NFTs in the international art market – pro/con, expert opinion

13.08.2021

NFT - pro/con, expert opinion

What are NFTs?

The abbreviation NFT stands for “Non-Fungible Token”. A token is the digitized form of an asset. Tokens can exist in both fungible and non-fungible form. The difference between the two token forms is that Fungible Tokens can be exchanged one for one, while Non-Fungible Tokens are unique and therefore not exchangeable. A simple example illustrates the difference: a 1-euro token can be exchanged for another 1-euro token at any time (and is therefore fungible). A work of art, such as a digital image, on the other hand, is unique (and thus not fungible). An NFT can best be compared to a physical collectible, with the difference that it is not in physical form, but in digital form.

What is the purpose of NFTs?

NFTs were introduced in 2014 with the aim of assigning value to digital and non-exchangeable goods and thus making them tradable. Non-fungible tokens are therefore used wherever virtual goods are to be assigned a value. The spectrum of these virtual goods has become very diverse in recent years and ranges from digital art and photos to music and videos to objects and characters in computer games. Even tweets exist as NFTs. Twitter co-founder Jack Dorsey sold his first tweet as an NFT for just under $3 million.

How are NFTs stored?

Like cryptocurrencies, NFTs are based on what is known as a “blockchain.” A blockchain is an expandable list of records in individual blocks. Because these records are stored on many different computers, a blockchain can be referred to as a distributed, public database. The nature of its architecture makes the blockchain an extremely tamper-proof database. However, unlike cryptocurrencies, Non-Fungible Tokens in a blockchain do not represent an exchangeable asset that can be traded between people, but a concrete digital asset.

How can you buy NFTs?

NFTs are nowadays offered on the internet on numerous trading sites, such as Mintable, OpenSea, and Rarible. In most cases, you need a cryptocurrency to buy Non-Fungible Tokens. Since a majority of NFTs are based on the Ethereum blockchain, one needs the associated cryptocurrency Ether. It is important to know that the purchase of an NFT does not automatically transfer all rights to use a copyrighted work. The legal form of an NFT transfer can be determined by the contracting parties in a privately autonomous manner and can include different types of use.

What are the criticisms of NFTs?

The technical processes behind the blockchain are known to consume enormous amounts of energy, due to the masses of hardware required for the peer-to-peer network. Depending on how electricity is generated, blockchain results in very high CO2 emissions. It is estimated that the average electricity consumption for generating a non-fungible token is nearly 350 kWh. This corresponds to almost ten percent of the average electricity consumption of a German household per year. In other words, one NFT has a CO2 footprint of over 200 kilograms, which is equivalent to a two-hour flight. Although there are now efforts to improve the energy efficiency of the blockchain, critics rightly complain that the energy consumption of a non-fungible token is grossly disproportionate to its importance.

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