A non-fungible token (NFT) represents a distinct digital identifier, immutably recorded on a blockchain, serving to authenticate ownership. This digital asset is inherently indivisible, irreplaceable, and non-replicable. Ownership of an NFT is documented on the blockchain, enabling its transfer by the proprietor, thereby facilitating its sale and exchange. While introduced in 2017 as an innovative investment category, a September 2023 report indicated that more than 95% of NFT collections possessed no financial worth.
A non-fungible token (NFT) is a unique digital identifier that is recorded on a blockchain and is used to certify ownership and authenticity. It cannot be copied, substituted, or subdivided. The ownership of an NFT is recorded in the blockchain and can be transferred by the owner, allowing NFTs to be sold and traded. Initially pitched in 2017 as a new class of investment asset, by September 2023 one report claimed that over 95% of NFT collections had zero monetary value.
NFTs commonly incorporate references to various digital assets, including but not limited to artworks, photographs, videos, and audio recordings. Their inherent uniqueness distinguishes them from cryptocurrencies, which are fungible, a characteristic reflected in the 'non-fungible' designation.
Advocates assert that NFTs offer a verifiable public certificate of authenticity or proof of ownership; however, the precise legal rights conferred by an NFT often remain ambiguous. Blockchain-defined ownership of an NFT lacks intrinsic legal standing and does not automatically bestow copyright, intellectual property rights, or any other legal entitlements pertaining to its linked digital asset. Furthermore, an NFT does not impede the dissemination or duplication of its associated digital file, nor does it preclude the generation of multiple NFTs referencing identical content.
The volume of NFT trading experienced a significant surge, escalating from US$82 million in 2020 to US$17 billion in 2021. NFTs have been utilized as speculative investment vehicles and have attracted considerable criticism due to the substantial energy consumption and carbon footprint linked to certain blockchain technologies, in addition to their involvement in art-related fraudulent activities. The NFT market has also been characterized as an economic bubble or a Ponzi scheme. By 2022, the NFT market underwent a substantial downturn; a May 2022 assessment indicated a decline of over 90% in sales volume compared to the preceding year.
Characteristics
An NFT constitutes a data file, securely recorded on a blockchain, a form of distributed digital ledger, enabling its subsequent sale and exchange. This digital token can be linked to a specific asset, whether digital or physical, such as an image, artwork, musical composition, or a recording of a sporting event. It may also grant specific licensing rights for the designated use of the associated asset. NFTs, along with any applicable licenses for the use, reproduction, or display of the underlying asset, are tradable and salable within digital marketplaces. Nevertheless, the often extralegal context of NFT transactions frequently leads to an informal transfer of asset ownership, lacking a formal legal framework for enforcement, thereby often serving primarily as a status symbol.
NFTs operate similarly to cryptographic tokens; however, unlike cryptocurrencies, they are typically not mutually interchangeable, hence their non-fungible nature. A non-fungible token incorporates data links, which may, for instance, direct to information regarding the storage location of the associated artwork, and these links are susceptible to degradation over time, known as link rot.
Copyright
An NFT exclusively signifies proof of ownership of a blockchain entry and does not inherently confer intellectual property rights to the digital asset it claims to represent. Consequently, an individual selling an NFT associated with their creative work does not automatically transfer copyright to the buyer, nor is the seller necessarily precluded from minting additional NFT copies of the identical work. Legal scholar Rebecca Tushnet states, "In one sense, the purchaser acquires whatever the art world thinks they have acquired. They definitely do not own the copyright to the underlying work unless it is explicitly transferred."
Some NFT initiatives, including Bored Apes, expressly grant intellectual property rights for specific images to their respective owners. The CryptoPunks NFT collection initially restricted its owners from commercial utilization of the associated digital artwork; however, this policy was subsequently revised to permit such use following the collection's acquisition by its parent company.
History
Early projects
The inaugural documented NFT, Quantum, was developed by Kevin McCoy and Anil Dash in May 2014. This NFT comprises a video clip produced by McCoy's wife, Jennifer. McCoy formally registered the video on the Namecoin blockchain and subsequently sold it to Dash for $4 during a live presentation at the Seven on Seven conferences held at the New Museum in New York City. McCoy and Dash termed this technological innovation 'monetized graphics,' which explicitly established a connection between a non-fungible, tradable blockchain marker and a piece of art through on-chain metadata facilitated by Namecoin.
