawful exploitation of various new cryptographic technologies, and that illicit actors often self-identify as innovators of the financial technology sector.

A February 2022 study from the United States Treasury assessed that there was "some evidence of money laundering risk in the high-value art market," including through "the emerging digital art market, such as the use of non-fungible tokens (NFTs)." The study considered how NFT transactions may be a simpler option for laundering money through art by avoiding the transportation or insurance complications in trading physical art. Several NFT exchanges were labeled as virtual asset service providers that may be subject to Financial Crimes Enforcement Network regulations. In March 2022, two people were charged for the execution of a $1,000,000 NFT scheme through wire fraud.

Other uses

• In 2019, Nike patented a system called CryptoKicks that would use NFTs to verify the authenticity of physical sneakers and would give a virtual version of the shoe to the customer.
• Event tickets have been suggested for sale as NFTs. This would enable event organizers or performers to garner royalties on resales.
• Some private online communities have been formed around the confirmed ownership of certain NFT releases.

Standards in blockchains

Specific token standards support various blockchain use-cases. Ethereum was the first blockchain to support NFTs with its ERC-721 standard and this is currently the most widely used. Many other blockchains have added or plan to add support for NFTs.

ERC-721 was the first standard for representing non-fungible digital assets on the Ethereum blockchain. ERC-721 is an inheritable Solidity smart contract standard; "inheritable" means that developers can create new ERC-721-compliant contracts by copying from a reference implementation. ERC-721 provides core methods that allow tracking the owner of a unique identifier, as well as a permissioned way for the owner to transfer the asset to others.

The ERC-1155 standard offers "semi-fungibility", as well as providing an analogue to ERC-721 functionality (meaning that an ERC-721 asset can be built using ERC-1155). Unlike ERC-721 where a unique ID represents a single asset, the unique ID of an ERC-1155 token represents a class of assets, and there is an additional quantity field to represent the amount of the class that a particular wallet has. Assets of the same class are interchangeable, and a user can transfer any amount of assets to others.

Issues and criticisms

Unenforceability of copyright

Because the contents of NFTs are publicly accessible, anybody can easily copy a file referenced by an NFT. Furthermore, the ownership of an NFT on the blockchain does not inherently convey legally enforceable intellectual property rights to the file.

It has become well known that an NFT image can be copied or saved from a web browser by using a right click menu to download the referenced image. NFT supporters disparage this duplication of NFT artwork as "right-clicker mentality". One collector quoted by Vice compared the value of a purchased NFT (in contrast to an unpurchased copy of the underlying asset) to that of a status symbol "to show off that they can afford to pay that much".

The "right-clicker mentality" phrase spread virally after its introduction, particularly among those who were critical of the NFT marketplace and who appropriated the term to flaunt their ability to capture digital art backed by NFT with ease. This criticism was promoted by Australian programmer Geoffrey Huntley who created "The NFT Bay", modeled after The Pirate Bay. The NFT Bay advertised a torrent file purported to contain 19 terabytes of digital art NFT images. Huntley compared his work to an art project from Pauline Pantsdown, and hoped the site would help educate users on what NFTs are and are not.

Storage off-chain

NFTs that represent digital art generally do not store the associated artwork file on the blockchain due to the large size of such a file. Such a token functions like a certificate of ownership, with a web address that points to the piece of art in question; this however makes the art itself vulnerable to link rot.

Environmental concerns

NFT purchases and sales are enabled by the high energy usage, and consequent greenhouse gas emissions, associated with blockchain transactions. Though all forms of Ethereum transactions have an impact on the environment, the direct impact of transaction is also dependent upon the size of the Ethereum transaction. The proof-of-work protocol required to regulate and verify blockchain transactions on networks such as Ethereum consumes a large amount of electricity. To estimate the carbon footprint of a given NFT transaction requires a variety of assumptions or estimations about the manner in which that transaction is set up on the blockchain, the economic behavior of blockchain miners (and the energy demands of their mining equipment), and the amount of renewable energy being used on these networks. There are also conceptual questions, such as whether the carbon footprint estimate for an NFT purchase should incorporate some portion of the ongoing energy demand of the underlying network, or just the marginal impact of that particular purchase. An analogy might be the carbon footprint associated with an additional passenger on a given airline flight.

Some NFT technologies use validation protocols such as proof of stake that use much less energy per validation cycle. Other approaches to reducing electricity include the use of off-chain transactions as part of minting an NFT. A number of NFT art sites hope to address these concerns, and some are moving to technologies and protocols with lower associated footprints. Others now allow the option of buying carbon offsets when making NFT purchases, although the environmental benefits of this have been questioned. In some instances, NFT artists have decided against selling some of their own work to limit carbon emission contributions. Though there are now "eco-friendly" NFTs, Ethereum still dominates the NFT market, resulting in an impact on the environment.

