The blockchain-supported phenomenon has really taken off in the art world by storm.
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IT’S DIFFICULT FOR most people to comprehend how or why an investor would want to buy Jack Dorsey’s first-ever tweet for €2.4 million. But then again, the entire concept of NFTs seems frankly alien, even when you go looking for simple explanations.
NFT stands for ‘non-fungible token’.
When a commodity is fungible, it means it can be exchanged for an equivalent amount of the same commodity without changing its value. If that’s a bit abstract, take the example of money. A €100 note is interchangeable with €100 no matter what way you slice up the second sum — whether it’s five €20 notes, 10 €10 notes or two €50 notes.
When something is non-fungible, it means it can’t be exchanged in a like-for-like fashion without altering its value, effectively making it unique or one-of-a-kind. Houses and used cars are classic examples of non-fungible goods because of their uniqueness.
Ok, that’s fairly straightforward. But what makes NFTs a particularly dense concept for explanation is their relation to blockchain technology and, in particular, the cryptocurrency Ethereum.
Suffice it to say that NFTs are supported by Ethereum — an alternative to BitCoin — and their value is held in that cryptocurrency. Transaction information is stored within the Ethereum blockchain, which makes it impossible to forge copies of the token.
Over the past few months, NFTs have really taken off in the art world as a way for artists to sell unique pieces of work to wealthy collectors. But the key thing to understand is that the ‘token’ in the phrase ‘non-fungible token’ isn’t the piece of art itself but rather, a line or two of code attached to the artwork that certifies its authenticity and its ownership.
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So you don’t own the artwork itself even after forking out for it. But although the artist can retain the copyright to the artwork itself, the token can’t be duplicated. That’s why investors are spending millions on what are effectively digital collectable assets like Dorsey’s first tweet or videos made by pop star Grimes.
If it all sounds a bit ridiculous, it’s probably because it is a bit ridiculous. Critics of the concept think it’s a prime example of ‘frothiness’ in the market. Usually a sign of a looming bubble, a frothy market happens when lots of extra money is sloshing around and asset prices seem to become more and more untethered from reality. But defenders of the phenomenon see a bright future in NFTs, particularly for artists.
Because all NFT transactions are stored in the blockchain, it means that artists get paid a certain amount every time an NFT is bought or sold. Some believe NFTs could be the solution to the well-worn problem of piracy in the digital era. Other legal observers are less convinced.