In October 2015, Etheria was launched and demonstrated at DEVCON 1 in London, Ethereum's inaugural developer conference, three months following the Ethereum blockchain's debut. The majority of Etheria's 457 purchasable and tradable hexagonal tiles remained unsold for over five years until March 13, 2021, when a resurgence of interest in NFTs precipitated a rapid buying spree. Within 24 hours, all tiles from both the current and a preceding version, each hardcoded at 1 ETH (equivalent to US$0.43 at the time of launch), were acquired for a cumulative total of US$1.4 million.
In 2016, Rare Pepes, a "semi-fungible" NFT initiative centered on the Pepe the Frog meme, emerged on the Bitcoin blockchain. This project involved a collective of artists contributing their creations to a curated directory and utilized the Counterparty protocol, which was established in 2014 and had previously facilitated the creation of other digital assets.
By 2017, several NFT projects began to appear on Ethereum, employing a "fungible" token standard known as ERC-20. Curio Cards, introduced in May of that year, is recognized as Ethereum's first art NFT project to use this fungible standard, featuring card-shaped artwork alongside various image types, including satirical corporate logos. Subsequently, in June, the generative art project CryptoPunks emerged, comprising 10,000 pixelated characters, and would later become one of the most commercially successful NFT ventures. In December, a clipart-based collection depicting images of rocks, named EtherRock, was also launched.
In November 2017, the highly acclaimed Ethereum-based blockchain game CryptoKitties debuted. This game is credited with pioneering what is widely considered the first authentic non-fungible token standard, designated as ERC-721. It initially employed an early iteration of ERC-721, which differed from the standard's formally published version in 2018.
ERC-721: Non-Fungible Token Standard
Although early experiments with non-fungibility, such as Colored Coins on Bitcoin, date back to 2012, a community-driven paper titled ERC-721: Non-Fungible Token Standard was published in 2018. Initiated by civic hacker and lead author William Entriken, this paper is recognized for establishing the foundational principles for NFTs and fostering the expansion of the broader ecosystem. It formalized and defined the term Non-Fungible Token ("NFT") within blockchain nomenclature by introducing a standard for smart contracts, "ERC-721," which ensures that tokens possess unique attributes and ownership details, making each distinct. This influence led to the development of derivative standards on Ethereum (such as ERC-1155, which enables semi-fungibility) and other blockchains. The versatility of ERC-721 facilitated the innovation of numerous applications, including digital artwork, verifiable deeds for physical items, real estate (both physical and virtual), access passes, and in-game assets. Ultimately, the advent of ERC-721 is acknowledged for fundamentally transforming the landscape of digital verification, authentication, and ownership.
Origins of the term "NFT" and its adoption
The term "NFT" is not known to have been applied to earlier projects prior to the blockchain game CryptoKitties' adoption of ERC-721. During discussions among stakeholders for the ERC-721 draft, the word deed was considered alongside other alternatives, including distinguishable asset, title, token, asset, equity, and ticket. Ultimately, through Entriken's initiative, operating under the moniker "Fulldecent," a vote was conducted during the paper's drafting phase to determine the terminology for the published version, with "NFT" being selected by the stakeholders.
The term "NFT" and awareness of the ERC-721 standard gained substantial exposure and widespread adoption through the popularity of CryptoKitties in 2017. While utilizing this standard, CryptoKitties achieved recognition as the first mainstream NFT decentralized application (dApp); the game's operational demands were significant enough to temporarily overwhelm Ethereum's processing capacity at the time.
Influence
During the peak success of CryptoKitties and the emergence of ERC-721 tokens in 2017, OpenSea, an NFT marketplace, was established to capitalize on the new non-fungible token standard. It strategically positioned itself early within the NFT market landscape and expanded to achieve a $1.4 billion market capitalization by 2021, amidst the then-ongoing NFT boom.
In 2021, ArtReview's Power 100 positioned ERC-721 as the leading entity, commending its role as "the most powerful art entity in the world" due to its innovation in establishing a novel market for artworks. This market diverged from conventional gatekeeping practices and attracted a distinct category of collectors. Notably, artist Beeple's composite artwork, Everydays: The First 5000 Days, was sold as an ERC-721 NFT at Christie's for $69 million, marking the inaugural instance of a traditional art institution engaging with NFTs.
The broader NFT market.
