NFTs or Non-Fungible Tokens combine the spheres of art, collection and technology – and they’re set to become even more popular in 2022. NFTs have been around nearly as long as cryptocurrencies such as Bitcoin, but this year Non-Fungible Tokens are going mainstream; brands such as Mercedes, Adidas and Prada to name a few have minted collections over the last 12 months. But what exactly is an NFT, and why are so many brands, artists and even sportstars jumping aboard the non-fungible craze?
On this page, we’ll explain everything you need to know about Non-Fungible Tokens, including how they work, how to buy one – as well the issues around their environmental impact.
What is an NFT?
A Non-Fungible item is something that isn’t interchangeable. In the real world, that’s something like a rare Pokémon card, a classic car, or the Mona Lisa. Cryptocurrencies such as Bitcoin and Ethereum are interchangeable (and therefore fungible) and conversely the interesting, expensive digital art NFTs you may have seen floating around on social media are totally unique – and therefore non-fungible.
Simply put, a Non-Fungible Token is a digital line of code stored on the blockchain, and used to guarantee the authenticity of a digital file. Famous NFTs such as the Bored Ape Yacht Club or BAYC tend to consist of cartoon-style digital art, but NFTs can take the form of any digital file. Music, movie files, photographs and technically even a word document can be minted as an NFT. The latter hasn’t happened yet, but there’s still time.
In the digital world, a place where things can be copied and pasted at will, NFTs are pretty hard to fathom. So how does an NFT remain unique?
How do NFTs work?
Proving provenance or authenticity is tricky in real life, and in the digital realm the need to prove what is original is even more crucial. To do this, NFTs rely on an important piece of technology at the heart of cryptocurrencies such as Bitcoin and Ethereum; the blockchain.
Simply put, the blockchain is a peer-to-peer generated ledger of every change or transaction involving a particular cryptocurrency. This shared collection of ‘receipts’ always exists in the cloud and is verified by a decentralised peer to peer network, making it effectively tamper-proof and extremely robust. It’s this system NFTs are verified with.
All cryptocurrencies have their own blockchain; Bitcoin does and so does Ethereum – the second most popular cryptocurrency. Most NFTs are verified by the Ethereum blockchain.
How are they made?
NFTs start life as a file like any other, but they become NFTs through a process called minting. Simply put, minting means uploading a digital file to the blockchain, where it then becomes a collectible asset. Adding a file to the blockchain involves an amount of energy and therefore resource, and this can range between $50 to $200 dollars. The price you’ll pay depends on the time of day and the current mining demands on the blockchain your NFT uses.
Can you copy an NFT?
The criticism of NFTs boils down to two key issues – and the first is how similar they can be to normal jpegs. NFT images can be screenshotted and reproduced, and some suggest that this makes them no different to a jpeg. However, it’s important to remember that NFTs are about owning the original image, along with all the permissions – and not just what it looks like.
For example, think of posters of the Mona Lisa vs the actual thing; while all of them can decorate a room, only the original has provenance and value. Most NFTs are minted in limited numbers, or made for a very limited time – therefore building in exclusivity.
What’s more, some NFTs give their registered holder a range of additional benefits; from exclusive access to events and products, to first dibs on other, equally rare and limited NFTs.
Are NFTs harmful for the environment?
NFTs are often criticized because of the amount of energy required to ‘mint’ them. Minting is the process of adding code to the blockchain (also used by cryptocurrencies) and this process cumulatively uses a huge amount of energy. For example, the blockchains required by cryptocurrencies already exceed more than that of a small country – and the more NFTs traded and created, the more energy consumed. 2022 is also looking like the biggest year yet for NFTs.
There are two main ways of reducing emissions around NFTs. The first is to pair mining operations with renewable energy sources such as solar, hydroelectric or geothermal power. Alternatively, rather than ‘proof of work’ systems used by most blockchains, ‘proof of stake’ blockchain technology can be used instead.
In 2022 some NFTs are designed to be more eco-friendly: the Tezo blockchain, used by McLaren F1 in their latest NFT collection, uses a proof-of-stake concept, which means it takes up significantly less power than other blockchains such as Ethereum. McLaren says the Tezo blockchain uses ‘two million times less energy’ than Bitcoin and Ethereum.
What’s the point in NFTs?
Like any new piece of technology, specifically one associated with soaring prices, hype and celebrities, NFTs are dividing opinion. In many ways they’re the high-tech, stripped-down, conclusion of our obsession with exclusivity and collection. The value of most NFTs is simply the price people are prepared to pay for them, and the figures seem to grow by the hour. However, there’s a possibility that NFTs are part of a bubble that’s about to burst: If you’re left holding a 3ETH NFT when demand is gone, you end up footing the bill.
However, in a world where art work – especially digital art and photography can be grabbed and copied – the idea of using technology to enforce ownership and pay artists is a positive thing.
So are NFTs a good thing or a bad thing? Just like cryptocurrencies, we’re going to have to wait and see.