What do an apathetic cartoon monkey, the first tweet ever tweeted on Twitter, and the viral noughties video ‘Charlie bit my finger’ have in common?
They’re all NFTs that have been sold for £900k, £2.1m, and £53k respectively.
NFTs are digital certificates of ownership whose authenticity can be traced through the decentralised blockchain system. Unlike actual money or cryptocurrencies, NFTs are not mutually interchangeable (aka fungible, hence the name). So, while one bitcoin equals any other bitcoin in value, each NFT can be tracked back to a unique underlying asset that is different in value and form compared to all other NFTs.
This inherent uniqueness is one of the key reasons that made NFTs so popular among collectors, in the art world and in sectors that prize exclusivity and ‘limited editions’, such as luxury, fashion and gaming.
NFT advocates are promoting them as ‘the future of ownership’. Legally, NFTs sit in an interesting place. By owning an NFT you possess the right to prove that a certain digital asset is yours, but not copyright of the asset or the asset itself.
This means while somebody bought the ‘Charlie bit my finger’ NFT, the video is still online for everyone to see, same as that fateful first tweet. You can right-click-and-save Gwyneth Paltrow’s Bored Ape, and her legal team will not be coming for you. In a way, NFTs are not unlike ‘Buy a Star’ certificates—you own the paperwork, but the asset it refers to is still not yours.
Once minted and uploaded onto the blockchain, an NFT can’t be changed—although it can be ‘burned’ (sent to an inaccessible address and thus removed from circulation). Some brands are using burning as a creative way to offer upgrades to the otherwise immutable NFTs. For example, Adidas NFT holders can upgrade the colour of their tokens after buying a pair of physical shoes and keep swapping their NFT with each new purchase, all done by burning and replacing the old token.
Because of the traceability that the blockchain brings, NFTs can be used as digital certificates of authenticity—you can own an NFT that proves that your concert ticket was bought on an official website, that your digital art was indeed made by a certain artist (unless it was stolen, more on that later), or that your poodle’s pedigree is impeccable.
When Ralph Lauren released a D2A (direct-to-avatar) collection on the gaming platform Roblox, the accompanying NFTs served as receipts that the virtual wearers possessed the real thing, downloaded from an official source.
The exclusivity from a token’s uniqueness can also be used to foster community-building and reward the most committed members. This is the case for the many musical artists who have found in NFT-based communities a way to connect directly to their audience, cutting out the middlemen.
Dolce & Gabbana unveiled a ‘wear-to-own’ project that rewards consumers for wearing their physical pieces in real life with NFTs that give exclusive access to events and special items, while Hollywood actress Mila Kunis’ production company recently announced a new television series in which the plot will be influenced by NFT owners, “choose your own adventure” style.
While authenticity certificates, community rewards and “choose your own adventure” storytelling are all interesting applications of this technology, they are hardly unachievable in a world without NFTs. However, a key promise of NFTs is that this new mode of ownership will bridge consumers’ lives in the physical world with their virtual belongings in the metaverse. With growing criticism towards the metaverse (who will own it and how will that impact the lives of its ‘residents’? Are Nintendo-Wii-like avatars in virtual office rooms really responding to a human need?) this promise might remain partially unfulfilled.
Limitations (and solutions)
Controversies abound when it comes to NFTs—from ‘rug pull’ schemes to astronomical energy bills, there are several issues standing in the way of this technology’s success and widespread adoption. So, what should platforms and owners do?
- Put a stop to stolen art
NFTs were initially heralded as a new and exciting tool that would grant artists unprecedented freedom - by minting NFTs of their art, creators would not only escape the constraints of the traditional art system but could also keep a steady income stream over time through smart contracts, an NFT feature that would allow them to collect royalties every time their art was exchanged.
By inextricably linking author and art, NFTs would also help resolve one of the biggest concerns regarding art in the Internet era - uncredited and stolen work. Currently, artists and creators do not have many options when they’re denied ownership of their work, which happens increasingly often as collaborative social media grows (viral TikTok dances, for example, spread so fast that the original creators are often left uncredited).
However, this utopian art world has not materialised yet – quite the opposite. Since anyone can anonymously mint a token, whether or not they have the rights to the original visual, NFTs are rife with artistic theft and forgery, making it even harder for artists to strike back: “How do you sue the anonymous holder of a crypto wallet? In which jurisdiction?” asked curator Tina Rivers Ryan in an interview with The Guardian.
NFT marketplaces need to make it easier for artists to protect their copyright and act against infringements.
- Crack down on crypto theft
NFTs have also become synonymous with unregulated financial speculation.
While NFT advocates claim that the tokens are the fully transparent currency of the future, their decentralised nature poses serious questions on which entities are supposed to regulate the space – as of now, as tech journalist Benjamin Powers puts it, “in crypto, possession is 10/10ths of the law”.
There are already numerous accounts of theft and money laundering in relation to NFTs, and when the NFT marketplace Nifty Gateway was hacked in 2021, one of the victims was only able to recoup their losses thanks to their traditional and very much centralised credit card company. ‘Rug pulls’, schemes in which a scammer artificially drives up prices and sells the NFTs whose value subsequently falls to zero, are common; a recent one in March robbed investors of over $1M.
Governments worldwide are catching up with NFTs and will likely regulate some of this activity, but crypto markets themselves will need to prove their trustworthiness to the public to be able to thrive in the long run.
- Regulate the market to build investor trust
NFTs are so far removed from real money that it’s easy to imagine that anyone could strike gold just by betting on the right monkey (or cat, or seal, or pixelated punk) at the right time. But when considering that only 9% of accounts holders possess over 80% of the $41bn market value of Ethereum-based NFTs (the most common NFT blockchain), NFTs are still the realm of relatively few investors.
As regulatory bodies around the world catch up with the NFT market, some speculate that the bubble might be close to bursting - the average NFT price fell from $6800 in January to $2000 and primary sales (between creator and collector) have dipped from nearly 26,000 per day at the beginning of the year to less than 3,200 in March. This might be bad news for the ‘get rich quick’ crowd, but could become the start of a more transparent NFT market that the average investor feels safe getting involved in.
- Drastically reduce the blockchain’s environmental footprint
Another major drawback of NFTs is their huge environmental footprint, since the blockchain system that underpins them, Ethereum, relies on resource-intensive crypto mining. An NFT of Space Cat, a cutesy drawing of an astronaut cat, has been reported to generate the same carbon footprint as an EU resident’s electricity use in two months.
Some industry players are discussing ways to make NFTs less energy-intensive, but at present the huge electricity bill is a feature, not a bug, meant to disincentivise malicious miners through a mechanism called Proof of Work. Ethereum is transitioning to a more energy-efficient verification system called Proof of Stake, and while this is a step in the right direction, it is not yet a complete solution.
NFT stakeholders will need to adapt to governmental regulations, seriously address the blockchain’s root sustainability issues, and produce more compelling use cases to move from cartoon-animal craze to tried-and-tested Web 3.0 ownership model.
Irene Squeo is an associate at Quantum.