The NFT market demonstrated substantial expansion throughout 2020, with its valuation escalating threefold to US$250 million. Subsequently, during the initial quarter of 2021, expenditures on NFTs surpassed US$200 million.
Public interest in NFTs intensified during the nascent months of 2021, following a series of prominent sales and art auctions.
By May 2022, The Wall Street Journal indicated a "collapsing" trend within the NFT market. Daily sales of NFT tokens had plummeted by 92% since September 2021, concurrently with an 88% reduction in active NFT market wallets from November 2021. Although escalating interest rates influenced speculative investments across financial sectors, the Journal characterized NFTs as "among the most speculative" assets.
In December 2022, programmer Casey Rodarmor unveiled "ordinals," an innovative method for integrating NFTs onto the Bitcoin blockchain. By February 2023, the widespread adoption of ordinals had resulted in elevated Bitcoin payment fees and potentially contributed to an appreciation in Bitcoin's market value.
A report published in September 2023 by the cryptocurrency gambling platform dappGambl asserted that 95% of NFTs had depreciated to a negligible monetary value, with 79% of all NFT collections remaining unpurchased.
Applications.
Associated Digital Assets.
NFTs facilitate the exchange of digital tokens that are intrinsically linked to a specific digital file asset. While NFT ownership typically grants a license for the utilization of the associated digital asset, it generally does not transfer the copyright to the purchaser. Certain agreements restrict usage to personal, non-commercial purposes, whereas others extend to commercial exploitation of the underlying digital asset. This decentralized approach to intellectual property rights presents an alternative to conventional copyright protection mechanisms, which are traditionally managed by state entities and industry intermediaries.
Digital Art.
Digital art represents a prevalent application for NFTs. Auctions of NFTs associated with digital artworks have garnered significant public interest, with Christie's hosting the inaugural major auction of this type in 2021. The artwork Merge by Pak achieved the highest NFT sale price at US$91.8 million, while Everydays: the First 5000 Days by Mike Winkelmann, professionally known as Beeple, secured the second-highest valuation at US$69.3 million, both in 2021.
Several NFT collections, such as Bored Apes, EtherRocks, and CryptoPunks, exemplify generative art. This artistic methodology involves the creation of numerous distinct images through the combinatorial assembly of various simple visual components.
In March 2021, Injective Protocol, a blockchain firm, acquired an original screen print by English graffiti artist Banksy, titled Morons (White), for $95,000. The company then documented its destruction by burning with a cigarette lighter. This video was subsequently uploaded—a process termed "minting" within the NFT community—and sold as an NFT. The individual responsible for the artwork's destruction, identifying as "Burnt Banksy," characterized the act as a mechanism for migrating a physical artwork into the NFT domain.
Tina Rivers Ryan, an American curator and art historian specializing in digital works, has noted a prevalent skepticism among art museums regarding the "lasting cultural relevance" of NFTs. Ryan draws a parallel between NFTs and the ephemeral "net art" trend that preceded the dot-com bubble. In July 2022, following the contentious sale of Michelangelo's Doni Tondo in Italy, the nation implemented a prohibition on the sale of NFT reproductions of renowned artworks. Due to the intricate and unregulated nature of this domain, the Italian Ministry of Culture issued a temporary directive advising its institutions to abstain from entering into contracts involving NFTs.
A centralized authentication system is absent, which would otherwise prevent the illicit sale of stolen and counterfeit digital works as NFTs. Nevertheless, prominent auction houses such as Sotheby's and Christie's, alongside numerous museums and galleries globally, have initiated collaborations and partnerships with digital artists including Refik Anadol, Dangiuz, and Sarah Zucker.
Non-fungible tokens (NFTs) associated with digital artworks were traded through specialized NFT platforms. OpenSea, established in 2017, emerged as an early marketplace supporting diverse NFT types. In July 2019, the National Basketball Association, the NBA Players Association, and Dapper Labs, the creator of CryptoKitties, initiated NBA Top Shot, a joint venture enabling basketball enthusiasts to acquire NFTs representing historical moments. In 2020, Rarible was established, facilitating the management of diverse digital assets. By 2021, Rarible and Adobe formed a partnership to enhance the verification and security of metadata for digital content, including NFTs. Also in 2021, the cryptocurrency exchange Binance introduced its dedicated NFT marketplace. In 2022, eToro Art, an initiative by eToro, was founded with a focus on fostering NFT collections and supporting nascent creators.
