Definition: digital, cryptographic form of an asset
What is a Non-Fungible Token (NFT)?
Non-Fungible Token is a unique, indivisible and non-fungible digital token. A token represents a digital or physical object on a blockchain. Tokens are a digital, cryptographic form of assets. Rights or ownership of physical or digital objects can be proven using tokens.
The literal translation of Non-Fungible Token is “non-exchangeable token”. NFT is the abbreviation for Non-Fungible Token. It is a unique, non-fungible and indivisible digital token that represents ownership or usage rights to a digital or physical object.
As with cryptocurrencies, blockchain technology serves as the technical foundation. However, cryptocurrencies are fungible tokens. Non-fungible tokens (NFT) are a digitized form of an asset. NFTs are tradable and can be bought or sold through trading platforms. Tokens contain cryptographic information that proves their uniqueness and allows them to be traced back. Tokens refer to a virtual or physical object such as a digital image.
Although the referred digital objects can be copied, the uniqueness of the reference of the NFT to the object is preserved. The first NFTs were created in 2012 in a Bitcoin sidechain. Meanwhile, non-fungible tokens are trading at significant values. The NFT market is unregulated and trading non-fungible tokens is highly speculative. There are NFTs for digital artwork, virtual trading cards, the world’s first SMS sent or the first entry in the online encyclopedia Wikipedia and much more.
Differentiating non-fungible tokens from cryptocurrencies
Non-fungible tokens and cryptocurrencies have the same technological and cryptographic basis as blockchain. However, cryptocurrencies are divisible tokens (fungible tokens) Unlike cryptocurrencies, an NFT is indivisible, non-exchangeable and unique.
While cryptocurrencies can be bought and used in any subset of an entity, an NFT exists only as a whole. There is only one non-fungible token for a particular representation of an object. With a cryptocurrency, on the other hand, it doesn’t matter which bitcoin or ether you use to pay, for example. Like banknotes, they can be exchanged at will.
Basic functionality of non-fungible tokens
Blockchain is the technological and cryptographic basis for non-fungible tokens. Blockchain is a kind of database that consists of many individual blocks of information arranged in a chain. The blocks are related to their respective predecessor block via their unique hash values. Manipulation of a single block invalidates the entire blockchain. This ensures that the data content is immutable. Blockchains are stored decentralized and managed in a peer-to-peer network. Each participating computer has a copy of the blockchain and can check its consistency.
With non-fungible tokens, various pieces of information about a digital or physical object are stored in the blocks of a blockchain. The blocks contain, for example, the reference (link) to a digital object and information about property rights, rights of use, buyers and sellers. The represented object itself does not exist in the blockchain. The Ethereum blockchain, used for the widespread cryptocurrency Ether, has become very popular for NFTs. NFTs can be bought and sold in this blockchain with the cryptocurrency ether.
Creating an NFT is also known as minting or minting. In minting, the digital object to be represented is uploaded to, for example, an NFT trading platform, and an NFT is generated for a fee. Adding an NFT to the blockchain, like mining digital money, involves a lot of computing effort.
Possible uses and examples for non-fungible tokens
Non-fungible tokens are often used to digitally represent virtual objects and clearly assign ownership or usage rights. Examples of such virtual objects are digital images and artwork, digital audio tracks, digital videos, digital trading cards, virtual items in computer games, digital membership cards, certificates, identities, patents, certificates of origin, website names and many more. In the past, the sale of some NFTs caused quite a stir. In some cases, significant sums of money were paid for individual non-fungible tokens. Examples of such NFT transactions are:
- the auction of the work Everydays by American digital artist Beeple for around US$69 million,
- the auction of the first entry in the online encyclopedia Wikipedia for 750,000 US dollars,
- the sale of the painting “The Kiss” by Gustav Klimt in the form of 10,000 NFTs for each 100 x 100 pixel image,
- the sale of the source code for the World Wide Web for $5.4 million,
- sells the first tweet on Twitter for $2.9 million,
- the sale of the first SMS sent for around 100,000 euros.
Criticism of non-fungible tokens
Trading in non-fungible tokens has attracted a lot of attention, but also criticism. Numerous criticisms of the creation, trading and use of digital tokens have been expressed. An important point of criticism is that the minting of NFT, just like the mining of cryptocurrencies, involves a large computing effort and thus energy consumption. CO2-Emissions for the generation of a single NFT should in some cases be over 200 kg, which means that CO2-Emission can correspond to several flight hours for one person (depending a lot on the blockchain technology used and the type of flight).
Another point of criticism is that the market for NFTs is still largely unregulated. There is a high potential for fraudulent transactions, unrealistic speculation and pyramid or Ponzi schemes. Another problem is that many legal issues regarding the creation, sale and purchase of non-fungible tokens and the ownership and use rights they contain are unresolved. In some cases there are significant copyright ambiguities. The legal situation often differs from country to country. In many cases, additional private, independent agreements must be concluded to clarify open questions.
The high prices achieved at auctions and sales of NFTs in recent years are interpreted as a sign of a new price bubble in the NFT market. In addition, non-fungible tokens are suitable for money laundering due to the anonymity of the blockchain and payment with cryptocurrencies.
Another point of criticism is that the purchase of a non-fungible token provides no assurance of the actual long-term preservation of the represented digital object. Although the NFT is preserved, the actual digital object referenced by an NFT may be deleted or lost. In principle, there is no guarantee for the long-term storage of the digital object or for its integrity without special protective measures.
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