Non-Fungible Tokens [NFTs]
NFT stands for ‘Non-Fungible Token’, ‘fungibility’ being the ability of an asset to be exchanged or substituted with similar assets of the same value’₁. NFTs act as a digital certificate of authenticity₁. Caitlin Ostroff explains it as having a digital signature in the way that a great work of art might bear the signature of the person who created it. Therefore, you can always go and look at the original and authorise its authenticity. An NFT is able to have this same effect through the blockchain where the information is recorded. They exist as a string of numbers and letters stored on a blockchain ledger, storing information such as who owns the digital asset, who sold it and when. This information is then encrypted in order to create authenticity and scarcity.
The popularity in NFTs all started in 2017 because of the blockchain game ‘CryptoKitties’. Originally built on the Ethereum blockchain using the ERC721 token standard (but as of May 2020 moved to its own dedicated blockchain ‘Flow’), CryptoKitties was an early exploration into the concept of digital scarcity as each CryptoKitty is unique and stored in a smart contract.
Since then, NFTs have been applied to video games, digital art and sports memorabilia. A well-known example is ‘NBA Top Shot’, a series of digital collectible trading cards representing a significant moment from basketball history stored on the Flow blockchain. From October 2020 — March 2021, NBA Top Shot’s sales equated into over $338 million.
Advantages of NFTs:
Unlike fungible cryptocurrencies like Bitcoin, every NFT is unique. This allows creators to make their content scarce and therefore more valuable because only 1 token can exist and cannot be traded for something similar because nothing similar can exist, helping to drive up prices and keep them competitive. Unlike with blockchain underlying Bitcoin, the person selling their digital assets can set terms. E.g. the original creator gets x-amount of profit. The exclusivity of NTFs have allowed them to infiltrate elite events. A clear example in how digital artists can greatly benefit from NFTs would be famous digital artist Mike Winklemann, aka Beeple, who made a composite of 5,000 daily drawings to create perhaps the most influential and well know NFT of themoment, “EVERYDAYS: The First 5000 Days,” which sold at Christie’s, a famous auction house, for a record-breaking $69.3 million.People are praising NFTs for giving artists credit where it is due and paying them accordingly, however there are downsides to NFTs.
Disadvantages of NFTs:
One issue is the fact that not all NFTs verify the person selling a digital art piece is actually the original creator. This is difficult on online marketplaces. One of the concerns is that anyone can essentially lie on a lot of these marketplaces and claim to be the person who created a token, which can be very difficult to verify, particularly when you do not know who they actually are or whether they are impersonating someone else.
In addition to this, some are sceptical as to whether ownership makes digital assets valuable. When it comes to digital art, a buyer owns the original digital painting, however they cannot stop others from copying the image and sharing or altering it online.
Finally, it is impossible to ignore the detrimental implications generating NFTs has on the environment due to the mining of the cryptocurrencies needed to support them. The nature of the proof-of-work blockchains in order to process the mining of Ethereum for example, uses obscene amounts of energy. In contrast to storing information about account balances in a central database, cryptocurrency transactions are recorded by a distributed network of miners, incentivised by block rewards ₂. These specialized computers are engaged in a computational race to record new blocks, which can only be created by solving cryptographic, complex maths problems. This system is used over centralised currencies because it does not rely on any trusted intermediary or single point of failure. However, the calculations which need to be solved for mining require many energy-intensive computations. For example, Bitcoin utilises 121 Terawatt-hours of electricity every year, which, the BBC reported in 2021, is more than the entire country of Argentina. Additionally, the Ethereum network, which many NFTs are based on, uses as much power as the entire nation of Qatar₃. A major concern among environmentalists is that mining tends to become less efficient as the price of cryptocurrency increases. In the case of bitcoin, the mathematical algorithms to solve in order to create blocks get more complex as the price goes up, but transaction throughout remains constant. For this reason, over time the network will consume more computing power and energy to process the same number of transactions.
In conclusion, despite NFTs opening opportunities for digital artists by making their work more valuable and creating scarcity around their creations but whether an image that could simply be copied should be sold for the equivalent of around $7.5 million, such as CryptoPunk #7804, is up to personal belief. Additionally, it is hard to ignore the environmental implications that NFTs have on the planet due to the substantial amounts of energy needed to mine them.
Written By: Sophie Cole
3 = https://digiconomist.net/ethereum-energy-consumption