Prominent auction houses, Sotheby's and Christie's, exhibit artworks linked to corresponding NFTs across both virtual gallery environments and physical display mediums such as screens, monitors, and televisions.
Mars House, an architectural NFT created in May 2020 by artist Krista Kim, was acquired in 2021 for 288 Ether (ETH), a sum equivalent to US$524,558 at the time of sale.
Games
NFTs are capable of representing in-game assets. Commentators suggest that such assets are user-controlled rather than developer-controlled, particularly when they can be transacted on external marketplaces without requiring developer authorization. However, the adoption of NFTs by game developers has been varied; while companies such as Ubisoft have integrated the technology, others like Valve and Microsoft have officially banned their use.
- CryptoKitties represented an early, successful blockchain-based online game where participants could acquire and exchange virtual feline characters. The integration of NFTs for monetization within the game attracted a $12.5 million investment, with individual virtual cats occasionally commanding prices exceeding $100,000. Subsequent to its notable success, CryptoKitties was incorporated into the ERC-721 standard, initially developed in January 2018 and formally ratified in June of the same year.
- In October 2021, Valve Corporation prohibited applications from its Steam platform that utilize blockchain technology or NFTs for the exchange of value or in-game artifacts.
- In December 2021, Ubisoft unveiled Ubisoft Quartz, described as "an NFT initiative enabling the acquisition of artificially scarce digital items via cryptocurrency." This announcement garnered substantial public criticism, evidenced by the Ubisoft Quartz promotional video achieving a 96% dislike ratio on YouTube. Ubisoft subsequently removed the video from public visibility on YouTube. Furthermore, the initiative faced internal opposition from Ubisoft developers. A 2022 annual report from the Game Developers Conference indicated that 70 percent of surveyed developers expressed no interest in incorporating NFTs or cryptocurrency into their game development.
- Some luxury brands issued NFTs for virtual cosmetic items within online video games. In November 2021, investment firm Morgan Stanley released a report projecting that this sector could expand to a US$56 billion market by 2030.
- In July 2022, Mojang Studios declared that NFTs would be prohibited within Minecraft, asserting that their integration conflicted with the game's foundational "values of creative inclusion and playing together."
Music and Film
NFTs have been suggested for application within the film industry, enabling the tokenization of movie scenes for sale as NFT-based collectibles. Entertainment industry artists may leverage NFTs to secure royalty payments. To date, NFTs have seen frequent adoption across both the music and film sectors.
- In May 2018, 20th Century Fox collaborated with Atom Tickets to issue limited-edition Deadpool 2 digital posters for promotional purposes. These were accessible via OpenSea and the GFT exchange.
- In March 2021, Adam Benzine's 2015 documentary Claude Lanzmann: Spectres of the Shoah was recognized as the inaugural motion picture and documentary film to be auctioned as an NFT.
- Further instances of NFT integration within the film industry encompass a series of NFT artworks for Godzilla vs. Kong, alongside the 2021 releases of Kevin Smith's horror film KillRoy Was Here and the 2021 production Zero Contact as NFTs.
- In September 2021, Shakira launched an NFT collection titled La Caldera, comprising four distinct pieces, each combining animated digital art with an audio component created by Shakira.
- In November 2021, director Quentin Tarantino launched seven non-fungible tokens (NFTs) derived from previously unreleased scenes of Pulp Fiction. Miramax later initiated legal action, asserting that their film rights had been infringed and that the initial 1993 contract with Tarantino granted them the exclusive authority to mint NFTs associated with Pulp Fiction.
- In August 2022, the band Muse issued their album Will of the People as a collection of 1,000 NFTs, marking the first instance where NFT sales contributed to eligibility for the UK and Australian music charts.
By February 2021, non-fungible tokens (NFTs) had generated US$25 million in revenue from the sale of digital artwork and music. On February 28, 2021, electronic dance music artist 3lau sold 33 NFTs for a cumulative US$11.7 million, commemorating the third anniversary of his album Ultraviolet. Subsequently, on March 3, 2021, an NFT was created to promote the Kings of Leon album When You See Yourself. Notable musicians who have utilized NFTs include American rapper Lil Pump, Grimes, visual artist Shepard Fairey in collaboration with record producer Mike Dean, and rapper Eminem.
A scholarly paper presented at the 40th International Conference on Information Systems in Munich in 2019 proposed the application of NFTs as ticketing mechanisms for various events. This approach would allow event organizers or performing artists to accrue royalties from subsequent resales of each ticket.
