Beeple. (2021). EVERYDAYS: THE FIRST 5000 DAYS [NFT]. Christie's.
Along with blockchain technology, another hot topic going around these days that seems to be a mystery for many is the Non-Fungible Tokens (NFT). They have become really famous in the art and gaming spectrum.
Considering that NFTs became known by the public not long ago, it will take some time before anyone can accurately determine whether they can be used for something other than speculation. However, once you dig deeper into the concept, it becomes clear that this technology has tremendous potential and that it is best if it remains with us.
First things first: what is an NFT? Let's break down the words to gain some initial understanding:
Token: Traditionally, the term token can be associated with pieces or elements that have a value associated with them, act as a sort of currency, and be exchanged (i.e., casino tokens or car wash money-like pieces).
Non-Fungible: Fungible means that something is easy to exchange or trade for something of the same type and value (i.e., gold, money, consumer goods on the supermarket shelves--like a box of cereals). Non-fungible is the opposite; it cannot be exchanged for something of the same type and value: it is unique (i.e., collectibles or museum pieces). For example, the original painting Le Jardin de l'artiste à Giverny from the artist Monet is a non-fungible work of art.
Monet, C. (1900). Jardin de l'artiste à Giverny [Oil on canvas].
Brought to the digital world, NFTs could be defined as a "unit of value-based in cryptography" that is unique, not divisible, and tradable with a sort of ID certificate of authentication.
NFTs use blockchain technology. This allows the author of the NFT to create and record the ownership of the NFT with(in) a blockchain transaction —for more information about blockchain, you can check the article Digesting Blockchain. The NFT information is registered on smart contracts —specific coding instructions that register information and automatically execute them in the blockchain. Smart contracts allow NFT creators to include any and all relevant parameters of the NFT and to access them anytime they want —this will be dealt with in a subsequent article.
The whole NFT creation is not stored in the blockchain. Just the main details and characteristics of the NFT are stored. Like a virtual register that acts as an ID card of the NFT, it contains the important NFT parameters like who created it, the date, and the characteristics attributable to the NFT. Also, since the information is recorded in the blockchain, it is made public and cannot be erased or modified.
For example, the smart contract allows designing the NFT so that, every time an NFT is sold, a percentage of the benefits is automatically transferred to the author —something that does not happen for many artworks after the first sale. This is good news for authors and creators and maybe not so good for the intermediaries, who may have to reinvent themselves if they wish to remain competitive.
The NFT registration in the smart contract can reflect any kind of information desired. They can represent assets in a secure and transparent way. An NFT can be designed and contain any information its owner wants, which could also imply the granting of rights. This means that NFTs do not need to be related to the art or gaming sectors, but they could relate, for example, to a user's" medical record, a digital ID, a graduation certificate, or proof of delivery of goods. This is where the revolutionary potential of NFTs lie. From this point of view, pretty much anything that can be translated into the digital world can be "tokenized." Because of this, commercial transactions and business models could be facing a significant change in how they are made.
MeldaVNH. (2022). Dreams [NFT]. OpenSea.
As of today, NFTs work and are exchanged mainly through the Ethereum and Bitcoin blockchains. To clarify, both Ethereum and Bitcoin are blockchains and have cryptocurrencies that go by the same name— but could work on any blockchain. Not all NFTs need to be up for trade, but most are these days. Those that are up for trade are "minted" on the blockchain, meaning that the NFT is uniquely published on the blockchain to make it purchasable. All the transactions of the NFT will remain visible in the blockchain, allowing users to track the initial and consecutive sale prices and time(s) of sale--not the identity of the parties, which are linked to a "wallet" represented by an alphanumeric number).
This is an example of what an NFT transaction history looks like:
OpenSea. (n.d.) [CryptoKitty #229795 transaction history] [Screenshot].
Generally, NFTs are offered for sale in NFT exchange platforms like OpenSea —an Ethereum based platform. There are many NFTs now up for trade. One of the most popular NFTs collections is the "CryptoKitties," which, at the date of the drafting of this article, has generated a volume-traded worth of 70.5k Ethereum, which, in dollars, is the impressive amount of 176M$. Another remarkable NFT sale was that of Beeple's work named Everydays: The First 50000 Days for $69M (see the first picture of the article).
OpenSea. (n.d.) [CryptoKitties landing page] [Screenshot].
From a regulatory perspective, since this technology is still not mature, there is still no specific regulation addressing it, but special care will likely be required regarding privacy and anonymization of the data stored, encrypted, and "uploaded" in the blockchain. For example, if the data in the smart contract relates to an individual's medical history, it will have to comply with the handling of protected sensible data according to the relevant regulations like the GDPR and guarantee that such information is only accessible by the individual and the parties authorized to have access to it.
Some downsides associated with this new technology so far, in line with the ones mentioned for blockchain, are that the developing standards to create NFTs suffer from hacking and fakes and plagiarism risks which, hopefully, with time, will be tackled. Also, smart contracts technology is complex, and understanding their operations and functions requires a high level of expertise skills. In spite of this, it seems to be a matter of time before more user-friendly ways to work with them in order to contain such risks are found.
The budding potential of NFTs is evident, as anything that can be represented in digital format can be converted to an NFT. NFTs have the potential to be more than assets used for speculation. Since our lives nowadays require full integration with the digital world, they can be a key tool to optimize transactions and exchange information, making them safer, faster, and more transparent. NFTs can also offer safeguards to the parties involved in a transaction by automatically granting them what they bargained for if the conditions are properly stated in the smart contract —the testing in the supply chain sector has proven exciting results—and potentially taking some unnecessary and burdensome intermediaries out of the equation.
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Beeple. (2021). EVERYDAYS: THE FIRST 5000 DAYS [NFT]. Christie's. https://onlineonly.christies.com/s/beeple-first-5000-days/beeple-b-1981-1/112924
Monet, C. (1900). Jardin de l'artiste à Giverny [Oil on canvas]. Musée d'Orsay, Paris.
OpenSea. (n.d.) [CryptoKitty #229795 transaction history] [Screenshot]. https://opensea.io/assets/0x06012c8cf97bead5deae237070f9587f8e7a266d/229795
OpenSea. (n.d.) [CryptoKitties landing page] [Screenshot]. https://opensea.io/collection/cryptokitties
MeldaVNH. (2022). Dreams [NFT]. OpenSea. https://opensea.io/assets/0x495f947276749ce646f68ac8c248420045cb7b5e/2682286971963689196555642600990882324412171456684959899575241281247824052230