Non-fungible token (NFT) is a unique digital token based on smart contracts and blockchain. NFTs can be used as a means to claim rights for digital objects. NFTs mainly exist on the Ethereum blockchain. Most common NFT standards are ERC-721 and ERC-1155. NFT technology is widely applied in digital art, gaming industry, etc.
A non-fungible token (NFT) is a digital cryptographic method for claiming ownership of an underlying asset and asserting its authenticity. Non-fungible tokens reaffirm the ownership of unique and valuable digital objects of the holder through metadata.
Despite the widespread use of NFTs to trade digital art objects, from a legal point of view, NFTs do not give the holder the right to distribute the digital object. The buyer of the NFT owns only the digital original or the key to it, while copyright legally remains with the creator of the work.
NFT is a technology that solves the problem of copyright in the digital space. With the help of NFT, artists and people of culture monetize their works by selling them and getting the opportunity to receive the so-called. "royalties" - a percentage of each resale of a digital object.
The beginning of the NFT can be traced back to the emergence of the concept of “Colored Coins” in 2012. Colored coins is a superstructure above the bitcoin protocol that at the time allowed users to mark bitcoins and link them to digital and real assets. However, in the case of colored coins, contracts between users were based on trust and were not registered in any way within the blockchain. Quantum by Kevin McCoy created in May 2014 is considered to be the first NFT.
NFTs are being implemented in areas ranging from programmable art, video and music to skins in gaming and land in virtual universes. In addition, there are projects, like the Austrian postal service’s Crypto Stamp , where stamps are linked to tokens to mark real postage. NFTs are also used to issue concert tickets, and the like. The possibilities of tokenizing a digital object into an NFT are not limited.
However, digital art remains the main application of NFTs. Among the most popular NFT projects are Cryptopunks , CryptoKitties , Bored Ape Yacht Club .
Most NFT marketplaces operate like auction houses, where users make bids to buy digital works of art. Most marketplaces also offer an instant purchase option where NFTs are sold at a certain predetermined price. Among the most popular NFT marketplaces are OpenSea, Nifty Gateway, Binance NFT, Rarible, NBA Top Shot Marketplace, SuperRare, Mintable, etc. Trading and buying NFTs is also possible at such auction houses as Sotheby's and Christie's .
NFT Legal Regulation
Taxation and legal regulation of NFTs varies by region. Selling or operating a selling business as well as investing in NFTs may be subject to taxes in some regions. NFT is a young technology and is developing fast, which makes it difficult to introduce effective regulating measures to it.
The creator of an NFT may retain copyright to it after sale. All terms of transaction and the contract are defined by the author and are written in the NFT code. The author can define royalties, i.e. a fee for each subsequent sale of the NFT. NFT marketplaces reserve the right to ban and delete accounts of those who have violated the terms of the contract.
The buyer of an NFT does not buy the exclusive right to distribute the digital object. They own the keys to one version of it that is considered to be the original. Copying, multiplication and distribution of this digital object by others cannot be terminated or regulated by the purchaser of an NFT.
- Most NFT-related transactions are significantly more expensive than the average ones. This is due to a use of the proof-of-work (PoW) consensus algorithm on Ethereum, and it requires serious computing resources. Hence the high commission for "gas", i.e. conducting operations on Ethereum. However, Ethereum is moving from a proof-of-work (PoW) to a proof-of-stake(PoS) consensus algorithm, which does not require such large amounts of energy and will solve the problem. This transition from PoW to PoS is also referred to as the transition to Ethereum 2.0 (Eth2).
- At the moment, NFT systems are closely related to the underlying blockchains, hence the issues with low performance and security of NFT collections.
- Storing a digital object on an external system is dangerous because the object may be easily lost. For example, if a site, where the digital object of NFT was stored and to which the user had a key in the form of a link, is no longer supported, then the digital object is forever gone.
- Privacy issues. Most NFT transactions are based on the Ethereum, which only provides pseudo-anonymity .
- Existing NFT ecosystems are isolated from each other. Users cannot use and manipulate the NFT outside its ecosystem.
NFT has been criticized primarily for its negative environmental impact and carbon footprint . There are no exhaustive studies on this subject. However, it is known that Ethereum – the most popular blockchain for minting, i.e. creating NFTs – is extremely energy-intensive at this stage of its development .
The NFT market has been criticized as a fertile ground for fraudulent and illegal activities such as money laundering. Minority of the works on the NFT market happen to be the works of real artists and professionals. There is also an issue of copyright infringement.
How it works
A block with NFT contains attributes of a digital object: a hash, a token name, a token symbol, a unique digital object itself or a link to it. One can consider NFT as a collection of metadata about a unique digital object.
Smart contracts at the heart of NFTs allow users to set terms of a deal. An artist who has created a digital object and turned it into an NFT has the right to set royalties, i.e. a fee to the creator of an NFT from each subsequent sale of this NFT.
ERC-721 is one of the two popular standards for NFTs. The ERC-721 standard was proposed by Dieter Shirley, Nastassia Sachs, William Entriken and Jacob Evans in 2018. It is written in the Solidity language and is based on the Ethereum blockchain. Each ERC-721 token is unique. ERC-721 tokens have:
- a name field, which specifies the name of the token for external applications or contracts,
- a role field, which contains information on how to pass the underlying property of the token, and the definition of this property itself,
- a token Of Owner By Index field, which allows to track tokens using a unique identifier.
ERC-1155 is an improved standard designed for creating both fungible and non-fungible tokens. It operates on the Ethereum blockchain and has a number of advantages over ERC-721 tokens. It is more efficient and safe, less resource-intensive and is cheaper. It can also maintain both fungible and non-fungible tokens in one smart contract.
2017 With the CryptoKitties launch comes the mass interest in NFTs. Also this year Lavra Labs launches its notorious CryptoPunks project.
2018-2019 In 2018 NonFungible.com begins tracking NFT markets and establishes the term "non-fungible" as the primary to describe a new asset’s class. In 2018 to 2019, platforms for publishing and creating NFTs appear: among them are SuperRare, Known Origin, Mintbase, Mintable. Now any user has the opportunity to "mint", i.e. create NFTs regardless of their smart contracts deployment skills. NFTs begin to be actively implemented in various areas - particularly in gaming (My Crypto Heroes , F1DeltaTime , etc.).
2020-2021 NFT sales are estimated at $12 million by December 2020, and by February 2021 they reach $340 million . By the end of 2021, NFT trading volume reaches $10.6 billion . Celebrities and organizations such as Dapper Labs with their NBA Top Shot project, Grimes and Rob Gronkowski get actively involved in promoting the NFT market. The so-called NFT boom takes place in 2021.