Other Associated Digital Assets
- Several prominent internet memes have been linked to NFTs, with their digital representations minted and subsequently sold by either their original creators or the individuals depicted. Illustrative examples encompass Doge, an image featuring a Shiba Inu dog, alongside 'Charlie Bit My Finger,' 'Nyan Cat,' and 'Disaster Girl.'
- Certain virtual environments, frequently promoted as metaverses, have integrated NFTs to facilitate the exchange of virtual commodities and digital real estate.
- A subset of adult content has been transacted as NFTs; however, the adversarial stance of many NFT marketplaces toward such material has posed considerable challenges for creators. The utilization of NFTs in this sector of the entertainment industry enables creators to disseminate their works independently, circumventing potential censorship or deletion by third-party platforms.
- The inaugural documented political protest NFT, titled 'Destruction of Nazi Monument Symbolizing Contemporary Lithuania,' originated from a video recorded by Professor Stanislovas Tomas on April 8, 2019, and was minted on March 29, 2021. The video depicts Tomas employing a sledgehammer to dismantle a state-sponsored Lithuanian plaque, situated at the Lithuanian Academy of Sciences, which commemorated the Nazi war criminal Jonas Noreika.
- In 2020, Dapper Labs, the developer behind CryptoKitties, launched the NBA TopShot project, enabling the acquisition of NFTs associated with significant basketball highlights. This initiative was developed on the Flow blockchain.
- In March 2021, an NFT representing Twitter founder Jack Dorsey's initial tweet was sold for $2.9 million. The identical NFT was subsequently offered for sale in 2022 with an asking price of $48 million, yet it only garnered a maximum bid of $280.
- On December 15, 2022, former United States President Donald Trump unveiled a collection of NFTs, each priced at $99, featuring his likeness. Reports indicated that this endeavor generated between $100,001 and $1 million in revenue.
- In April 2023, a collective undertook a
Applications of NFTs in Scientific and Medical Domains
NFTs have been posited for various applications within scientific and medical contexts. Proposed uses include tokenizing patient data, enhancing supply chain traceability, and minting patents as NFTs.
Academic institutions have leveraged the financial proceeds from NFT sales to fund research initiatives.
- In May 2021, the University of California, Berkeley, declared its plan to auction NFTs representing two patents for Nobel Prize-winning inventions: CRISPR gene editing and cancer immunotherapy. The university stipulated that it would retain ownership of the underlying patents. Eighty-five percent of the revenue generated from this collection was designated for research funding. The collection, which featured handwritten notes and faxes by James Allison, was titled The Fourth Pillar. It was sold in June 2022 for 22 Ether, equivalent to approximately US$54,000 at that time.
- A prominent American geneticist, George Church, declared his intent to monetize his DNA through non-fungible tokens (NFTs), allocating the proceeds to fund research at Nebula Genomics. In June 2022, twenty NFTs depicting his likeness were released, diverging from the initial plan to issue NFTs of his actual DNA, a change attributed to prevailing market conditions. Despite receiving varied responses, this initiative is viewed as a component of a broader endeavor to leverage the genetic information of 15,000 individuals for genetic research purposes. The project aims to utilize NFTs to guarantee that individuals contributing their genetic data receive direct remuneration for their input. Numerous other entities have engaged in comparable, frequently critiqued, initiatives involving blockchain-based genetic data, seeking to enhance user control over their information and facilitate direct financial compensation upon data sale.
- Molecule Protocol, a Swiss-based initiative, endeavors to employ non-fungible tokens (NFTs) for the digitization of intellectual property rights belonging to individual scientists and research teams, thereby facilitating research funding. The project's whitepaper outlines its objective to tokenize the copyrights of scientific publications as NFTs, enabling their exchange between researchers and investors within an anticipated marketplace. In July 2022, the project successfully secured US$12 million in seed funding. RMDS Lab has subsequently declared a comparable methodology.
Speculation
Non-fungible tokens (NFTs) that represent digital collectibles and artworks are inherently speculative assets. Experts characterized the rapid increase in NFT acquisitions as an economic bubble, drawing parallels to the Dot-com bubble. In March 2021, Mike Winkelmann specifically labeled NFTs an "irrational exuberance bubble." By mid-April 2021, a notable decline in demand led to a substantial decrease in prices. Financial theorist William J. Bernstein likened the NFT market to the 17th-century tulip mania, asserting that any speculative bubble necessitates a technological innovation to generate public excitement, with a portion of this enthusiasm stemming from exaggerated product forecasts. From the perspective of regulatory policymakers, NFTs have intensified existing challenges, including speculation, fraud, and pronounced market volatility.
