If you’ve been keeping an eye on the tech and financial landscapes recently, you’re bound to have heard “NFTs” mentioned as the new hot item. But what exactly are NFTs, and are they all they’re cracked up to be? Read on to find out more.
“NFT” stands for “non-fungible token.” While fungible assets are entirely interchangeable with other assets of the same type, no matter where they were produced, mined or farmed- for example, one £10 note is equivalent to two £5 notes, and an ounce of gold in one part of the world are as valuable as an ounce of gold from another part of the world- non-fungible assets cannot be interchanged with something else.
Examples of non-fungible assets include unique items like diamonds or paintings, but NFTs are non-fungible assets in the digital world that have no tangible form of their own. These digital files are maintained on blockchains, which typically run on vast decentralised networks of computers, and act as digital ledgers for verifying and authenticating these tokens.
These tokens are currently being used as certificates of authenticity for digital assets such as digital art and tweets, and are very much in vogue for big tech movers and shakers as well as prominent digital artists. Graphic designer Mark Winkelmann, also known as “Beeple,” made history by selling a piece of art entitled “Everydays: The First 500 Days” for $69.3m via NFT, making it the third-highest price paid at auction for work by a living artist.
Celebrities have also tried to cash in on the NFT craze. Musician Grimes has sold several pieces of digital artwork via NFT at auction, raising a total of $6m. An original Banksy, which was burnt and destroyed in a livestreamed video, was sold via NFT for $380,000 last week. Twitter founder Jack Dorsey recently put his first tweet up for auction, with bids on a certificate of authenticity, as well as the metadata of the original tweet, reaching $2.5m.
The risks of NFTs
While this technology sounds exciting, and has been hailed as a new golden goose by many prominent online figures, the reality of NFTs is a lot less exciting and a lot riskier than it may initially appear.
Chief operating officer at foresight business L’Atelier BNP Paribas Nadya Ivanova told the BBC: “NFTs are booming right now, so there is an opportunity for both individuals and businesses to profit from being early adopters.”
“But while the underlying utility of NFTs is clear and will likely last, the current surge in interest won’t last forever. As ever, the golden rule is to only invest however much you are comfortable with losing.”
When it comes to money, one of the main concerns about NFTs is the lack of security these tokens actually provide. For one, owning an NFT tied to a piece of art may give you a token of authenticity for the original asset, but it does not stop other people from simply copying and sharing the original piece. In many cases, the artist still retains the copyright ownership to their work, and can continue to produce and sell copies of the original.
Owing to the deregulated nature of blockchain and cryptocurrency platforms, NFTs are particularly vulnerable to fraud– if a hacker gets a hold of your NFT, there is very little you can do about it, and you are very unlikely to receive support from the deregulated cryptocurrency platforms.
The system is also vulnerable to art theft, as Twitter accounts have been set up to “tokenise” tweets and art without the consent of the original creators. Once these assets are tied to an NFT by these art thieves, the original will be considered a fake by the criteria of the blockchain. This represents a significant ethical quandary, and is a strike against the argument that NFTs benefit the wider art community.
Another important factor to consider is the contributions NFT production at scale could make to a wider global problem- the ongoing climate catastrophe. NFTs mostly run on a proof-of-work blockchain, which is less energy efficient than a proof-of-stake blockchain, and an analysis of data from an NFT market found that the average NFT art transaction used 340 kWh of electricity and had a carbon footprint of 211 kg of carbon dioxide; this is equivalent to around a month’s worth of electricity consumption for a resident in the EU, driving for 1,000 km, or flying for 2 hours.
While the prospect of using NFTs to earn big bucks could seem like a tempting one, it’s important to remember that money is no good without a world to spend it in, and accelerating climate change could have massive and irreversible effects on the economy as well as the natural world.