words by Maria Margot Kafka, Staff Writer
A Nyan Cat GIF NFT was auctioned for $590,000. Twitter’s former CEO sold his first tweet for $3 million. As images, they are both free to download from the internet but worth millions as NFTs. So what are NFTs and how are they valuable?
NFT stands for non-fungible token. Non-fungible is an economic term for unique and non-replaceable items. There is one Mona Lisa painting made by Da Vinci, but countless prints, making only the former non-fungible. Token refers to coin-like objects protected using blockchain technology. NFTs are not the images themselves but a transaction receipt.
The benefits for digital artists are unprecedented. Creators retain their item’s copyrights and reproduction rights, allowing them to control scarcity and make changes even after the sale. Some NFTs also have resale royalties, so creators earn a percentage every time the NFT is exchanged. According to bidders’ interviews, part of the rationale of spending so much on early NFTs is to support a new market that works without a middle-man exploiting people’s work. Buyers can now financially support artists they like or own little parts of internet history with basic usage rights. Such as the ability to legally repost the images online or set them as a profile picture.
As for collectors, NFTs are speculative assets. A prime example is one of Beeple’s artworks. The NFT was originally bought for $67,000 when it depicted Joe Biden and Donald Trump in the nude. Its value soared after Beeple changed it into a picture of naked Trump covered in graffiti. The buyer then resold the NFT for $6.6 million with Beeple getting 10% securing him at least $727,000 in profit.
But how does NFT technology make this market feasible? In one word: blockchains.
A blockchain is a network of computers, where each party (node) performs calculations on the same database of transaction histories. Their purpose is to sum all transactions and compare them with all other parties to get a consensus. Effectively, it is a peer-to-peer process that validates the blockchain’s decentralised ledger.
The blocks consist of unique encrypted data chunks that include a hash. Hashes are transaction fingerprints with information about the seller, buyer, and transfer of ownership. Each block also contains the previous block’s hash to create a chain where new blocks can be added, but previous blocks can’t be changed without breaking the chain. If you wanted to alter one block’s hash to make yourself the buyer, you would have to change the hash on every downstream block, on every node. This should be done faster than the network can compare sums and flag the transaction as fraudulent in the absence of a consensus. This is what makes NFTs unstealable, in theory.
One downside to this technology is its enormous carbon footprint, since the energy required to run these calculations around the clock is provided by fossil fuels. This led many individuals to start a market boycott until blockchains can use renewable energy. In response, Ethereum, the main blockchain NFTs run on, promised a future change in the method of transaction validation that requires 99% less energy.
So why are NFTs worth millions? In simple terms rules, if something is scarce and collectible, we all agree it has value. But NFTs give us more than bragging rights. Blockchain technology offers an alternative decentralised method of commerce with the power to change the field of economics. For better or for worse, they are here to stay.