Money Laundering
Non-fungible tokens (NFTs), similar to other blockchain-based securities and conventional art transactions, present a potential avenue for money laundering. Wash trading, a method involving the creation of multiple wallets by a single individual to simulate numerous fictitious sales before ultimately selling the NFT to a third party, can be facilitated through NFTs. A Chainalysis report indicates that such wash trades are gaining traction among money launderers, primarily due to the predominantly anonymous character of transactions on NFT marketplaces. Looksrare, launched in early 2022, gained notoriety for the substantial transaction volumes achieved in its initial operational period, reaching up to US$400,000,000 daily. A significant portion of these considerable sums was attributed to wash trading activities. The Royal United Services Institute suggested that potential money laundering risks associated with NFTs could be alleviated by implementing "KYC best practices, strong cyber security measures, and a stolen art registry (...), without impeding the expansion of this nascent market."
NFT auction platforms may encounter regulatory scrutiny to ensure adherence to anti-money laundering statutes. Gou Wenjun, who directs a monitoring center for the People's Bank of China, articulated concerns that NFTs possess the potential to "easily become money-laundering tools." He highlighted the illicit exploitation of cryptographic technologies, noting that nefarious actors frequently masquerade as financial technology innovators.
A 2022 analysis conducted by the United States Treasury concluded that "some evidence of money laundering risk" existed within the high-value art market, extending to "the emerging digital art market, such as the use of non-fungible tokens (NFTs)." The study posited that NFT transactions could offer a more straightforward method for laundering funds via art, circumventing the logistical and insurance complexities inherent in trading physical artworks. Multiple NFT exchanges were identified as virtual asset service providers, potentially falling under the purview of Financial Crimes Enforcement Network regulations. In March 2022, two individuals faced charges related to orchestrating a million-dollar NFT scheme through wire fraud.
In July 2022, the European Commission declared its intention to formulate regulations aimed at combating money laundering, with an anticipated implementation by 2024.
Other Applications
- In 2019, Nike secured a patent for CryptoKicks, a system designed to leverage NFTs for authenticating physical products and providing customers with a corresponding virtual representation of the footwear.
- Furthermore, specific NFT releases have incorporated exclusivity as a utility, granting holders access to private online communities.
- Both academic research and practical implementations propose the utilization of NFTs for software licensing and for facilitating the transfer of source code copyright ownership.
Blockchain Standards
Subsequent to Ethereum's establishment of the ERC-721 standard, numerous other blockchains have integrated support for NFTs.
The ERC-721 standard defines an inheritable smart contract framework, enabling developers to construct new contracts by replicating a reference implementation. This standard furnishes fundamental methods for tracking the ownership of a distinct identifier and facilitating asset transfers between owners. In contrast, the ERC-1155 standard introduces "semi-fungibility," where a single token can represent a category of interchangeable assets.
Challenges and Critiques
Unenforceability of Content Ownership
Given the public accessibility of NFT content, any individual can readily duplicate a file referenced by an NFT. Moreover, possessing an NFT on the blockchain does not intrinsically confer legally enforceable intellectual property rights to the associated digital asset.
It is widely recognized that NFT images can be copied or saved directly from a web browser through the use of a right-click menu to download the referenced image. Proponents of NFTs often dismiss this duplication of digital artwork as indicative of a "right-clicker mentality." A collector cited by Vice likened the value of an acquired NFT—as opposed to an unpurchased duplicate of the underlying asset—to a status symbol, serving to "show off that they can afford to pay that much."
The expression "right-clicker mentality" rapidly gained traction following its emergence, particularly among critics of the NFT market who co-opted the term to highlight the ease with which NFT-backed digital art could be acquired. This critique was notably advanced by Australian programmer Geoffrey Huntley, who developed "The NFT Bay," a platform designed in the style of The Pirate Bay. The NFT Bay promoted a torrent file allegedly comprising 19 terabytes of digital art images associated with NFTs. Huntley drew parallels between his initiative and an art project by Pauline Pantsdown, expressing an aspiration for the site to inform users about the fundamental nature and limitations of NFTs.
