NFTs: Beeple, Bubble or Brave New World

  • May 01, 2021
  • Jennifer Davidson and Imtiaz Karamat, Deeth Williams Wall LLP

Non-Fungible tokens or NFTs have captured the zeitgeist of the collective world in recent months. Is it a craze, the latest bubble, or is this the groundwork of a new tomorrow? The COVID-19 pandemic has created a brave new world of digital transformation, and NFTs may just be the logical consequence of a new era.

The NFT Model

NFTs may have only recently become part of the popular vernacular, but they have been around for some time. The first NFTs were launched back in 2015 with early successes like CryptoKitties, a video game that operates on Ethereum’s blockchain. Each CryptoKitty is a unique, collectable creature and is branded as a one-of-a-kind, irreplaceable and immutable furrever friend that is captured as a digital token. CryptoKitty tokens can be bought, sold and traded and the craze of CryptoKitties had many digital fans frantically building up their own collections. Between 2015 and 2018, CryptoKitties generated more than $40 million in transactions [1].  

NFTs of today have built on this model to create more complex versions of these cryptographic tokens. The token acts as a certificate of authenticity or digital receipt that verifies that the token, and the asset that it represents, is unique. This is done through a cryptographic hash function (unique identifying code), which governs an owner’s rights to the NFT and may also cover a variety of other functionalities, including linking the NFT to assets and determining the rights associated with those linked assets [2]. In isolation, the purchase of an NFT will simply result in the purchase of that token. However, when an NFT is linked to an asset, the governing code may function as a smart contract granting the NFT’s purchaser particular rights in the linked asset. For example, the governing code of an NFT linked to a given piece of art may grant the NFT’s purchaser a commercial license to sell or license the artwork. 

Many tend to think of NFTs as a new form of digital currency, and while NFTs can be bought, sold and traded like a digital currency, the uniqueness of each token sets it apart from a basic cryptocurrency like bitcoin. This directly relates to the term, “Non-Fungible Tokens”. Bitcoins are “fungible” or interchangeable, with there being no difference between each bitcoin. In contrast, NFTs are each unique and irreplaceable; this Non-Fungible nature opens up a new world that exceeds the capability and applications of a simple digital currency model. 

The model of a Non-Fungible Token built on blockchain technology creates the ability to have an immutable ledger recording transfers of ownership and validating authenticity [3]. To take this back to an offline world comparison, if you own a piece of original art created by a recognized artist, the value of that artwork on the market is dependent on the owner’s ability to prove authenticity. NFTs may meet this requirement by allowing for definitive pedigree, easily producible and incontrovertible evidence that the work is authentic. This is based on NFT transactions being recorded on blockchains, which are distributed and replicated across multiple computer systems by peer-to-peer networking and create entries that are deemed unaffected by any outside interference. The resiliency of these entries to tampering make them, in theory, immutable. Consequently, the chain of title for an NFT may function as an absolute record of ownership. 

As a result of being unique and fully traceable, transactions involving NFT-linked assets have a degree of legitimacy that cannot be found with traditional contracts. Thus, NFTs function as an indisputable digital receipt for the transfer of rights from seller to purchaser.