So…What Exactly Are Non-Fungible Tokens?
Even if you haven’t been following the latest developments of cryptocurrencies and blockchain, your newsfeed must have been inundated with these curious and catchy titles: “NBA Top Shot Digital Collectibles,” “Beeple sold an NFT for $69 million,” “Jack Dorsey sells his first tweet as an NFT for over $2.9 million,” and of course “Elon Musk produced a techno track about NFT he is selling as an NFT.” You might wonder what exactly is this craze surrounding NFTs (non-fungible tokens) that drew attention from tech giants, art lovers to NBA fans alike?
First of all, to understand what non-fungible token is, it is helpful to know that what a fungible token is. Fungible token refers to identical and mutually interchangeable tokens that can be used for commercial transactions,1 like bitcoins, whereas a non-fungible token is a unique digital token that comes with a unique identification code created on the Ethereum blockchain that loses value when split into smaller parts, much like a collectible or a piece of art.2 The Ethereum blockchain enables transactions of NFTs through a decentralized ledger that tracks and broadcasts the transaction history of each unique token,3 eliminating the need for a middleman like an art broker while ensuring its authenticity – something that art collectors and investors care a lot about.
Then, how does a tweet or a piece of art have anything to do with this intangible, unique digital code that exists on a blockchain? It turns out that artists or creators can “mint” an NFT on Ethereum through “smart contract”, a computer program that is more aptly described as a “digital vending machine” that automatically execute the terms of an agreement between parties on the blockchain.4 The practical “minting” process entails the artist creating a digital wallet, uploading his or her creative work, either in the form of an audio file, image, video, or even a website and finally waiting for the smart contract code to run and represent the work as an NFT that could be purchased and traded in the NFT market.5
Nonetheless, it would be mistaken for buyers of NFTs to think that they own the copyright of the piece of video, image or audio attached to their NFTs. Just like if you purchased a mug with the image of Mona Lisa printed on it, you don’t own the copyright of the original Mona Lisa – you don’t own the copyright of Jack Dorsey’s first tweet if you purchased its NFT. What NFT gives you is a cryptographically certified receipt that you own this unique version of the original work.6 Additionally, similar to printing Mona Lisa on mugs, there is nothing to stop the creator from making more copies of the same NFT and sell them to other willing buyers.7 Therefore, the uniqueness of NFTs is perhaps illusory as well.8 In sum, what NFT represents is a digital version of the original work that exists on the blockchain that people could sell and trade.
Rakesh Sharma, Non-Fungible Token (NFT) Definition, Investopedia, https://www.investopedia.com/non-fungible-tokens-nft-5115211#:~:text=NFTs%20are%20unique%20cryptographic%20tokens,reducing%20the%20probability%20of%20fraud (Mar. 8, 2021) [https://perma.cc/K7DW-JH63].↩
Ghaith Mahmood, NFTs: What Are You Buying and What Do You Actually Own?, The Fashion Law, https://www.thefashionlaw.com/nfts-what-are-you-buying-and-what-do-you-actually-own/ (Mar. 18, 2021) [https://perma.cc/YNF8-BJR2].↩
Sam Richards, Introduction To Smart Contracts, Ethereum, https://ethereum.org/en/developers/docs/smart-contracts/ (Mar. 8, 2021) [https://perma.cc/ST48-XDG7].↩
Samantha Ayson, A complete guide to minting an NFT, Foundation Labs, Inc., https://help.foundation.app/en/articles/4742869-a-complete-guide-to-minting-an-nft [https://perma.cc/Y8QT-8XVS] (last visited Mar. 29, 2021).↩
Andres Guadamuz, Can copyright teach us anything about NFTs?, TechnoLlama, https://www.technollama.co.uk/can-copyright-teach-us-anything-about-nfts (Mar. 7, 2021) [https://perma.cc/6S7B-AN8D].↩