The facility with which NFT content can be duplicated underscores more extensive legal complexities concerning "tokenization," the mechanism through which NFTs ostensibly signify ownership of underlying assets. Before recent legislative amendments, such as the 2022 revisions to the Uniform Commercial Code (UCC) in the United States, tokenization encountered substantial impediments under conventional property law. Legal academics have observed that NFTs did not intrinsically confer ownership rights enforceable against third parties, given that the blockchain record alone does not conform to established legal paradigms for property. For instance, if an NFT purports to represent ownership of digital art, yet the art is independently transferred to another entity, the NFT holder might lack a legal foundation to reclaim it, thereby retaining only a contractual claim against the issuer rather than a proprietary right in the asset itself.
This challenge originates from the numerus clausus principle, a foundational concept in property law that restricts the categories of recognized property rights to a defined, standardized set. Historically, tokenization mechanisms, such as negotiable instruments or bills of lading, necessitated specific legal acknowledgment to function as enforceable representations of rights in underlying assets. Without such recognition, NFTs encountered difficulties conforming to these limitations, as parties were unable to arbitrarily create novel property rights. In the United States, Article 12 of the Uniform Commercial Code (UCC), enacted in 2022, addresses this by classifying NFTs as "controllable electronic records" (CERs), establishing a new class of personal property that can be legally owned, transferred, and utilized as collateral. This legislative reform facilitates tokenization under specific conditions, for instance, when an NFT signifies a "controllable account" (e.g., a payment right), provided the underlying debtor consents to honor the CER's controller. Nevertheless, for digital art or other assets lacking such agreements, the disparity between NFT ownership and enforceable content rights persists, thereby reinforcing the "right-clicker" critique that blockchain ownership does not guarantee control over the associated digital file.
Off-chain Storage
Non-fungible tokens representing digital art typically do not store the corresponding artwork file directly on the blockchain. This practice is due to the substantial file sizes involved and the inherent limitations in blockchain processing speed. Such a token functions as a certificate of ownership, incorporating a web address that directs to the specific piece of art; however, this method renders the artwork itself susceptible to link rot.
Environmental Implications
The acquisition and sale of NFTs have been facilitated by the considerable energy consumption and subsequent greenhouse gas emissions associated with certain types of blockchain transactions. While all Ethereum transactions have historically impacted the environment, the direct effect of these transactions has also varied with their scale. The proof-of-work protocol, essential for regulating and verifying blockchain transactions on networks (including Ethereum until 2022), demands substantial electricity. Estimating the carbon footprint of a particular NFT transaction requires various assumptions or estimations regarding the transaction's configuration on the blockchain, the economic behavior of blockchain miners (and the energy requirements of their mining equipment), and the proportion of renewable energy utilized by these networks. Furthermore, conceptual questions arise, such as whether the carbon footprint estimate for an NFT purchase should encompass a portion of the underlying network's ongoing energy demand or solely the marginal impact of that specific transaction. An analogous situation might be the carbon footprint associated with an additional passenger on a given airline flight.
In 2022, Ethereum significantly reduced its energy consumption by 99.99 percent through its transition to a proof-of-stake consensus mechanism. Other strategies for mitigating electricity usage include employing off-chain transactions as part of the NFT minting process. Some NFT marketplaces have offered the option to purchase carbon offsets during NFT transactions, although the environmental efficacy of this approach has been subject to scrutiny. In certain instances, NFT artists have opted against selling some of their own creations to limit their contributions to carbon emissions.
Artist and Buyer Transaction Fees
Sales platforms impose various fees on artists and buyers for activities such as minting, listing, claiming, and secondary sales. An analysis of NFT markets conducted in March 2021, immediately following the US$69.3 million sale of Beeple's "Everydays: the First 5000 Days," revealed that the majority of NFT artworks sold for less than US$200, with one-third selling for under US$100. Artists selling NFTs below US$100 incurred platform fees ranging from 72.5% to 157.5% of that amount. On average, these fees constituted 100.5% of the sale price, indicating that such artists typically paid more in fees than they generated from sales.
Plagiarism and Fraudulent Activities
Instances have been documented where artists and creators have had their work sold as NFTs by unauthorized parties. Following the death of artist Qing Han in 2020, a fraudster assumed her identity, leading to several of her works becoming available for purchase as NFTs. Similarly, an individual impersonating Banksy successfully sold an NFT purportedly created by the artist for US$336,000 in 2021; the seller subsequently refunded the money after the incident garnered media attention.