Artist and buyer fees

Sales platforms charge artists and buyers fees for minting, listing, claiming, and secondary sales. Analysis of NFT markets in March 2021, in the immediate aftermath of Beeple's "Everydays: the First 5000 Days" selling for US$69.3 million, found that most NFT artworks were selling for less than US$200, with a third selling for less than US$100. Those selling NFTs below $100 were paying platform fees between 72.5% and 157.5% of that amount. On average the fees make 100.5% of the price, meaning that such artists were on average paying more money in fees than they were making in sales.

Plagiarism and fraud

There have been cases of artists and creators having their work sold by others as an NFT without permission. After the artist Qing Han died in 2020, her identity was assumed by a fraudster and a number of her works became available for purchase as NFTs. Similarly, a seller posing as Banksy succeeded in selling an NFT supposedly made by the artist for $336,000 in 2021; the seller refunded the money after the case drew media attention. In 2022, it was discovered that as part of their NFT marketing campaign, an NFT company that voice actor Troy Baker announced his partnership with had plagiarized voice lines generated from 15.ai, a free AI text-to-speech project developed by MIT.

The ease of creating plagiarized NFT works, along with the anonymity of minting NFTs, makes it hard to pursue legal action against NFT plagiarists.

Some NFT marketplaces responded to cases of plagiarism by creating "takedown teams" to respond to artist complaints. The NFT marketplace OpenSea has rules against plagiarism and deepfakes (non-consensual intimate imagery). Some artists criticized OpenSea's efforts, saying they are slow to respond to takedown requests and that artists are subject to support scams from users who claim to be representatives from the platform. Others argue that there is no market incentive for NFT marketplaces to crack down on plagiarism.

• A process known as "sleepminting" allows a fraudster to mint an NFT in an artist's wallet and transfer it back to their own account without the artist becoming aware. This allowed a white hat hacker to mint a fraudulent NFT that had seemingly originated from the wallet of the artist Beeple.
• Plagiarism concerns led the art website DeviantArt to create a bot that searches and compares user art to art on popular NFT marketplaces. If the bot finds art that is similar, it warns the user and instructs the user how they can contact NFT marketplaces to request that they take down their plagiarized work.
• The BBC reported a case of insider trading when an employee of the NFT marketplace OpenSea bought specific NFTs before they were launched, with prior knowledge those NFTs would be promoted on the company's home page. NFT trading is an unregulated market in which there is no legal recourse for such abuses.
• When Adobe announced they were adding NFT support to their graphics editor Photoshop, the company proposed creating an InterPlanetary File System database as an alternative means of establishing authenticity for digital works.
• The price paid for specific NFTs and the sales volume of a particular NFT author may be artificially inflated by wash trading, which is prevalent due to a lack of government regulation on NFTs.

Security

In January 2022, it was reported that some NFTs were being exploited by sellers to unknowingly gather user IP addresses.

Pyramid/Ponzi scheme claims

The structure of the NFT market resembles a pyramid or Ponzi scheme, in which early adopters profit at the expense of those buying in later. In June 2022, Bill Gates stated his belief that NFTs are "100% based on greater fool theory".

Rug pulls

A "rug pull" is a scam, similar to an exit scam or a pump and dump scheme, in which the developers of an NFT or other blockchain project hype the value of a project to pump up the price and then suddenly sell all their tokens to lock in massive profits or otherwise abandon the project while removing liquidity, permanently destroying the value of the project. Rug pulls have become an increasingly common hazard when buying NFTs, with the proceeds of some rug pulls being valued at hundreds of thousands or even millions of dollars. Rug pulls accounted for 37 percent of all crypto-related scam revenue in 2021, according to one analysis.

Regulation

The FATF outlined a framework to determine whether or not NFTs qualify as virtual assets. When answering the following questions: "Is the digital asset unique as opposed to interchangeable?" and "Is the digital asset used as a collectable rather than for payment or investment purposes?". These assets would not be considered virtual assets if both answers are "yes", as mentioned on the FATF’s Updated Guidance . The purpose of NFTs will determine whether or not they are considered virtual assets.

Because the answers to the previous questions depend on context, it may be difficult to provide clear guidelines on how NFT-related activities (such as issuance and secondary sale services) will be regulated. It is likely that regulatory obligations will be assessed on a case-by-case basis (as in other areas, such as token offerings) until generally applicable rules can be developed.

In popular culture

A comedy sketch on the March 27, 2021, episode of Saturday Night Live featured characters explaining NFTs through rap to US Treasury Secretary Janet Yellen, as played by Kate McKinnon.

The 2021 Paramount+ television film South Park: Post Covid: The Return of Covid featured an adult version of Butters Stotch in his Professor Chaos persona tricking people into purchasing NFTs in 2061. The film portrays them as a poor investment, and Chaos has grown so adept at selling them that he is locked in a mental institution.

See also

• Decentralized autonomous organization
• Digital signature
• Web3
• List of most expensive non-fungible tokens

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External links

• ERC-721 Standard
• Media related to Non-fungible token at Wikimedia Commons

• Non-fungible token
• Blockchain and auctions
• Digital art
• Blockchain art