The Voiceverse NFT Plagiarism Controversy
In January 2022, a notable instance of speech synthesis NFT plagiarism and fraud emerged when Voiceverse, an NFT company, was found to have illicitly appropriated content from 15.ai, a non-commercial text-to-speech initiative. Forensic log files indicated that Voiceverse had generated voice lines, specifically those of Twilight Sparkle and Rainbow Dash, using 15.ai's technology, subsequently altering their pitch to obscure their origin. These altered voice lines were then promoted as proprietary creations and sold as NFTs without authorization. When confronted, Voiceverse attributed the unauthorized usage to a marketing team member who allegedly failed to provide proper attribution. The developer of 15.ai, who had publicly expressed opposition to NFTs a month prior to this incident, responded with a widely circulated and supported tweet stating, "Go fuck yourself."
The inherent anonymity within the NFT ecosystem, coupled with the ease of forging digital assets, presents significant challenges for pursuing legal remedies against NFT plagiarists.
In February 2023, a New York court ordered artist Mason Rothschild to pay $133,000 in damages to Hermès, following a jury's verdict in favor of the copyright holder regarding Rothschild's 2021 digital renditions of the brand's Birkin handbag.
In response to plagiarism incidents, some NFT marketplaces have established "takedown teams" to address artist complaints. OpenSea, a prominent NFT marketplace, explicitly prohibits plagiarism and deepfakes, particularly non-consensual intimate imagery. However, certain artists have criticized OpenSea's efforts, citing slow response times to takedown requests and vulnerability to support scams from users impersonating platform representatives. Conversely, others contend that NFT marketplaces lack sufficient market incentives to rigorously combat plagiarism.
- A fraudulent technique known as "sleepminting" enables an perpetrator to mint an NFT directly into an artist's digital wallet and subsequently transfer it to their own account without the artist's knowledge. This method was notably employed by a white hat hacker to mint a deceptive NFT that appeared to originate from the wallet of artist Beeple.
- Concerns regarding plagiarism prompted the art website DeviantArt to develop an algorithm designed to compare user-submitted artwork on its platform with art available on popular NFT marketplaces. Should the algorithm detect similar artwork, it notifies the original author and provides instructions on how to contact NFT marketplaces to request the removal of their plagiarized work.
- The BBC documented a case of insider trading involving an employee of the NFT marketplace OpenSea, who purchased specific NFTs with prior knowledge that these assets would be promoted on the company's homepage before their public launch. The NFT trading market remains unregulated, offering no legal recourse for such abuses.
- When Adobe announced the integration of NFT support into its graphics editor Photoshop, the company proposed the creation of an InterPlanetary File System database as an alternative mechanism for establishing the authenticity of digital works.
- The prices paid for specific NFTs and the sales volume attributed to particular NFT creators can be artificially inflated through wash trading, a practice prevalent due to the absence of governmental regulation concerning NFTs.
Security
In January 2022, reports indicated that certain NFTs were being exploited by sellers to surreptitiously collect users' IP addresses. This exploit leverages the off-chain nature of NFTs, as a user's computer automatically accesses a web address embedded within the NFT to display its content. The server at this address can then log the user's IP address and, in some instances, dynamically alter the returned content to reflect this data. OpenSea exhibits a particular vulnerability to this loophole because it permits the linking of HTML files.
Pyramid/Ponzi scheme claims
Critics frequently liken the structural dynamics of the NFT market to a pyramid or Ponzi scheme, where early participants accrue profits at the expense of subsequent investors. In June 2022, Bill Gates articulated his conviction that NFTs are "100% based on greater fool theory."
"Rug pull" exit scams
A "rug pull" constitutes a fraudulent scheme, akin to an exit scam or a pump-and-dump operation, wherein the developers of an NFT or other blockchain project artificially inflate the project's perceived value to drive up the NFT's price. Subsequently, they abruptly liquidate all their tokens to secure substantial profits or abandon the project entirely while removing liquidity, thereby permanently destroying the project's value and leaving investors with no recovery of their initial investment.
Certificate of authenticity
- Certificate of authenticity
- Decentralized autonomous organization
- Deed
- William Entriken, recognized as the principal author of the ERC-721 standard.
- The concept of 'Title' as a property within digital asset frameworks.
- Web3, representing the decentralized iteration of the internet.
- Media related to Non-fungible token at Wikimedia Commons